United States of America
In the Matter of
AXEDA SYSTEMS INC.,
|ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934|
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Axeda Systems Inc., Jason C. Liu and Stewart C. Adams (collectively "Respondents").
In anticipation of the institution of these proceedings, the Respondents have submitted Offers of Settlement (the "Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondents each consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondents' Offers, the Commission finds that:
1. Axeda Systems Inc., a Delaware corporation located in Malvern, Pennsylvania, is the successor name of Ravisent Technologies, Inc. ("Ravisent"), which was the name of the company during the time of the violations alleged herein. In July 1999, Ravisent conducted an initial public offering of 5,750,000 shares of common stock at $12 per share. Ravisent's common stock has been registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the NASDAQ. For the fiscal year ended December 31, 2000, Ravisent reported revenue of approximately $20.9 million and a net loss of approximately $40.9 million.
2. Jason C. Liu, age 32, a resident of Naperville, Illinois, was Ravisent's Chief Financial Officer from June 1996 through May 2000, when he resigned from the company.
3. Stewart C. Adams, age 49, a resident of Millington, New Jersey, is a certified public accountant and was Ravisent's controller from February 1999 through April 2000, when he resigned from the company.
4. During the relevant time period, Ravisent's principal business was the development and licensing of software products to manage video and audio data in personal computers and other consumer electronics devices. Its customers consisted primarily of personal computer and consumer electronics manufacturers. Prior to August 1998, Ravisent's revenue consisted primarily of computer hardware and software sales to manufacturers.
5. As part of its obligations as a public reporting company, Ravisent commenced filing quarterly reports on Form 10-Q ("10-Q reports") with the Commission for the quarter ended June 30, 1999, the company's second quarter. These reports contained unaudited financial statements prepared by the company.
6. During the second and third quarters of 1999 (ended June and September, respectively), as a result of the incorrect application of Generally Accepted Accounting Principles ("GAAP"), Ravisent prematurely recognized revenue totaling approximately $4.7 million from three separate contracts. These errors, which were recorded in the company's books, led, in turn, to the company's filing of two materially false and misleading Form 10-Q's. Specifically, Ravisent, in violation of GAAP, prematurely recognized revenue of $3.92 million during the second quarter and $750,000 during the third quarter from three of its largest sales transactions (as discussed in detail below).
7. In the second quarter, Ravisent erroneously reported revenue of $11.6 million and a net loss of $248,000 when, under GAAP, it should have reported revenue of $7.68 million and a net loss of $1.15 million. In the third quarter, Ravisent erroneously reported revenue of $5.99 million and net earnings of $1.097 million when, under GAAP, it should have reported revenue of $5.24 million and net earnings of $530,000.
8. These GAAP violations were detected during the company's year-end audit. Ravisent then restated its results for the second and third quarters in its Form 10-K annual report filed on March 14, 2000.
9. Ravisent's non-compliance with GAAP, and the subsequent false 10-Q reports, resulted from the conduct of Liu, the company's former Chief Financial Officer. At all relevant times, Liu was responsible for preparing the 10-Q reports, maintaining certain of the company's financial records and making revenue determinations on the company's sales contracts. Further, Liu signed the 10-Q reports at issue. Among other things, Liu failed to adequately apprise himself of and correctly apply GAAP in making revenue determinations on three of Ravisent's largest sales contracts during the second and third quarters. As a result, Liu caused Ravisent's 10-Q reports to be materially false and misleading.
10. In the first transaction, Liu caused Ravisent to recognize, and recorded in the company's records, revenue of $1.08 million from a purported sale of computer hardware during the second quarter in violation of GAAP. In this case, the purported sale was actually a consignment whereby the buyer enjoyed the right to return any unsold goods. GAAP requires that revenue be recognized in accordance with Financial Accounting Standard No. 48 ("FAS 48"), which sets forth the criteria for recognizing revenue when a right of return exists. Before revenue can be recognized, FAS 48 requires, in pertinent part, that "the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product." This contract failed to satisfy the condition of FAS 48 because the buyer's obligation to pay Ravisent was contingent upon the buyer's resale of the product, which did not occur during the second quarter. As a result, Liu failed to comply with FAS 48 by causing Ravisent to recognize the revenue from this contract during the second quarter.
11. In the second contract, Liu again failed to comply with the provisions of FAS 48 when he caused Ravisent to recognize, and recorded in the company's records, revenue of $2.24 million from another sale of computer hardware during the second quarter. In this case, the buyer's obligation to pay Ravisent was contingent on the buyer's resale of the goods. Specifically, this contract contained an indemnification clause whereby Ravisent assumed financial liability for any goods that the buyer was unable to resell. Because the buyer did not resell these goods during the second quarter, Liu violated GAAP by causing Ravisent to recognize the revenue from this contract.
12. In the third contract, which involved the licensing of software, Liu failed to understand and correctly apply AICPA Statement of Position 97-2 ("SOP 97-2") to the recognition of software revenue. GAAP requires that revenue from the sale or licensing of software be recognized consistent with SOP 97-2. In relevant part, SOP 97-2 sets forth criteria that must be met before a company can recognize any revenue from a contract that includes a "future delivery" of goods and/or services. Ravisent's software contract contained such a future deliverable, i.e., the contract required that Ravisent provide a future product which was not yet available. However, Liu caused Ravisent to recognize, and recorded in the company's records, $600,000 and $750,000 in revenue from this contract in the second and third quarters, respectively, even though the criteria of SOP 97-2 had not been met, in violation of GAAP. Ravisent was ultimately able to properly recognize the revenue from this contract in March 2000.
13. As the controller, Adams failed in his assigned responsibilities to establish adequate internal accounting controls sufficient to provide reasonable assurances that the company's revenue determinations, which would be reflected in its public filings, were made in accordance with GAAP. In that regard, Adams failed to establish rigorous, systematic procedures for reviewing the company's preliminary revenue determinations concerning the three contracts at issue.
14. Section 13(a) of the Exchange Act requires all issuers subject to the reporting requirements of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Rule 13a-13, promulgated pursuant to Section 13(a), requires issuers to file quarterly reports with the Commission on Form 10-Q. Rule 12b-20, promulgated pursuant to Section 12 of the Exchange Act, requires "such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made not misleading." A violation of these provisions is established if annual or quarterly reports are shown to contain materially false or misleading information regarding such items as the issuer's income.
15. Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts that accurately and fairly reflect its transactions and dispositions of assets in reasonable detail. A violation of Section 13(b)(2)(A) is established if the issuer fails to maintain accurate books and records. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain the accountability of assets. Rule 13b2-1 of the Exchange Act was promulgated to enforce the provisions of Section 13(b) and is directed toward the conduct of individuals associated with the issuer. Rule 13b2-1 states, in pertinent part, that "no person shall directly or indirectly falsify or cause to be falsified any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act."
16. As a result of the conduct described above, Ravisent violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; and
17. As a result of the conduct described above, Liu caused Ravisent's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and violated Rule 13b2-1.
18. As a result of the conduct described above, Adams caused Ravisent's violations of Section 13(b)(2)(B) of the Exchange Act.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondents' Offers.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 21C of the Exchange Act, that Respondent Axeda Systems Inc. cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder;
B. Pursuant to Section 21C of the Exchange Act, that Respondent Liu shall cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and from committing or causing any violations and any future violations of Rule 13b2-1; and
C. Pursuant to Section 21C of the Exchange Act, that Respondent Adams shall cease and desist from causing any violations and any future violations of Section 13(b)(2)(B) of the Exchange Act.
By the Commission.
Jonathan G. Katz
|Home | Previous Page||