SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Quarter Ended March 31, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 000-26287
Axeda Systems Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2763854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21 Oxford Road
Mansfield, Massachusetts 02048
---------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (508) 337-9200
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---------------------------
On May 12, 2003, 27,257,788 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.
AXEDA SYSTEMS INC.
FORM 10-Q
INDEX
Page
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Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002 ............ 2
Consolidated Statements of Operations for the three months ended March 31, 2003
and 2002 (unaudited). .................................................................... 3
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
and 2002 (unaudited). .................................................................... 4
Notes to the Consolidated Financial Statements ............................................. 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk ................................. 29
Item 4 Controls and Procedures .................................................................... 29
Part II Other Information
Item 1 Legal Proceedings ......................................................................... 30
Item 2 Changes in Securities ..................................................................... 31
Item 3 Defaults Upon Senior Securities ........................................................... 31
Item 4 Submission of Matters to a Vote of Security Holders ....................................... 31
Item 5 Other Information ......................................................................... 31
Item 6 Exhibits and Reports on Form 8-K .......................................................... 32
Certifications ............................................................................. 34
1
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AXEDA SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $100 in 2003
and $650 in 2002.................... .................................................$ 12,057 $ 19,065
Accounts receivable, net........................... .................................... 2,862 3,305
Prepaid expenses and other current assets .............................................. 1,066 973
----- ---
Total current assets....................................................... .......... 15,985 23,343
Furniture and equipment, net................................................. .......... 2,832 3,111
Goodwill.......................................................................... ..... 3,640 3,651
Identified intangible assets, net............................................ .......... 1,920 2,087
Other assets ................................................................ .......... 336 321
--- ---
Total assets............................................................... .......... $ 24,713 $ 32,513
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable............................................. .......... $ 184 $ 238
Accounts payable............................................................. .......... 2,175 2,448
Accrued expenses ............................................................ .......... 5,345 8,015
Income taxes payable......................................................... .......... 673 616
Deferred revenue............................................................. .......... 701 1,078
--- -----
Total current liabilities.................................................. .......... 9,078 12,395
Non-current liabilities:
Notes payable, less current portion, and other non-current liabilities............ ..... 979 1,046
--- -----
Total liabilities...................................................... .............. 10,057 13,441
------ ------
Commitments and contingencies (note 6)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized in 2003 and
2002, none issued or outstanding...................... ............................... - -
Common stock, $.001 par value 50,000,000 authorized; 27,806,588 shares
issued in 2003 and 27,822,217 in 2002...... ............................. ............ 28 28
Additional paid-in capital................................................... .......... 144,100 143,847
Deferred stock compensation........................................................... . (436) (578)
Accumulated deficit.......................................................... .......... (127,667) (122,880)
Accumulated other comprehensive income....................................... .......... 11 35
Treasury stock at cost, 603,800 shares in 2003 and 2002...................... .......... (1,380) (1,380)
------- -------
Total stockholders' equity................................................. .......... 14,656 19,072
------ ------
Total liabilities and stockholders' equity.......................... ................. $ 24,713 $ 32,513
======== ========
See accompanying notes to the consolidated financial statements.
2
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Revenues:
License ................................................................. $ 2,317 $ 3,040
Services and maintenance ................................................ 963 543
Hardware ................................................................ 137 1,057
------------ ------------
Total revenues ........................................................ 3,417 4,640
------------ ------------
Cost of revenues:
License ................................................................. 511 1,035
Services and maintenance ................................................ 1,012 717
Hardware ................................................................ -- 1,009
Software amortization ................................................... 157 529
------------ ------------
Total cost of revenues ................................................ 1,680 3,290
------------ ------------
Gross profit .......................................................... 1,737 1,350
------------ ------------
Research and development
Non-cash compensation ................................................... 28 64
Other research and development expense .................................. 1,714 2,232
Sales and marketing
Non-cash compensation ................................................... 11 19
Other selling and marketing expense ..................................... 2,505 4,802
General and administrative
Non-cash compensation ................................................... 103 860
Other general and administrative expense ................................ 2,561 3,063
Depreciation and amortization ........................................... 308 310
Total operating expenses .............................................. 7,230 11,350
------------ ------------
Operating loss ........................................................ (5,493) (10,000)
Gains on disposals of assets .............................................. 743 --
Interest income (expense), net ............................................ 31 220
Other income (expense), net ............................................... (18) --
------------ ------------
Loss before provision for income taxes (benefit) .......................... (4,737) (9,780)
Provision for income taxes (benefit) ................................. 50 (668)
------------ ------------
Net loss .................................................................. $ (4,787) $ (9,112)
============ ============
Basic and diluted net loss per weighted average common share outstanding .. $ (0.18) $ (0.34)
============ ============
Weighted average number of common shares outstanding used in calculation of
basic and diluted net loss per common share ............................... 27,179,237 26,789,174
============ ============
See accompanying notes to the consolidated financial statements.
3
AXEDA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss .................................................................. $ (4,787) $ (9,112)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 465 839
Net (gains) and losses on disposal of assets .............................. (729) --
Non-cash compensation ..................................................... 142 943
Changes in items affecting operations:
Accounts receivable ....................................................... 443 (85)
Inventories ............................................................... -- 1,786
Loan receivable--officer .................................................. -- 34
Prepaid expenses and other current assets ................................. (93) 495
Goodwill, intangible assets and other assets .............................. (4) (18)
Accounts payable .......................................................... (273) (269)
Accrued expenses .......................................................... (1,674) (2,607)
Income taxes payable ...................................................... 57 (668)
Deferred revenue .......................................................... (377) (168)
-------- --------
Net cash used in operating activities ................................... (6,830) (8,830)
-------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (105) (223)
-------- --------
Net cash used in investing activities ................................... (105) (223)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt and other non-current liabilities and other .. (121) (1,770)
-------- --------
Net cash used in financing activities ................................... (121) (1,770)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ................ 48 (76)
-------- --------
Net decrease in cash and cash equivalents ................................... (7,008) (10,899)
Cash and cash equivalents:
Beginning of period ......................................................... 19,065 47,349
-------- --------
End of period, including restricted cash of $100 in 2003 and $1,399 in 2002 . $ 12,057 $ 36,450
======== ========
See accompanying notes to the consolidated financial statements.
4
AXEDA SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 2003 and 2002 is unaudited)
All amounts are in thousands, except share and per share amounts, unless noted
otherwise.
1) Summary of Significant Accounting Policies
a) Description of Business and Liquidity
Axeda Systems Inc. ("we", "our", "us" or "Axeda") develops, markets and sells
enterprise software products and services used by multiple industries and
customers worldwide for Device Relationship Management ("DRM"), to access and
exploit information hidden within remote machines, devices and facilities. We
distribute our DRM products through direct sales to original equipment
manufacturers ("OEMs") and enterprise customers, as well as through distributors
and value-added resellers. We maintain regional sales and support offices for
DRM in the United States, Japan and France.
In December 2001 we purchased all of the outstanding capital stock of eMation,
Ltd., a private company organized under the laws of the State of Israel and
headquartered near Boston, Massachusetts. In 2003 our revenues have been
substantially generated from selling DRM products. During 2002 our revenues were
increasingly generated from selling DRM products.
We have sustained significant net losses and negative cash flows from operations
since our inception. For the quarters ended March 31, 2003 and 2002, our net
losses were $4,787 and $9,112, respectively, and negative cash flows from
operations were $6,830 and $8,830, respectively. There can be no assurances that
we will be able to generate sufficient revenues or positive cash flows from
operations necessary to achieve or sustain profitability in the short or long
term. However, management believes that the current cash and cash equivalent
amounts will be sufficient to sustain our operations through at least March 31,
2004.
Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations, and decrease our losses and
corresponding use of cash. We have halved the number of global offices, reduced
staffing levels by 43%, and have closely monitored our infrastructure costs. We
exited the personal computer, or PC, business and focused our efforts on several
key markets for DRM Systems products. In 2002 and through the first quarter of
2003, we recorded $2.3 million in restructuring charges to reduce staffing
levels, terminate certain leases and consolidate our operations. Combined with
our expected continued year over year growth in DRM Systems revenues, we believe
that future losses will continue to be lower than in previous quarters. We will
continue to evaluate our cost structure and may undertake additional measures to
reduce expenses in the future. To the extent our cash and cash equivalent
amounts or future revenues prove to be insufficient, we will further reduce our
operating costs. We may also raise cash through the sale of equity or issuance
of debt if the capital markets present attractive opportunities.
b) Basis of Presentation
The interim consolidated financial statements of Axeda for the three months
ended March 31, 2003 and 2002 included herein have been prepared by us, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments consisting
only of normal recurring items, necessary to present fairly the financial
position of Axeda at March 31, 2003 and 2002 and the results of its operations
and cash flows for the three months then. The unaudited consolidated financial
statements included in this Form 10-Q should be read in conjunction with the
audited consolidated financial statements and notes thereto, included in our
Form 10-K for the year ended December 31, 2002. The interim results presented
are not necessarily indicative of results for any subsequent quarter or for the
year ending December 31, 2003.
c) Principles of Consolidation
The consolidated financial statements include our financial statements and the
financial statements of our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
d) Cash and Cash Equivalents
For purposes of the statement of cash flows, we consider all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
5
e) Revenue Recognition
We recognize software revenues in accordance with the American Institute of
Certified Public Accountants' ("AICPA") Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
98-9"). License revenues are recognized in the period in which persuasive
evidence of an arrangement exists, the fee is fixed or determinable, delivery of
the technology has occurred requiring no significant production modification or
customization and collectibility is probable.
For software arrangements that include multiple elements, SOP 97-2 requires
us to allocate the fee to the individual elements based on vendor-specific
objective evidence of fair value ("VSOE"), regardless of the prices stated
within the contract. VSOE is limited to the price charged when the element is
sold separately or, for an element that is not yet sold separately, the price
established by management having the relevant authority. When there is VSOE for
the undelivered elements in multiple-element arrangements that are not accounted
for using contract accounting, we allocate revenue to the delivered elements of
the arrangement using the residual value method. Therefore, we defer revenues
from the arrangement fee equal to the fair value of the undelivered elements and
the difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements.
The fair value of maintenance and postcontract customer support ("PCS")
obligations are based upon separate sales of renewals to other customers or upon
renewal rates quoted in the contracts. The fair value of services, such as
training or consulting, is based upon our separate sales of these services to
other customers.
When VSOE does not exist to allocate revenue to each of the various
elements of an arrangement and revenue cannot be allocated using the residual
value method, the entire fee from the arrangement is deferred until the earlier
of the establishment of VSOE or the delivery of all the elements of the
arrangement. In cases where a license grants a customer unspecified upgrade
rights, the license fee is deferred and recognized ratably over the term of the
arrangement. Billed amounts due from the customers in excess of revenue
recognized are recorded as deferred revenue.
Our Axeda Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance, Axeda Connector
and Axeda FactorySoft OPC products may be sold on a per-unit basis. In cases
where we sell such DRM products on a per-unit basis, revenues are recognized
when the product ships to an OEM, distributor or end user.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly or daily
rates or fixed fees, and we generally recognize revenue as these services are
performed.
Revenues related to development contracts involving significant
modification or customization of software under development arrangements are
recognized in accordance with the provisions of AICPA Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1"), using the percentage-of-completion
method, based on the efforts-expended method or based on performance milestones
specified in the contract where such milestones fairly reflect progress toward
contract completion. For software license arrangements that include services
requiring significant modification or customization of the licensed software, we
apply the percentage-of-completion method of contract accounting to the entire
arrangement. For arrangements that include services that, under SOP 97-2,
qualify for separate accounting, we follow the provisions of SOP 97-2 and
allocate revenues to the services element based on VSOE and recognize the
revenues as the services are performed. Revenues related to services are
recognized upon delivery of the service in the case of time and material
contracts. Losses on contracts are recognized for the entire anticipated loss,
if any, as soon as the loss becomes evident.
Royalties representing software license fees paid on a per unit basis are
recognized when earned, which is based on receiving notification from licensees
stating the number of products sold which incorporate the licensed technology
from us and for which license fees, based on a per unit basis, are due. The
terms of the license agreements generally require the licensees to notify us
within 15 to 45 days of the end of the quarter during which the sales of the
licensees' products take place. We record the revenue in the quarter following
the sale of the licensee's products to its customers.
Hardware revenues are recognized upon shipment of products to customers.
For hardware transactions where no software is involved, we apply the provisions
of Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB 101") issued by the
U.S. Securities and Exchange Commission ("SEC").
f) Financial Instruments
Our financial instruments principally consist of cash and cash
equivalents, accounts receivable, accounts payable and notes payable that are
carried at cost, which approximates fair value.
6
g) Stock-based Compensation
SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"),
provides companies the alternative to adopt the fair value method for expense
recognition of employee stock options and stock-based awards or to continue to
account for such items using the intrinsic value method as outlined under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") with pro forma disclosures of results of operations as if
the fair value method had been applied.
At March 31, 2003 we have two stock-based employee compensation
plans. We account for those plans under the recognition and measurement
principles of APB 25 and related interpretations. The following table
illustrates the effect on net loss and net loss per share if we had applied the
fair value recognition provisions of SFAS 123 to stock-based compensation:
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Net loss, as reported ....................................... $ (4,787) $ (9,112)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards .................................................. (504) (1,215)
-------- --------
Pro forma net loss........................................... $ (5,291) $(10,327)
======== ========
Net loss per common share - basic and diluted:
As reported ............................................ $ (0.18) $ (0.34)
======== ========
Pro forma .............................................. $ (0.19) $ (0.39)
======== ========
We used the following range of assumptions to determine the fair value of
stock options granted using the Black-Scholes option-price model:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Dividend yield...................... 0% 0%
Expected volatility................... 97% 192%
Average expected option life........ 4 years 4 years
Risk-free interest rate............... 1.27% 2.28%
h) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant areas involving the
use of estimates in these financial statements include allowances for
uncollectible accounts receivable, goodwill and intangible assets, valuation
allowances for deferred tax assets and deferred tax liabilities, foreign income
taxes and percentage of completion for certain sales agreements accounted for
under contract accounting. Actual results could differ from those estimates.
i) Computation of Earnings Per Share
We compute earnings per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share" (SFAS No. 128"). In accordance with SFAS
128, basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method), and the incremental
common shares issuable upon the conversion of the convertible preferred stock
(using the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
7
The following potential shares of common stock have been excluded from
the computation of diluted net loss per share for all periods presented because
the effect would have been anti-dilutive:
i) Three Months Ended March 31, 2003
Options to purchase approximately 5.0 million shares of common stock with a
weighted-average exercise price of $1.95 were outstanding during the three
months ended March 31, 2003 but were not included in the computation of diluted
EPS because the effects of assumed conversion or exercise would have an
anti-dilutive effect on EPS. The outstanding options include 2.4 million options
that are vested, with a weighted average exercise price of $2.62, of which 0.8
million are vested and in the money, with a weighted average exercise price of
$0.01. The options have various expiration dates during the next 10 years.
Warrants to purchase approximately 0.6 million shares of common stock with a
weighted-average exercise price of $2.80 were vested and outstanding during the
three months ended March 31, 2003, but were not included in the calculation of
diluted EPS because the effects of assumed conversion or exercise would have an
anti-dilutive effect on EPS. The outstanding warrants include 0.2 million
warrants that are vested and in the money, with a weighted average exercise
price of $0.06. The warrants have various expiration dates during the next 5
years.
ii) Three Months Ended March 31, 2002
Options to purchase approximately 4.7 million shares of common stock with a
weighted-average exercise price of $2.50 were outstanding during the three
months ended March 31, 2002 but were not included in the computation of diluted
EPS because the effects of assumed conversion or exercise would have an
anti-dilutive effect on EPS. The outstanding options include 1.7 million options
that were exercisable, with a weighted average exercise price of $3.32, of which
1.3 million were vested and exercisable, with a weighted average exercise price
of $1.25.
Warrants to purchase approximately 0.5 million shares of common stock with a
weighted-average exercise price of $3.20 were vested and outstanding during the
three months ended March 31, 2002, but were not included in the calculation of
diluted EPS because the effects of assumed conversion or exercise would have an
anti-dilutive effect on EPS. The outstanding warrants include 0.3 million
warrants that were vested and in the money, with a weighted average exercise
price of $0.27.
j) Recent Accounting Pronouncements
In April 2003 the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") initiated a project, Issue 03-5,
"Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software" ("EITF 03-5"). The EITF consideration of the
interaction between EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables," and higher-level literature resulted in concern about apparent
diversity in practice with respect to the application of the provisions of SOP
97-2 to arrangements containing software deliverables and non-software
deliverables. A similar Issue had been removed from the EITF agenda in November
of 2002 (along with eight other revenue recognition issues) in light of the
FASB's project on revenue recognition. EITF 03-5 will consider the narrower
issue of whether the provisions of SOP 97-2--particularly the VSOE
requirements--apply to (a) all deliverables in an arrangement containing
more-than-incidental software or (b) only software elements (as defined in SOP
97-2). The issue is whether non-software deliverables included in an arrangement
that contains software that is more than incidental to the products or services
as a whole are included within the scope of SOP 97-2. The EITF has not yet
reached a consensus on this matter.
In March 2003 the FASB added a project to its agenda that will seek to improve
the accounting and disclosures relating to stock-based compensation, with a view
to issuing an Exposure Draft later this year that could become effective in
2004. The project will address whether compensation paid in the form of equity
instruments should be recognized in the financial statements and how that
compensation should be measured. In April 2003 the FASB decided that goods or
services received in exchange for compensation result in a cost that is
recognized in the income statement as an expense when the goods or services are
consumed by an enterprise, that the economic event being measured is the
exchange of goods or services received for stock-based compensation, that the
measurement focus of that exchange is the value of the goods or services
received, that the exchange should be measured at the grant date and that the
measurement attribute for the exchange is the fair value. The FASB believes
there is a need for one consistent approach to recognize the costs associated
with employee stock options, and also will examine whether there are ways to
improve the precision and consistency of measuring the cost of employee stock
options, as well as whether to require additional informative disclosures.
Subsequent to the April decisions by the FASB, the United States Senate
introduced proposed legislation that calls for a three-year moratorium on
mandatory expensing of stock-based compensation and directs the Securities and
Exchange Commission to call for improved disclosure on employee stock option
plans.
8
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees. FIN 45 requires that at the time a company
issues certain guarantees, the company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and initial measurement provisions of FIN 45
were applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15, 2002
and are applicable to all guarantees issued by the guarantor subject to FIN 45's
scope, including guarantees issued prior to the issuance of FIN 45. The adoption
of FIN 45 did not have a material impact on the Company's consolidated financial
position or results of operations.
Beginning in February 2003, the FASB staff issues future application guidance
(like that found in Staff Implementation Guides and Staff Announcements) through
FASB Staff Positions ("FSPs"). In April 2003 the FASB proposed the FSP
"Accounting for intellectual property infringement indemnifications under FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." Under the
proposal, an indemnification by a software vendor-licensor included in a
software licensing agreement that indemnifies the licensee against liability and
damages arising from any claims of infringement by the software vendor's
software constitutes a guarantee subject to the scope of FIN 45, but is not
subject to the initial recognition and measurement provisions thereof. Rather,
the software vendor must make the disclosures required under FIN 45. Our
software license agreements typically provide for indemnification of customers
for intellectual property infringement claims. We also warrant to customers,
when requested, that our software products operate substantially in accordance
with standard specifications for a limited period of time. Historically, minimal
costs have been incurred related to product warranties, and as such no accruals
for warranty costs have been made.
On January 1, 2003 we adopted SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002. We have applied the disclosure
provisions of SFAS 148 in the notes to the consolidated financial statements.
The adoption of SFAS 148 did not have an impact on our results of operations,
financial position or cash flows because we did not adopt the fair value method
of accounting.
On January 1, 2003 we adopted SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS 146"), which addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
did not have a significant impact on our financial position or results of
operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
issue number 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"). This consensus addresses
the accounting issues pertaining to consideration received from a vendor, and is
applicable for new arrangements or modification of existing arrangements entered
into after December 31, 2002. The adoption of EITF 02-16 did not have an impact
on our results of operations, financial position or cash flows.
k) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2) Supplemental Disclosure of Balance Sheet Information
Provision for Doubtful Accounts
Accounts receivable are net of provisions for doubtful accounts of $56
and $84 as of March 31, 2003 and December 31, 2002, respectively.
Acquired Intangible Assets
Accumulated amortization at March 31, 2003 and December 31, 2002 was
$240 and $73, respectively.
9
3) Notes Payable
As of March 31, 2003, we had approximately $161 outstanding on an equipment line
of credit with EVP with interest rates ranging from 12% to 13% and payments due
monthly over a 36 month period ending in December 2003. As of March 31, 2003, we
are in compliance with all of the covenants to EVP.
4) Line of Credit
We received a commitment letter from a commercial bank in April 2003 in
connection with a line of credit in the amount of the lesser of $2.0 million or
the borrowing base, as defined (limited to a percentage of eligible domestic
accounts receivable). We are finalizing the terms and documenting the loan
agreement.
5) Accrued Expenses
Accrued expenses consist of the following:
March 31, December 31,
2003 2002
---- ----
Legal and professional fees ...................... $ 553 $1,202
Payroll and related costs ........................ 1,461 2,778
Severance ........................................ 268 355
Unutilized leased facilities ..................... 683 566
Royalties to Israeli government agencies ......... 484 828
Legal settlements ................................ 2 277
Sales, excise and other taxes .................... 610 689
Other ............................................ 1,284 1,320
------ ------
$5,345 $8,015
====== ======
6) Commitments and Contingencies
On March 20, 2003, Industria Politecnica Meridionale Spa. ("IPM"), an Italian
corporation, filed a claim against us. The action was filed in the United States
District Court for the Northern District of California (the "Court"). The
lawsuit alleges breach of an agreement between our Internet appliance ("IA")
subsidiary and IPM and fraud in connection with the delivery of circuit boards
to IPM that were unsuited for the purpose for which they were intended, and
claims damages of $15 million for breach of contract, and $15 million each for
fraud and punitive or exemplary damages. We believe that such lawsuit and claims
are wholly without merit and that we have meritorious defenses to the actions,
as well as significant counterclaims. We plan to vigorously defend the
litigation, and, on May 2, 2003 we moved to dismiss all claims against us.
However, failure to successfully defend this action could substantially harm our
results of operations, liquidity and financial condition. We are unable to
predict the outcome of these matters or reasonably estimate an amount of
possible loss given the current status of this matter.
Various third parties have notified us, as well as some of our former customers
for our former digital media products, that our former DVD products infringe
patents held by such third parties. We have received notices of up to an
aggregate of $6.5 million dollars asserting rights under the indemnification
provisions and warranty provisions of our license agreements from several
customers relating to such claims of infringement. We have not determined
whether and to what extent the patents held by such third parties are valid and
whether and to what extent our products may infringe such patents. We are unable
to predict the outcome of these matters, however, we are able to reasonably
estimate an amount of possible loss given the current status of certain of these
matters, and, in 2002, accrued $375.
In March 2003 we entered into a confidential settlement agreement with Phoenix
Technologies and the remaining $550 of the purchase price for the sale of the
assets of our former IA business held in escrow by a third party for
indemnification purposes (included in restricted cash at December 31, 2002), was
paid to us and is no longer restricted. In connection with this settlement
agreement, we reversed accruals of approximately $743 initially recorded in
March 2001 as part of the sale of our former IA business.
We entered into a confidential settlement agreement with a former lender in
February 2003 to settle all claims between the parties, whereby in February 2003
we paid $137.5 and issued a warrant to purchase 100,000 shares of our common
stock with an exercise price per share of $0.58533, which had an estimated fair
value of approximately $26.
In January 2003 we settled a dispute with a former vendor for our former IA
products whereby we entered into a confidential settlement and release agreement
and paid the vendor $550. The cost of the settlement was accrued as of December
31, 2002.
10
7) Segment Information
We sell and license our technology to customers primarily in North America,
Europe and Asia. A majority of our revenues are derived from our North American
operations, and our total revenues were derived from the following geographic
regions:
Three Months Ended March 31,
----------------------------------------
2003 2002
------------------ --------------------
Country/ Geographic Region % of Total % of Total
- -------------------------- ---------- ----------
North America:
United States ............ $1,217 36% $2,072 45%
Canada ................... 250 7 677 14
------ ------ ------ ------
Total - North America 1,467 43 2,749 59
------ ------ ------ ------
Europe:
Germany .................. 16 -- 273 6
France ................... 583 17 598 13
Netherlands .............. 121 4 263 6
Switzerland .............. 152 5 -- --
United Kingdom ........... 62 2 124 3
Other .................... 277 8 262 5
------ ------ ------ ------
Total - Europe ...... 1,211 36 1,520 33
------ ------ ------ ------
Asia-Pacific:
Israel ................... 117 3 101 2
Japan .................... 540 16 212 5
Other .................... 23 1 33 1
------ ------ ------ ------
Total - Asia-Pacific 680 20 346 8
------ ------ ------ ------
Other ......................... 59 1 25 --
------ ------ ------ ------
Total ................ $3,417 100% $4,640 100%
====== ==== ====== ====
8) Segment Reporting
Segment information is presented in accordance with Statement of Financial
Account Standards No. 131 ("SFAS 131"), "Disclosures About Segments Of An
Enterprise And Related Information." This standard requires segmentation based
upon our internal organization and disclosure of revenue and operating income
based upon internal accounting methods. For the quarter ended March 31, 2003 DRM
is our reportable segment.
The DRM segment was created as a result of the acquisition of eMation in
December 2001. DRM is a distributed software solution designed to enable
businesses to remotely monitor, manage and service intelligent devices. DRM
enables the live exchange of information via the Internet, between remotely
deployed "intelligent devices" (instruments, equipment, machines, facilities,
appliances, sensors or systems incorporating computer-based control technology)
and the people that build, service and use them. The Axeda DRM System enables
manufacturers and service providers to use the Internet to establish and manage
continuous connections with devices deployed at their customers' facilities,
allowing them to stay in touch with their products throughout their lifecycle,
tapping the value of remote device information with new, automated e-service,
operations monitoring, and e-commerce offerings. The product offerings enable
customers to gain business insight and benefits from live information sources by
helping them capitalize on the wealth of previously unavailable device
performance and usage data.
11
We evaluate operating segment performance based on revenue and gross profit. We
have not historically evaluated segment performance based on operating income or
allocated assets to our individual operating segments.
Three Months Ended March 31,
----------------------------
2003 2002
------ ------
Revenues:
DRM ..................... $3,031 $2,494
Other ................... 386 2,146
------ ------
Total ........... $3,417 $4,640
====== ======
Gross profit:
DRM ................ $1,600 $ 966
Other .............. 137 384
------ ------
Total ........... $1,737 $1,350
====== ======
9) Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information:
Three Months Ended March 31,
----------------------------
2003 2002
----- ----
Cash paid during the period for:
Interest .......................................... $ 22 $ 40
===== ====
Income taxes ...................................... -- --
===== ====
Non-cash investing and financing activities:
Amortization of deferred stock compensation ....... 142 324
===== ====
10) Comprehensive Income (Loss)
The components of comprehensive loss are as follows:
Three Months Ended March 31,
2003 2002
------- -------
Net loss ......................................... $(4,787) $(9,112)
Foreign currency translation adjustment .......... (48) 76
------- -------
Comprehensive loss ............................... $(4,835) $(9,036)
======= =======
12
Axeda Systems Inc.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. Such statements are based on current expectations of future
events that involve a number of risks and uncertainties that may cause the
actual events to differ from those discussed herein. Such factors include, but
are not limited to: our ability to become profitable; future expenses; future
results of operations; uncertainties in the market for DRM solutions and the
potential for growth in the DRM market; our ability to raise capital; the
potential for NASDAQ delisting if the trading price of our stock remains below
$1.00; declining sales of our legacy products; our dependence on the cyclical
software industry; present and future competition; our ability to manage
technological change and respond to evolving industry standards; the long sales
cycle for DRM solutions; our customers' ability to implement or integrate our
DRM solutions successfully and in a timely fashion or achieve benefits
attributable to our DRM solutions; limited distribution channels; dependence on
strategic partners; the difficulty of protecting proprietary rights; the
potential for defects in products; claims for damages asserted against us; risks
from international operations; and others discussed under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks and other factors. Accordingly,
any forward-looking statements included herein do not purport to be predictions
of future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates," "plans," "estimates," or "intends," or the negative
of any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. All forward-looking statements, and reasons why results may differ
that are included in this report, are made as of the date of this report, and
except as required by law, we disclaim any obligations to update any such
factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein or reasons why results might differ
to reflect future events or developments. References herein to "Axeda", "we,"
"our," and "us" collectively refer to Axeda Systems Inc., a Delaware
corporation, and all of its direct and indirect U.S., Israeli, Japanese,
European and Canadian subsidiaries.
Overview and Recent Events
On December 7, 2001, we acquired all of the outstanding shares of eMation, Ltd.,
or eMation, a private company organized under the laws of the State of Israel.
The acquisition gave us an entry into the DRM market and changed our strategic
focus to the enterprise software and services market. eMation historically
derived its main source of revenues from its industrial automation products,
which are now offered as Axeda Agent components of our DRM system. While we
continue to sell the components of the DRM system, such as the Axeda Supervisor,
Axeda @aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC, to support our
traditional industrial automation business, we expect that sales of these
products will decrease in the future as we devote most of our resources to the
development and support of the Axeda DRM system. For the three months ending
March 31, 2003, substantially all of our license and services revenues were from
sales of our DRM Solutions.
In May 2002 we entered into a Software Distribution Agreement with Sonic IP,
Inc. ("Sonic"), a wholly-owned subsidiary of Sonic Solutions. As a result, we
exited the personal computer, or PC, business and terminated or assigned to
Sonic substantially all of the customer contracts of our PC business. As a
result, a comparison of our results in 2003 with 2002 may not provide a
meaningful indication of our future performance.
13
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002.
The following table sets forth, for the periods indicated, the amount and
percentage of total revenues represented by certain items reflected in our
consolidated statements of operations:
Axeda Systems Inc.
Unaudited Consolidated Statements of Operations Data
(In thousands)
Three Months Ended March 31,
-----------------------------------------------
2003 2002
--------------------- ------------------------
Percentage of Percentage of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues:
License ........................................... $ 2,317 67.8% $ 3,040 65.5%
Services and maintenance .......................... 963 28.2 543 11.7
Hardware .......................................... 137 4.0 1,057 22.8
------ ----- ------ -----
Total revenues .................................. 3,417 100.0 4,640 100.0
------ -------- ------- ------
Cost of revenues:
License ........................................... 511 15.0 1,035 22.3
Services and maintenance .......................... 1,012 29.6 717 15.5
Hardware .......................................... -- -- 1,009 21.7
Software amortization ............................. 157 4.6 529 11.4
------ -------- ------- ------
Total cost of revenues .......................... 1,680 49.2 3,290 70.9
------ -------- ------- ------
Gross profit ..................................... 1,737 50.8 1,350 29.1
------ -------- ------- ------
Research and development (R&D)
Non-cash compensation ............................ 28 0.8 64 1.4
Other R&D expense ................................ 1,714 50.2 2,232 48.1
Sales and marketing (S&M)
Non-cash compensation expense .................... 11 0.3 19 0.4
Other S&M expense ................................ 2,505 73.3 4,802 103.5
General and administrative (G&A)
Non-cash compensation ............................ 103 3.0 860 18.5
Other G&A expense ................................ 2,561 74.9 3,063 66.0
Depreciation and amortization ........................ 308 9.0 310 6.7
------ -------- ------- ------
Total operating expenses ............................. 7,230 211.6 11,350 244.6
------ -------- ------- ------
Operating loss ....................................... (5,493) (160.7) (10,000) (215.5)
Gains on disposal of assets .......................... 743 21.7 -- --
Interest income (expense), net ....................... 31 0.9 220 4.7
Other income (expense), net .......................... (18) (0.5) -- --
------ -------- ------- ------
Loss before provision for income taxes (benefit) ..... (4,737) (138.6) (9,780) (210.8)
Provision for income taxes (benefit) ................. 50 1.5 (668) (14.4)
------ -------- ------- ------
Net loss ............................................. $ (4,787) (140.1)% $ (9,112) (196.4)%
====== ======== ======= ======
14
Revenues. Overall revenues decreased by 26%, or $1.2 million, from $4.6 million
in the quarter ending March 31, 2002 to $3.4 million during the quarter ending
March 31, 2003. Sales of our DRM systems increased $0.5 million or 22% while PC
and hardware sales decreased $1.7 million or 82% over the same period of the
prior year. Our license and hardware revenues decreased $0.7 million and $0.9
million respectively, while our services and maintenance revenues increased $0.4
million from the prior year.
The $0.7 million decrease from the prior year in license revenues was
attributable to the discontinuance of our former PC business, which contributed
$0.8 million to the decrease and was offset by a $0.1 million increase in DRM
licensing fees. In 2003 we expect license revenues from our former PC business
to be minimal, as we have exited the PC business, and expect DRM license
revenues to increase as our DRM software solutions are more widely adopted.
Decreased sales of components for our former Internet appliances and Internet
set-top boxes resulted in a decline in hardware revenues of approximately $0.9
million for the quarter ended March 31, 2003 from $1.1 million for the quarter
ended March 31, 2002. In 2003, we expect hardware revenues and related gross
profit to be minimal.
Services and maintenance revenues increased 77% from approximately $0.5 million
for the quarter ended March 31, 2002 to approximately $1.0 million for the
quarter ended March 31, 2003. The increase was attributable to a greater demand
for professional services in connection with existing DRM installations as well
as additional maintenance plans sold with our DRM Systems.
Historically, the majority of our revenues has been derived from a small number
of customers. However, as our model has shifted to the enterprise software
market, our revenues have been less concentrated. For the quarter ended March
31, 2003, our top three customers accounted for $1.0 million or 28% of our total
revenues. For the quarter ended March 31, 2002, three customers accounted for
$1.6 million or 34% of our total revenues. In the future, we expect our revenues
to be less concentrated as sales of our enterprise software and services span a
wider customer base and we expect early adopters of our DRM solutions to
increase our revenues.
We sell our DRM system solutions to Global 2000 companies in the industrial and
building automation, high technology devices, medical instrumentation,
semiconductor equipment, and office automation industries. In the quarter ended
March 31, 2003 companies based in North America accounted for 43% of our
revenues. We anticipate that revenues from international operations will
continue to represent a significant portion of our revenues.
Cost of Revenues. Cost of revenues decreased $1.6 million or 49% from $3.3
million during the quarter ended March 31, 2002 to $1.7 million for the quarter
ended March 31, 2003. Cost of revenues for license fees and hardware sales
decreased approximately $0.5 million and $1.0 million, respectively, from the
prior year, while cost of revenues associated with services and maintenance
increased approximately $0.3 million from the prior year. In addition,
amortization of our developed and core technologies, acquired in the eMation
acquisition, decreased $0.4 million for the quarter ended March 31, 2003 due to
an impairment charge recorded for our identified intangible assets in the fourth
quarter of 2002.
The $0.5 million decrease in cost of license revenues from the prior year is due
to a decrease in costs associated with our former PC products. The $1.0 million
decrease in cost of hardware revenues corresponds to the decrease in hardware
sales. The $0.3 million increase in cost of services and maintenance is
attributable to the $0.7 million increase in our DRM services and maintenance
plans for the quarter ended March 31, 2003. We expect our cost of license fees
as a percentage of license revenues to decline, as our license revenues will be
comprised entirely of our DRM products. The addition of non-cash amortization of
acquired technology will partially offset this future decrease in cost of
revenues as a percentage of total revenues, and will represent approximately
$0.6 million of our cost of revenues for the year ending December 31, 2003.
Gross Profit. Gross profit increased by $0.4 million, or 29%, from $1.4 million
for the quarter ended March 31, 2002 to $1.7 million for the quarter ended March
31, 2003. The increase in gross profit is attributable to an increase in
revenues of our DRM license fees, services and maintenance, and reduced software
amortization expense offset by a decrease in revenues associated with sales of
our former PC products.
For the quarter ended March 31, 2003, 96% of our total revenues were derived
from licenses and services and maintenance, in comparison to 78% in 2002. As a
percentage of total revenues, gross profit increased from 29% for the quarter
ended March 31, 2002 to 51% for the quarter ended March 31, 2003. The overall
reduction in negative gross profit from our services and maintenance operations
was the result of an increase in the number of billable consulting engagements.
Research and Development Expense. Other research and development expenses
consist of staff, staff-related, professional and other development related
support costs associated with the development of new products, customization of
existing products for customers, quality assurance and testing. Research and
development expenses decreased 23%, from $2.2 million for the quarter ended
March 31, 2002 to $1.7 million for the quarter ended March 31, 2003.
15
The elimination of the PC development team in 2002 contributed $0.8 million to
the decrease in research and development expenses during the quarter ended March
31, 2003, from the prior year, and was partially offset by $0.2 million for
additional DRM development staff and $0.1 million of one-time transition
expenses associated with the closing of our Israeli operations. As a percentage
of total revenues, other research and development expenses increased from 48% to
50%. The increase in research and development expenses as a percentage of total
revenues resulted from reduced hardware revenues. We expect research and
development expenses to decrease in 2003 as we optimize our development teams to
meet our current business requirements. Additionally, we expect research and
development to decrease as a percentage of revenue as our future revenues
increase.
Sales and Marketing Expense. Other selling and marketing expenses consist of
salaries, travel expenses and costs associated with trade shows, advertising and
other marketing efforts, as well as technical support costs. Selling and
marketing expenses decreased $2.3 million or 48% from $4.8 million for the
quarter ended March 31, 2002 to $2.5 million for the quarter ended March 31,
2003.
The elimination of our former business development personnel focused on
professional services in 2002 contributed $1.2 million to the decrease in sales
and marketing expense for the quarter ended March 31, 2003 from the prior year.
In addition, $0.6 million of the decrease was equally attributable to
elimination of the PC sales team and a reduction in initial branding expense in
2002. Decreases in public relations expense, the use of outside consultants,
advertising and severance also contributed $0.5 million to the sales and
marketing expense decrease for the quarter ended March 31, 2003. As a percentage
of total revenues, sales and marketing expenses decreased from 104% to 73% due
to both lower revenues and lower sales and marketing expenses. We expect sales
and marketing expenses to decrease in 2003 as we optimize our sales and
marketing teams to meet our current business requirements. Additionally, we
expect sales and marketing to decrease as a percentage of revenue as our future
revenues increase.
Other General and Administrative Expense. Other general and administrative
expenses consist of staff, staff related, and support costs for our finance,
legal, human resources, information systems and other departments. Other general
and administrative expenses decreased $0.4 million or 15% from $3.0 million for
the quarter ended March 31, 2002 to $2.6 million for the quarter ended March 31,
2003. As a percentage of total revenues, other general and administrative
expenses increased from 65% to 75% of total revenues due to a decrease in
revenues.
The $0.4 million decrease in other general and administrative expenses consists
of a $0.2 million decrease in rent expense in support of our former PC business
and a $0.2 million decrease in other costs over the prior year. In addition,
reduced costs associated with the closure of our Israeli operations and outside
consultants were offset by an increase in severance expense for the quarter
ending March 31, 2003. We expect general and administrative expense to decrease
in 2003 as we optimize our general and administrative teams to meet our current
business requirements. Additionally, we expect general and administrative
expense to decrease as a percentage of revenue as our future revenues increase.
Non-cash Compensation General and Administrative Expense. Non-cash general and
administrative expense consists of amortization of compensation related to stock
options. Non-cash general and administrative expense decreased from $0.9 million
for the quarter ended March 31, 2002 to $0.1 million for the quarter ended March
31, 2003. The decrease is attributable to grant accelerations, grant
modifications and deferred compensation expense incurred in 2002. No similar
expense was incurred in the first quarter of 2003. For the quarter ended March
31, 2002, a $0.4 million expense was incurred for the acceleration of option
vesting in accordance with certain employment agreements. In addition, $0.2
million was the result of amortization of deferred compensation recorded in
connection with stock options granted to employees at less than fair market
value granted between July and December 2001. The remaining portion of the first
quarter 2002 non-cash compensation general and administrative expense was
attributable to a one-time charge of $0.2 million for the modification of stock
options held by a former employee.
Depreciation and Amortization. We recorded depreciation and amortization of $0.3
million for the quarters ended March 31, 2003 and March 31, 2002.
Gains on Sales of Assets. We signed a confidential settlement agreement in March
2003 for the escrow relating to the sale of the assets of our former IA business
in March 2001. In connection with this settlement agreement, we reversed
accruals of approximately $0.7 million recorded in March 2001 as part of the
sale. No corresponding gains were recorded for the quarter ended March 31, 2002.
Interest Income and (Expense), Net and Other, Net. Net interest income decreased
$0.2 million, or 85%, for the quarter ended March 31, 2003 over the comparable
period in 2002. The decrease is the result of lower bank interest rates and
lower cash balances from 2002.
Provision for Income Taxes (Benefit). The income tax benefit recorded for the
quarter ended March 31, 2002 is attributable to the reversal of certain 2001
U.S. income tax accruals no longer necessary as a result of newly enacted tax
legislation in 2002.
16
Axeda Systems Inc.
LIQUIDITY AND CAPITAL RESOURCES
Since March 2001, our operations have largely been financed through the sales of
the assets of our Consumer Electronics ("CE") and IA businesses. As of March 31,
2003, we had approximately $12.1 million in cash and cash equivalents.
Net cash used in operating activities for the quarter ending March 31, 2003 was
$6.8 million, compared to $8.8 million for the quarter ending March 31, 2002.
Cash used in operating activities for the first quarter of 2003 was primarily
the result of our net loss of approximately $4.8 million and other changes in
working capital of $2.2 million. The reduction in net cash used is primarily the
result of the lower net loss.
Net cash used in investing activities for the quarter ending March 31, 2003 was
$0.1 million, as compared to $0.2 million for the quarter ending March 31, 2002,
and consisted of purchases of furniture and equipment in both periods.
Net cash used in financing activities was $0.1 million for the quarter ending
March 31, 2003, compared to $1.8 million for the quarter ending March 31, 2002,
and consisted of principal payments reducing indebtedness in each period.
As of March 31, 2003, we had approximately $0.2 million outstanding on an
equipment loan facility ("the Loan") with payments due monthly over a 36 month
period ending in December 2003. As of March 31, 2003, we were in compliance with
all of our covenants under the Loan.
As of March 31, 2003, we have $1.4 million of estimated accrued costs related to
facilities leases that we no longer occupy. We have made significant efforts to
terminate these leases, but if these leases cannot be terminated or if the
facilities cannot be sublet, we may be required to make these payments over the
respective lease terms.
We maintain an irrevocable, cash-secured, standby letter of credit (the "letter
of credit") from a bank of $0.15 million as security for our corporate
headquarters lease. The letter of credit expires in August 2003 and provides for
automatic one-year renewals, but not beyond August 2007. The letter of credit is
secured by a certificate of deposit for $0.15 million from the same bank, and
also expires in August 2003. This amount is restricted for withdrawal and is
included in other assets (non-current) in our consolidated balance sheets.
Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations, and decrease our losses and
corresponding use of cash. We have halved the number of global offices, reduced
staffing levels by 43%, and have closely monitored our infrastructure costs. We
exited the PC business and focused our efforts on several key markets for DRM
Systems products. In 2002 and through the first quarter of 2003, we recorded
$2.3 million in restructuring charges to reduce staffing levels, to terminate
certain leases and consolidate our operations. Combined with our expected
continued year over year growth in DRM Systems revenues, we believe that future
losses will continue to be lower than in previous quarters. We will continue to
evaluate our cost structure and may undertake additional measures to reduce
expenses in the future. To the extent our cash and cash equivalent amounts or
future revenues prove to be insufficient, we will further reduce our operating
costs.
We believe that our current cash and cash equivalents balance will be adequate
to meet our cash needs through at least March 31, 2004, and our current business
plan does not foresee the need for further financing to fund our operations for
the next year. However, due to risks and uncertainties in the market place, we
may need to raise additional capital. To provide additional flexibility, we
received a commitment letter from a commercial bank in April 2003 in connection
with a line of credit in the amount of the lesser of $2.0 million or the
borrowing base, as defined (limited to a percentage of eligible domestic
accounts receivable). We are finalizing the terms and documenting the loan
agreement. In addition, if the capital markets present other attractive
opportunities, we may raise cash through the sale of equity or issuance of debt.
We have no material commitments for capital expenditures, and we anticipate
minimal spending on capital expenditures as our needs in operations,
infrastructure and personnel arise.
17
AXEDA SYSTEMS INC.
Employee and Director Stock Options
Option Program Description
Our stock option program is a broad-based, long-term retention program
that is intended to attract, retain and provide performance incentives for
talented employees, officers and directors, and to align stockholder and
employee interests. Currently, we grant options from the 1999 Stock Incentive
Plan (1999 Plan). The 1999 Plan has three separate programs which include: the
discretionary option grant program, under which employees may be granted options
to purchase shares of common stock; the stock issuance program, under which
eligible employees may be granted shares of common stock; and the automatic
grant program, whereby eligible non-employee board members are granted options
to purchase shares of common stock. In addition, our stock option program
includes the 1995 Stock Option Plan (the 1995 Plan), from which we no longer
grant options. The plans listed above are collectively referred to in the
following discussion as "the Plans." We consider our option programs critical to
our operation and productivity; essentially all of our employees participate.
Option vesting periods are generally 1 to 4 years and expire 10 years from the
grant date for the 1999 Plan. Option vesting periods are generally 2 to 5 years
and expire 5 to 10 years from the grant date for the 1995 Plan.
All stock option grants to executive officers are made after a review
by and with the approval of the Compensation Committee of the Board of
Directors. All members of the Compensation Committee are independent directors,
as defined in the current and proposed rules applicable to issuers traded on the
NASDAQ Stock Market. See the "Compensation Committee Report in Executive
Compensation" appearing in our 2003 Proxy Statement for further information
concerning our policies and procedures, including those of the Compensation
Committee, regarding the use of stock options.
Distribution and Dilutive Effect of Options
The table below provides information about stock options granted for
the first quarter of 2003 and for the year ended December 31, 2002 to our Chief
Executive Officer and our three other executive officers, as identified in our
2003 Proxy Statement. This group is referred to as the Named Executive Officers.
Please refer to the section headed "Executive Options" below for the Named
Executive Officers.
Options granted to Named Executive Officers for the first quarter of
2003 and the year ended December 31, 2002 are summarized as follows:
Three Months Year Ended
Ended March 31, December 31,
2003 2002
------ -------
Net grants during the period as % of outstanding shares (#) .......... -% 9.17%
Grants to named executive officers* during the period as %
of total options granted (%) ......................................... -% 13.82%
Grants to named executive officers* during the period as %
of outstanding shares granted (%) .................................... -% 1.27%
Cumulative options held by named executive officers* as %
of total options outstanding (%) .....................................39.26% 40.90%
* See "Stock Option Exercises and Option Holdings," below for named executive
officers; these are our CEO and our three other executive officers.
18
General Option Information
The following table sets forth the summary of activity under the Plans
for the three months ended March 31, 2003 and the year ended December 31, 2002:
Options Outstanding
----------------------------------
Number of Shares Weighted Average
Available for Exercise Price
Options Number of Shares (per share)
------- ---------------- -----------
December 31, 2001 ........ 771,301 3,781,592 $ 2.43
------- --------- --------
Grants ................... (2,533,700) 2,533,700 1.63
Exercises ................ -- (207,331) 0.26
Cancellations* ........... 925,823 (1,029,142) 3.27
Additional shares reserved 1,100,000 N/A
--------- ---------
December 31, 2002 ........ 263,424 5,078,819 $ 1.95
------- --------- --------
Grants ................... -- -- --
Exercises ................ -- (2,500) 0.01
Cancellations* ........... 83,015 (90,047) 1.58
Additional shares reserved 600,000 N/A
------- ----------
March 31, 2003 ........... 946,439 4,986,272 $ 1.95
======= ========== =====
* The "Number of Shares Available for Options" does not include options under
assumed plans exercisable for 103,319 and 7,032 shares that were cancelled
during 2002 and the first quarter of 2003, respectively, as no options will be
granted in the future pursuant to these assumed plans.
The following table sets forth a comparison, as of March 31, 2003, of the number
of shares subject to our options whose exercise prices were at or below the
closing price of our common stock on March 31, 2003 ("In-the-Money" options) to
the number of shares subject to options whose exercise prices were greater than
the closing price of our common stock on such date ("Out-of-the-Money" options):
Exercisable Unexercisable Total
------------------------ -------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ------ ------ ------------- ------ --------
In-the-money ............ . 798,637 $ 0.01 320,067 $ 0.01 1,118,704 $ 0.01
Out-of-the-money (1) .... . 1,607,352 $ 3.92 2,260,216 $ 1.52 3,867,568 $ 2.51
Total options outstanding . 2,405,989 $ 2.62 2,580,283 $ 0.75 4,986,272 $ 1.95
(1) Out-of-the-money options are those options with an exercise price equal to
or above the closing price of $0.40 as of March 31, 2003, as reported by the
NASDAQ National Market.
Executive Options
We did not grant any stock options to our Named Executive Officers in the first
quarter of 2003.
19
Stock Option Exercises and Option Holdings
The following table shows stock options exercised by the Named Executive
Officers in the three months ended March 31, 2003, if any, including the total
value of gains on the date of exercise based on actual sale prices or on the
closing price that day if the shares were not sold that day, in each case less
the exercise price of the stock options. In addition, the number of shares
covered by both exercisable and non-exercisable stock options, as of March 31,
2003, is shown. Also reported are the values for "In-the-Money" options. The
dollar amounts shown in the "In-the-Money" column represent the positive spread
between the exercise price of any such existing stock options and the closing
price as of March 31, 2003 of our common stock.
Number of Securities Underlying Values of Unexercised
Number of Shares Unexercised Options In-the-Money Options**
Named Executive Acquired on Value ------------------------------ ----------------------------
Officer * Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------- -------- -------- ----------- ------------- ----------- -------------
Robert M. Russell - $ - 315,415 565,585 $62,833 $ 69,567
Dale Calder - - 359,375 215,625 86,250 33,750
Thomas J. Fogarty - - 197,290 132,710 50,000 -
Ned Barlas - - 108,560 63,273 21,000 -
*The definition of "named executive officer" here is the same definition used in
our 2003 proxy statement: our CEO and our three other executive officers.
**Option values based on stock price of $0.40 on March 31, 2003.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued
upon the exercise of options under all of our existing equity compensation plans
as of March 31, 2003:
(1) (2) (3)
Number of Securities
Number of Securities Weighted-Average Remaining Available for
to be Issued upon Exercise Price of Future Issuance Under Equity
Exercise of Outstanding Options, Compensation Plans (Excluding
Outstanding Options, Warrants, and Rights Securities Reflected in
Plan Category Warrants, and Rights (per share) Column (1) )
- ------------- ---------- -------------- ------------------
Equity Compensation Plan Approved by
Shareholders (A) (B) 3,667,913 $ 2.19 946,439
========= ====== =======
(A) On December 7, 2001, we acquired all of the outstanding shares of
eMation, Ltd., a private company organized under the laws of the State
of Israel, pursuant to a share purchase agreement amended and restated
as of October 5, 2001. In connection with such acquisition, we assumed
options issued under eMation, Ltd.'s 2001 Stock Option Plan that
became exercisable for up to 1,428,710 shares of our common stock,
530,000 of which are exercisable for $0.01 per share and the remaining
898,710 exercisable at $2.14 per share. No options have been or will
be granted under the eMation, Ltd. 2001 Stock Option Plan subsequent
to our acquisition of eMation, Ltd.
(B) The number of shares reserved for issuance under our 1999 Stock
Incentive Plan is automatically increased on January 1 of each year by
an amount equal to three percent (3%) of the shares of Common Stock
outstanding on the last trading day of the immediately preceding
calendar year, but in no event shall such annual increase exceed six
hundred thousand (600,000) shares. On January 1, 2003, 600,000
additional shares were reserved for issuance. If proposal three in our
2003 proxy statement is approved at our 2003 annual meeting, the limit
of six hundred thousand (600,000) shares on the amount by which the
share reserve under the plan automatically increases at the beginning
of each year will be increased to one million (1,000,000) shares.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in note 1j to
the consolidated financial statements included at Part I, Item 1 herein.
20
Axeda Systems Inc.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISK FACTORS
Our business is subject to a number of risks. You should carefully consider the
risks described below, in addition to the other information contained in this
Report and in our other filings with the SEC. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also affect our business operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose part or all of your investment.
We have never been profitable and may never achieve profitability in the future
We had a net loss from operations of approximately $4.8 million for the quarter
ended March 31, 2003. To date, we have not achieved operating profitability on
an annual basis.
We have invested and continue to invest significant resources in product
development, selling and marketing, services and support and administrative
expenses. To achieve profitability, we will need to increase revenues and/or
reduce expenses significantly. We cannot assure you that our revenues will grow
or that we will achieve or maintain profitability in the future.
Our future success depends upon the acceptance of our DRM solutions
Our future growth will be driven by the Axeda DRM System and related services.
We have limited experience in this market. We acquired eMation in December 2001.
eMation was founded in 1988 and historically derived its main source of revenues
from its industrial automation products. We offer the Axeda DRM System and also
continue to separately sell the Axeda Supervisor, Axeda @aGlance/IT, Axeda Web
@aGlance and Axeda FactorySoft OPC to support our traditional industrial
automation business.
Net revenues from our legacy products, which include Axeda Supervisor, Axeda
@aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC, have decreased and we
expect that net revenues from these products will continue to decline in the
future as we focus our efforts on the development of the Axeda DRM System
Net revenues from eMation's legacy products, which include Axeda Supervisor,
Axeda @aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC, have accounted
for a significant portion of its historical net revenues but have declined
recently. We anticipate that net revenues from our legacy products will continue
to decline in the future as we plan to continue to focus on the development of
the Axeda DRM System. We do not know if this transition in product development
will be successful. If the expected decline in net revenues attributable to our
legacy products is not offset by increases in net revenues from the Axeda DRM
System, our business will be harmed.
It may be difficult to raise needed capital in the future, which could
significantly harm our business
We may require substantial additional capital to finance our future growth and
fund our ongoing research and development activities beyond 2003. Our capital
requirements will depend on many factors, including:
o acceptance of and demand for our products;
o the costs of developing new products; and
o the extent to which we invest in new technology and research and
development projects.
Although our current business plan does not foresee the need for further
financing to fund our operations for the next year, due to risks and
uncertainties in the market place, we may need to raise additional capital.
Additionally, to the extent that the proceeds from the dispositions of our CE
and IA businesses and license of our PC business are exhausted, and if our
existing sources of cash and cash flow from operations, if any, are insufficient
to fund our activities, we may need to raise additional funds. Our cash used in
operations for the three months ended March 31, 2003 and 2002 were $(6.9)
million and $(8.8) million, respectively. We may be unable to finalize the
documentation in order to draw down on the $2.0 million line of credit offered
in an April 2003 commitment letter from a commercial bank. If we issue
additional stock to raise capital, your percentage ownership in Axeda would be
reduced. Additional financing may not be available when needed and, if such
financing is available, it may not be available on terms favorable to us.
We received a letter from NASDAQ stating that if we are unable to comply with
the minimum bid price of $1.00, our common stock will be delisted
We received a letter dated January 6, 2003, from the staff of the NASDAQ Stock
Market, or NASDAQ, which notified us that the bid price for our common stock had
been below $1.00 per share for a period of thirty consecutive days. NASDAQ
21
advised us that we would be given a period of ninety days within which to comply
with the minimum bid price requirement in order to maintain the listing of our
common stock on the NASDAQ National Market. We received further notification
from the NASDAQ that on March 11, 2003, the Securities and Exchange Commission
declared effective NASDAQ's rule filing which extends the compliance period from
90 calendar days to 180 calendar days. If we are unable to demonstrate
compliance with the minimum bid requirement for ten consecutive days on or
before July 7, 2003, NASDAQ will provide us with written notification that our
common stock will be delisted. At that time we may appeal the staff's decision
to a NASDAQ Listing Qualification Panel. In the alternative, we may apply to
transfer our securities to the NASDAQ SmallCap Market. If we submit a transfer
application and pay the applicable listing fees by July 7, 2003, initiation of
de-listing proceedings will be stayed pending NASDAQ's review of our transfer
application. If the transfer application is approved, we will have a 180 day
grace period ending on January 1, 2004 from meeting the NASDAQ SmallCap listing
requirements, and may be eligible for an additional 90 day grace period if we
continue to meet the initial listing requirements for the NASDAQ SmallCap
Market. We intend to pursue all available options to meet the NASDAQ listing
requirements. If our common stock is delisted from the NASDAQ National Market,
sales of our common stock would likely be conducted on the SmallCap Market or in
the over-the-counter market. This may have a negative impact on the liquidity
and price of our common stock.
Economic conditions could adversely affect our revenue growth and ability
to forecast revenue
The revenue growth of our business depends on the overall demand for DRM
software and services. Because our sales targets are primarily major corporate
customers in the medical instruments, enterprise technology, the industrial and
building equipment, and office and print production industries, our business
depends on the overall economic conditions and the economic and business
conditions within these industries. Predictions regarding economic conditions
have a low degree of certainty, and further predicting the effects of the
changing economy is even more difficult. Customers may defer or reconsider
purchasing products if they continue to experience a lack of growth in their
business or if the general economy fails to significantly improve. The September
11, 2001 terrorist attacks, consequences of the war in Iraq, and the possibility
of war or hostilities relating to other countries, and changes in international
political conditions as a result of these events may continue to affect the U.S.
and the global economy and could adversely affect the growth rate of our
software license and services revenue and have an adverse effect on our
business, financial condition or results of operations.
Our historical financial information is of limited value in projecting our
future operating results or evaluating our operating history
We believe that you should not rely on the results for any period prior to the
eMation acquisition as an indication of our future performance because our
business model has changed significantly since the sales of our CE and IA assets
in the first quarter of 2001, the license of our PC technology to Sonic in May
2002, and the acquisition of eMation in December 2001.
We may not be able to compete effectively
Competition in the market for DRM solutions is emerging and expected to grow
stronger. We expect that competition will increase in the near term and that our
primary long-term competitors may not yet have entered the market. Our future
competitors may have significantly more personnel or greater financial,
technical, marketing and other resources than either our current competitors or
we do. Furthermore, our future competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements than we
can. Also, future competitors may have greater name recognition and more
extensive customer bases that they can leverage. Increased competition could
result in price reductions, fewer customer orders, reduced gross profit margins
and loss of market share, any of which could harm our business.
We may not be able to keep pace with technological advances
The process of remotely extracting and managing information from intelligent
devices will likely be characterized by rapid technological change, frequent new
product introductions and emerging industry standards. We also expect that the
rapid evolution of Internet-based applications and standards, as well as general
technology trends such as changes in or introductions of operating systems, will
require us to adapt our products to remain competitive. Our products could
become obsolete and unmarketable if we are unable to quickly adapt to new
technologies or standards.
22
To be successful, we will need to develop and introduce new products and product
enhancements that respond to technological changes, evolving industry standards
and other market changes and developments in a timely manner and on a
cost-effective basis. Although we plan to continue to spend substantial amounts
on research and development in the future, we cannot assure you that we will
develop new products and product enhancements successfully or that our products
will achieve broad market acceptance. Our failure to respond in a timely and
cost-effective manner to new and evolving technologies and other market changes
and developments could adversely impact our business.
Our sales cycle for DRM products is long and may be seasonal and we may rely on
large contracts from relatively few DRM customers, which may cause our operating
results to fluctuate
Our sales cycle is lengthy and may be subject to seasonality. Our sales
typically involve significant capital investment decisions by prospective
customers, as well as a significant amount of time to educate them as to the
benefits of our products. As a result, before purchasing our products, companies
spend a substantial amount of time performing internal reviews and obtaining
capital expenditure approvals. It may take up to nine to twelve months or more
from the time we first contact a prospective customer before receiving an
initial order. The length of our sales cycle may also depend on a number of
additional factors, including the following:
o the complexities of the problems our solutions address;
o the breadth of the solution required by the customer, including the
technical, organizational and geographic scope of the license;
o the sales channel through which the solution is sold;
o the economic conditions in the United States and abroad;
o increased economic uncertainty and political instability world-wide
following the September 11, 2001 terrorist attacks, the war in Iraq and
the threat of future outbreak or continued escalation of hostilities
involving the United States or other countries; and
o any other delays arising from factors beyond our control.
Furthermore, our software license revenues may result from a relatively small
number of sales, some of which generate disproportionately large revenues.
Variations in the length of our sales cycles could cause our revenue to
fluctuate widely from period to period. Because we typically recognize a
substantial portion of our software revenue in the last month of a quarter, any
delay in the license of our products could cause significant variations in our
revenue from quarter to quarter. These fluctuations could cause our operating
results to suffer in some future periods because our operating expenses are
relatively fixed over the short term and we devote significant time and
resources to prospective clients.
A variation in the conversion of our revenue pipeline to contracts could
adversely affect our revenues and ability to forecast operations
Our revenue pipeline estimates may not consistently correlate to actual revenues
in a particular quarter or over a longer period of time. A slowdown in the
economy, domestically and internationally, has caused and may continue to cause
customer purchasing decisions to be delayed, reduced in amount or canceled, all
of which have reduced and could continue to reduce the rate of conversion of the
pipeline into contracts. A variation in the pipeline or in the conversion of the
pipeline into contracts could cause us to plan or budget inaccurately and
thereby could adversely affect our business, financial condition or results of
operations.
Implementation of our products can be difficult, time-consuming and expensive
and customers may be unable to implement our products successfully or otherwise
achieve the benefits attributable to our products
Our customers often desire to integrate our DRM solutions with their existing
computer systems and software programs. This can be complex, time-consuming and
expensive, and may cause delays in the deployment of our products. As a result,
some customers may have difficulty or be unable to implement our products
successfully or otherwise achieve the benefits attributable to our products.
Delayed or ineffective implementation of our software and services may limit our
ability to expand our revenues and may result in customer dissatisfaction, harm
to our reputation and cause issues relating to the collection of accounts
receivable.
We are dependent upon our key management for our future success, and few of our
key personnel are obligated to stay with us
Our success depends on the efforts and abilities of our senior management and
certain other key personnel. Many of our key employees are employed at will. Our
business could be harmed if any of these or other key employees left or was
seriously injured and unable to work and we were unable to find a qualified
replacement.
Our future growth will be limited if we are unable to expand our indirect
distribution sales channels
We currently have relationships with only a limited number of indirect
distribution channels, consisting of relationships with independent software
vendors, software distributors and system integrators. Nevertheless, we have
derived, and we anticipate that we will continue to derive, a significant
portion of our revenues from these relationships.
23
Our future growth will be limited if:
o we fail to work effectively with indirect distribution channels;
o we fail to increase the number of indirect distribution channels with
which we have relationships;
o the business of one or more of our indirect distribution channels fails;
or
o there is a decrease in the willingness and ability of our indirect
distribution channels to devote sufficient resources and efforts to
marketing and supporting our products.
If any of these circumstances occurs, we will have to devote substantially more
resources to the sales, marketing, distribution, implementation and support of
our products than we otherwise would, and our own efforts may not be as
effective as those of our indirect distribution channels.
Increased sales through indirect channels may adversely affect our
operating performance
Even if our marketing efforts through indirect channels are successful and
result in increased sales, our average selling prices and operating margins
could be adversely affected because of the lower unit prices that we receive
when selling through indirect channels.
We depend on our strategic partners and other third parties for sales and
implementation of our products. If we fail to derive benefits from our existing
and future strategic relationships, our business will suffer
From time to time, we have collaborated with other companies in areas such as
marketing, distribution or implementation. Maintaining these and other
relationships is a meaningful part of our business strategy. However, some of
our current and potential strategic partners are either actual or potential
competitors, which may impair the viability of these relationships. In addition,
some of our relationships have failed to meet expectations and may fail to meet
expectations in the future. A failure by us to maintain existing strategic
relationships or enter into successful new strategic relationships in the future
could seriously harm our business, operating results and financial condition.
Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed
Our ability to compete depends substantially upon our internally developed
technology. We have a program for securing and protecting rights in patentable
inventions, trademarks, trade secrets and copyrightable materials. However,
there can be no assurance that we have taken or will take all necessary steps to
protect our intellectual property rights. If we are not successful in protecting
our intellectual property, our business could be substantially harmed.
We regard the protection of patentable inventions as important to our business.
We currently have eleven U. S. patent applications pending relating to our DRM
business and nine patent applications pending internationally. It is possible
that our pending patent applications may not result in the issuance of patents
or that our patents may not be broad enough to protect our proprietary rights.
We rely on a combination of laws, such as copyright, trademark and trade secret
laws, and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our proprietary rights. Despite any
precautions which we have taken:
o laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
o other companies may claim common law or other trademark rights based
upon state or foreign law which precede our registration or use of such
marks;
o current federal laws that prohibit software copying provide only
limited protection from software pirates, and effective trademark,
copyright and trade secret protection may be unavailable or limited in
certain foreign countries;
o policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming and we are unable to determine the extent
to which piracy of our products and trademarks may occur, particularly
overseas;
o certain of our products are licensed under shrink-wrap license
agreements that are not signed by licensees and therefore may not be
binding under the laws of certain jurisdictions; and
o tamper-resistant copy protection codes and dongles may not be
successful in preventing unauthorized use of our software.
The laws of other countries in which we market our products might offer little
or no effective protection of our proprietary technology. Reverse engineering,
unauthorized copying or other misappropriation of our proprietary technology
could enable third parties to benefit from our technology without paying us for
it, which could significantly harm our business.
Any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenue. Infringement claims
and lawsuits would likely be expensive to resolve and would require management's
time and resources and, therefore, could harm our business.
24
We may be subject to product returns, product liability claims and reduced sales
because of defects in our products
Our products are very complex and may contain undetected errors that could harm
our reputation, result in product liability or decrease market acceptance of our
products. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Our products are integrated with
our customers' networks and software applications. Errors may also arise as a
result of defects in the products and systems into which our products are
incorporated. We are unable to test our products in each of the applications in
which they are designed to work. It is possible that defects could cause our
customers to experience device or application failures. We have an extensive
quality assurance process in place and procedures to handle customer complaints
and deliver bug fixes. Despite our quality assurance process and that of our
customers, defects and errors may be found in new products or in new versions or
enhancements of existing products after commercial shipment has begun. We may be
required to devote significant financial resources and personnel to correct any
defects. Known or unknown errors or defects that affect the operation of our
products could result in the following, any of which could harm our business:
o delay or loss of revenues;
o although we have not lost a customer due to defects, it is foreseeable
that a customer could cancel a contract due to defects;
o diversion of development resources;
o increased product development costs;
o damage to our reputation;
o delay or diminish market acceptance of our products;
o increased service and warranty costs; and
o litigation costs.
Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition, our product
liability insurance may not be adequate to cover our losses in the event of a
product liability claim resulting from defects in our products and may not be
available to us in the future.
Substantial litigation regarding intellectual property rights exists in our
industry
There is a risk that third-parties, including current and potential competitors
and current developers of our intellectual property, will claim that our
products, or our customers' products, infringe on their intellectual property
rights or that we have misappropriated their intellectual property. Software,
business processes and other property rights in our industry might be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Other parties might currently have, or might eventually be
issued, patents that infringe on the proprietary rights we use. Any of these
third parties might make a claim of infringement against us.
We may be required to pay substantial damages and may be restricted or
prohibited from selling our products if it is proven that we violate the
intellectual property rights of others. The defense of infringement claims and
lawsuits, regardless of their outcome, would likely be expensive to resolve and
could require a significant portion of management's time. We cannot assume that
we will prevail in intellectual property disputes regarding infringement,
misappropriation or other disputes. Litigation in which we are accused of
infringement or misappropriation might cause a delay in the introduction of new
products, require us to develop non-infringing technology, require us to enter
into royalty or license agreements, which might not be available on acceptable
terms, or at all, or require us to pay substantial damages, including triple
damages if we are held to have willfully infringed a third party's intellectual
property. If a successful claim of infringement was made against us and we could
not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could be
significantly harmed.
In addition, rather than litigating an infringement matter, we may determine
that it is in our best interests to settle the matter. The terms of a settlement
may include the payment of damages and our agreement to license technology in
exchange for a license fee and ongoing royalties. These fees may be substantial.
If we are forced to take any of the actions described above, defend against any
claims from third parties or pay any license fees or damages, our business could
be harmed.
25
We have received notices of claims related to our PC products regarding the
alleged infringement of third parties' intellectual property rights that may
cause us to pay damages
Some third parties claim to hold patents covering various aspects of DTV, HDTV
and DVD technology incorporated into our former and our former customers'
digital media products and have claimed that various aspects of DTV, HDTV and
DVD technology incorporated into our and our customers' digital media products
infringe upon patents held by them, including the following:
o A group of companies has formed a consortium known as MPEG-LA to
enforce the proprietary rights of other holders of patents covering
essential aspects of MPEG-2 technology that were incorporated into our
former products.
o Another group of companies has formed a consortium known as DVD6C
(formerly DVD Patent License Program) to enforce the proprietary rights
of other holders of patents covering essential aspects of DVD
technology that were incorporated into our former products.
o Another consortium of companies, commonly known as 3C, notified a
number of DVD product manufacturers that the members of the consortium
hold patents that are essential to DVD technology, and have requested
that such companies pay license royalties for the use of the technology
covered by the 3C patents.
If MPEG LA, DVD6C, 3C, or any other third party proves that our former digital
media products infringe their proprietary rights, we may be required to pay
substantial damages for such past infringement.
We may also be liable to some of our former customers for damages that they
incur in connection with intellectual property claims. Some of our license
agreements with former customers contain warranties of non-infringement and/or
commitments to indemnify our customers against liability arising from
infringement of third-party intellectual property, which may include third-party
intellectual property such as the patents held by members of MPEG LA, DVD6C, and
others. These commitments may require us to indemnify or pay damages to our
customers for all or a portion of any license fees or other damages, including
attorneys' fees, they are required to pay or agree to pay these or other third
parties. We have received notices of up to an aggregate of $6.5 million
asserting rights under the indemnification provisions and warranty provisions of
our license agreements from several former digital media products customers. We
may be required to pay substantial damages with respect to such indemnification
assertions.
Stock-based compensation will negatively affect our operating results
We have recorded deferred compensation in connection with the grant of stock
options to employees where the option exercise price is less than the estimated
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred stock compensation, net of
forfeitures, within stockholders' equity of $2.0 million at March 31, 2003,
which is being amortized over the vesting period of the related stock options,
ranging from one to four years. A balance of $0.4 million remains at March 31,
2003 and will be amortized as follows: $0.3 million in 2003; and $0.1 million in
2004.
The amount of stock-based compensation in future periods will increase if we
grant stock options where the exercise price is less than the quoted market
price of the underlying shares or if we modify the terms of existing stock
options. The amount of stock-based compensation amortization in future periods
could decrease if options for which accrued, but unvested deferred compensation
has been recorded, are forfeited.
Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability
We conduct business in a number of different countries. We sell products in
several countries outside the United States, including France, Germany, Holland,
Japan, the United Kingdom, Israel and other countries in Asia and Latin America.
Our operations outside the United States include facilities located in France
and Japan. For the quarter ended March 31, 2003, we derived approximately 64% of
our revenues from sales to foreign companies. We anticipate that revenues from
international operations will continue to represent a significant portion of our
revenues. As a result, we are subject to risks associated with selling and
operating in foreign countries. For example, some of our contracts with foreign
customers are denominated in foreign currencies. We do not currently hedge
against the risk of such transactions and as a result, we face a risk of loss
related to possible fluctuations in currency exchange rates.
26
Our geographic diversity requires significant management attention and financial
resources. Significant management attention and financial resources are needed
to develop our international sales, support and distribution channels. We may
not be able to maintain international market demand for our products. Our
business could be adversely impacted if we are unable to successfully launch our
DRM products into our international operations.
Additional risks related to selling and operating in foreign countries include,
among others:
o legal uncertainty regarding liability;
o language barriers in business discussions;
o cultural differences in the negotiation of contracts and conflict
resolution;
o time zone differences;
o reduced protection for intellectual property rights in some countries;
o differing labor regulations;
o tariffs, trade barriers and other regulatory barriers;
o problems in collecting accounts receivable;
o political and economic instability;
o changes in diplomatic and trade relationships;
o seasonal reductions in business activity;
o potentially adverse tax consequences;
o complexity and unexpected changes in local laws and regulations;
o greater difficulty in staffing and managing foreign operations; and
o increased financial accounting and reporting burdens and complexities.
We are subject to conditions attached to governmental grants we have
received in Israel
Prior to being acquired by us in December 2001, eMation received grants in
Israel from the Office of the Chief Scientist, or OCS, in the aggregate amount
of $1.8 million to fund the development of our Axeda Supervisor product. We have
paid royalties to the OCS in the aggregate amount of $1.4 million. As of March
31, 2003, $0.2 million of the remaining potential $0.4 million of principal
liability is accrued in other current liabilities. We are obligated to pay
royalties of 3.0% to 3.5% of revenues derived from sales of products funded
through grants received from the OCS. The terms of the OCS grants require that
we manufacture our products that are developed with such grants in Israel. In
addition, we may not transfer the technology developed pursuant to the terms of
these grants to third parties without the prior approval of a governmental
committee.
Additionally, prior to being acquired by us in December 2001, eMation received
grants from the Israeli Government through the Marketing Fund in the aggregate
amount of $1.2 million and royalties in the aggregate amount of $0.6 million
have been repaid. As of March 31, 2003, $0.3 million of the remaining potential
$0.6 million of principal liability is accrued in other current liabilities. We
are obligated to pay royalties of 4.0% of revenues derived from sales of
products that result from grants received through the Marketing Fund.
Because of their significant stock ownership, our officers and directors can
exert significant influence over our future direction
As of March 31, 2003, our executive officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 4.0 million
shares, or approximately 15% of our outstanding common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors, the approval of mergers or other business combination transactions or
a sale of all or substantially all of our assets.
27
Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to our stockholders
The board of directors has the authority without any further vote or action on
the part of our stockholders to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions of
the preferred stock. This preferred stock, if it is ever issued, may have
preference over and harm the rights of the holders of our common stock. Although
the issuance of this preferred stock will provide us with flexibility in
connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.
Our certificate of incorporation and by-laws include provisions that may have
the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only capable of being removed by the
affirmative vote of 66 2/3% or greater of all classes of voting stock. These
factors may further delay or prevent a change of control.
We may not be able to compete effectively in the Internet-related products
and services market
Our DRM solutions communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to
continue developing products that are compatible with the Internet. We cannot
predict with any assurance whether the demand for Internet-related products and
services will increase or decrease in the future.
Critical issues concerning the commercial use of the Internet, including
security, privacy, demand, reliability, cost, ease of use, accessibility,
quality of service and potential tax or other government regulation, remain
unresolved and may affect the use of the Internet as a medium to support the
functionality of our products. If these critical issues are not favorably
resolved, our business, financial condition or results of operations could be
adversely affected.
Our business is subject to changes in financial accounting standards, which may
affect our reported revenue, or the way we conduct business
We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP"). GAAP are subject to
interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants ("AICPA"), the SEC and various bodies
appointed by these organizations to interpret existing rules and create new
accounting policies. In particular, a task force of the Accounting Standards
Executive Committee, a subgroup of the AICPA, meets on a quarterly basis to
review various issues arising under the existing software revenue recognition
rules, and interpretations of these rules. Additional interpretations issued by
the task force may have an adverse effect on how we report revenue or on the way
we conduct our business in the future.
28
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell such products in North
America, Asia and various countries in Europe. We collect a portion of our
revenues and pay a portion of our operating expenses in foreign currencies. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Currently, we do not use derivative instruments to hedge our foreign exchange
risk, although we may do so in the future. Our interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated
under the Securities Exchange Act of 1934) are effective.
b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation including any corrective actions with regard to significant
deficiencies and material weakness.
29
PART II: OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
Between February and April 2000, eleven class action lawsuits were filed against
certain of our current and former officers and directors and us in the United
States District Court for the Eastern District of Pennsylvania. On May 25, 2000,
the cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In
re RAVISENT Technologies Inc. Securities Litigation." Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Act of 1933, Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder and seeks unspecified damages on behalf of a purported class of
purchasers of our stock during the period stated above. On July 3, 2000, we
filed a motion to dismiss the consolidated and amended class action complaint.
The motion is presently fully briefed and the parties are waiting for a hearing
date to be set for the motion. Certain of our employees and certain holders of
5% or more of Axeda common stock are members of the putative classes alleged in
these actions and therefore may have interests adverse to us with respect to the
alleged claims in these actions. We believe that such lawsuits or claims are
without merit and that we have meritorious defenses to the actions. We plan to
vigorously defend the litigation. However, failure to successfully defend these
actions could substantially harm our results of operations, liquidity and
financial condition.
On November 27, 2001, a putative shareholder class action was filed against us,
certain of our officers and directors, and several investment banks that were
underwriters of our initial public offering. The action was filed in the United
States District Court for the Southern District of New York, purportedly on
behalf of investors who purchased our stock between July 15, 1999 and December
6, 2000. The lawsuit alleges violations of Sections 11 and 15 of the Securities
Act of 1933 and Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder against one or both of the Company and the
individual defendants. The claims are based on allegations that the underwriter
defendants agreed to allocate stock in our July 15, 1999 initial public offering
to certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases in the aftermarket at
pre-determined prices. Plaintiffs allege that the prospectus for our initial
public offering was false and misleading in violation of the securities laws
because it did not disclose these arrangements. Similar "IPO allocation" actions
have been filed against over 300 other issuers that have had initial public
offerings since 1998 and all are included in a single coordinated proceeding in
the Southern District of New York. Certain of our employees were members of the
putative classes alleged in these actions (the "Individual Defendants"). On July
15, 2002, we moved to dismiss all claims against the Individual Defendants and
us. On October 9, 2002, the Court dismissed the Individual Defendants from the
case without prejudice. We believe that such lawsuit and claims are without
merit and that we have meritorious defenses to the actions. We plan to
vigorously defend the litigation. However, failure to successfully defend this
action could substantially harm our results of operations, liquidity and
financial condition.
On March 20, 2003, Industria Politecnica Meridionale Spa. ("IPM"), an Italian
corporation, filed a claim against us. The action was filed in the United States
District Court for the Northern District of California (the "Court"). The
lawsuit alleges breach of an agreement between our Internet appliance subsidiary
and IPM and fraud in connection with the delivery of circuit boards to IPM that
were unsuited for the purpose for which they were intended, and claims damages
of $15 million for breach of contract, and $15 million each for fraud and
punitive or exemplary damages. We believe that such lawsuit and claims are
wholly without merit and that we have meritorious defenses to the actions, as
well as significant counterclaims. We plan to vigorously defend the litigation,
and, on May 2, 2003 we moved to dismiss all claims against us. However, failure
to successfully defend this action could substantially harm our results of
operations, liquidity and financial condition. We are unable to predict the
outcome of these matters or reasonably estimate an amount of possible loss given
the current status of this matter.
From time to time, we have received notices of claims of infringement of other
parties' proprietary rights and other claims in the ordinary course of our
business. See "RISK FACTORS - We have received notices of claims related to our
PC products regarding the alleged infringement of third parties' intellectual
property rights that may cause us to pay damages." We have accrued for estimated
losses in the accompanying financial statements for those matters where we
believe the likelihood of an adverse outcome is probable and the amount of the
loss is reasonably estimable. The adverse resolution of any one or more of these
matters could have a material adverse effect on our business, financial
condition or results of operations.
30
AXEDA SYSTEMS INC.
Item 2: CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
In February 2003, we issued a warrant to purchase 100,000 shares of our
common stock, with an exercise price of $0.58533 and expiring in
February 2004 in connection with the settlement of a dispute with a
former lender. The warrant was issued in a private placement exempt
from registration under the Securities Act of 1933 pursuant to Section
4(2) of the Act.
Item 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5: OTHER INFORMATION
On April 30, 2003 the Company filed a proxy statement for the following purposes
at its annual meeting of stockholders to be held June 17, 2003:
1. To elect two directors to serve for a three-year term ending in the
year 2006 and until their successors are duly elected and qualified, or
until their earlier resignation or removal;
2. To approve an amendment to our 1999 Stock Incentive Plan to increase
the number of shares authorized for issuance over the term of the plan
(prior to any future automatic increase) by an additional 500,000
shares;
3. To approve an amendment to our 1999 Stock Incentive Plan to increase
the limit on the amount by which the share reserve under the plan
automatically increases at the beginning of each year from 3% of
outstanding shares up to a maximum of six hundred thousand (600,000)
shares to 3% of outstanding shares up to a maximum of one million
(1,000,000) shares;
4. To ratify the appointment of KPMG LLP as our independent auditors for
the year ending December 31, 2003; and
5. To transact such other business as may properly come before our annual
meeting and any adjournment or postponement thereof.
31
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
Exhibit Title
99.1* Certifications required pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Filed herewith
(b) The following reports were filed on Form 8-K during this period:
On February 5, 2003 the Registrant filed a Form 8-K to furnish information
pursuant to Regulation FD, including its February 4, 2003 press release
announcing financial results for the fourth quarter and year ended December 31,
2002.
On March 5, 2003 the Registrant filed a Form 8-K to announce that on March 5,
2003, Axeda Systems Inc. submitted the certification required pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 in connection with its Form 10-K
for the year December 31, 2002.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Mansfield,
Commonwealth of Massachusetts on this 15th day of May 2003.
May 15, 2003
Axeda Systems Inc.
/s/ Thomas J. Fogarty
-----------------
Thomas J. Fogarty
Executive Vice President and Chief Financial Officer
33
CERTIFICATIONS
I, Robert M. Russell Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Axeda Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Robert M. Russell Jr.
-------------------------
Robert M. Russell Jr.
Chairman of the Board and
Chief Executive Officer
34
AXEDA SYSTEMS INC.
I, Thomas J. Fogarty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Axeda Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Thomas J. Fogarty
---------------------
Thomas J. Fogarty
Executive Vice President and
Chief Financial Officer
35