UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-27122
ADEPT TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in its Charter)
California 94-2900635
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
150 Rose Orchard Way San Jose, California 95134
(Address of Principal Executive Offices) (Zip Code)
(408) 432-0888
(Registrant's Telephone Number, Including Area Code)
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]
The number of shares of the Registrant's common stock outstanding as of February
5, 2003 was 15,225,480.
ADEPT TECHNOLOGY, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
December 28, 2002 and June 30, 2002......................................... 3
Condensed Consolidated Statements of Operations
Three and six months ended December 28, 2002 and December 29, 2001.......... 4
Condensed Consolidated Statements of Cash Flows
Six months ended December 28, 2002 and December 29, 2001.................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 40
Item 4. Controls and Procedures............................................. 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 42
Item 2. Changes in Securities and Use of Proceeds........................... 42
Item 4. Submission of Matters to a Vote of Security Holders................. 42
Item 5. Other Information................................................... 42
Item 6. Exhibits and Reports on Form 8-K.................................... 43
Signatures.................................................................. 44
Certifications.............................................................. 45
Index to Exhibits........................................................... 47
2
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 28, June 30,
2002 2002
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 8,172 $ 17,375
Short-term investments.................................................... - 4,306
Accounts receivable, less allowance for doubtful accounts of $851 at
December 28, 2002 and $832 at June 30, 2002.......................... 10,403 12,500
Inventories............................................................... 10,246 11,189
Prepaid assets and other current assets................................... 2,901 854
----------- -----------
Total current assets.................................................. 31,722 46,224
Property and equipment at cost................................................. 13,238 12,688
Less accumulated depreciation and amortization................................. 8,493 6,965
----------- -----------
Property and equipment, net.................................................... 4,745 5,723
Goodwill....................................................................... 7,671 6,889
Other intangibles, net......................................................... 1,556 1,124
Other assets................................................................... 2,433 2,534
----------- -----------
Total assets.......................................................... $ 48,127 $ 62,494
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 7,856 $ 6,561
Accrued payroll and related expenses...................................... 1,801 2,463
Accrued warranty.......................................................... 1,729 1,566
Deferred revenue.......................................................... 748 637
Accrued restructuring charges............................................. 1,798 1,909
Accrued taxes............................................................. 1,708 1,664
Accrued liabilities related to business acquisitions...................... 1,660 2,730
Other accrued liabilities................................................. 1,431 1,368
----------- -----------
Total current liabilities............................................. 18,731 18,898
Long term liabilities:
Restructuring charges..................................................... 706 1,450
Other long term liabilities............................................... 2,099 1,242
Commitments and contingencies
Redeemable convertible preferred stock, no par value:
5,000 shares authorized, 100 shares issued and outstanding at
December 28, 2002 and June 30, 2002 (liquidation preference - $25,000)...... 25,000 25,000
Shareholders' equity:
Preferred stock, no par value:
5,000 shares authorized, none issued and outstanding..................... - -
Common stock, no par value:
70,000 shares authorized, 15,225 and 14,051 shares issued and outstanding
at December 28, 2002 and June 30, 2002, respectively..................... 108,899 107,384
Accumulated deficit........................................................... (107,308) (91,480)
------------ ------------
Total shareholders' equity............................................... 1,591 15,904
----------- -----------
Total liabilities, redeemable convertible preferred stock and shareholders'
equity................................................................. $ 48,127 $ 62,494
=========== ===========
See accompanying notes.
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Six months ended
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------------ ------------ ----------- ------------
Net revenues.................................................. $ 10,748 $ 14,431 $ 21,023 $ 27,816
Cost of revenues.............................................. 7,773 9,172 16,032 17,909
------------ ------------ ----------- ------------
Gross margin.................................................. 2,975 5,259 4,991 9,907
Operating expenses:
Research, development and engineering................... 3,071 4,585 6,593 10,423
Selling, general and administrative..................... 6,477 7,117 12,920 14,831
Restructuring charges................................... -- -- 1,136 12,336
Amortization of intangible assets....................... 199 180 348 360
------------ ------------ ------------ ------------
Total operating expenses...................................... 9,747 11,882 20,997 37,950
------------ ------------ ------------ ------------
Operating loss................................................ (6,772) (6,623) (16,006) (28,043)
Interest income, net.......................................... 30 137 209 219
------------ ------------ ------------ ------------
Loss before income taxes and cumulative effect of
change in accounting principle.............................. (6,742) (6,486) (15,797) (27,824)
Provision for income taxes.................................... -- 66 31 146
------------ ------------ ------------ ------------
Net loss before cumulative effect of change in
accounting principle....................................... (6,742) (6,552) (15,828) (27,970)
Cumulative effect of change in accounting principle*.......... -- -- - (9,973)
------------ ------------ ------------ ------------
Net loss...................................................... $ (6,742) $ (6,552) $ (15,828) $ (37,943)
============ ============ ============ ============
Basic and diluted net loss per share:
Before cumulative effect of change in accounting $ (0.45) $ (0.48) $ (1.08) $ (2.07)
============ ============ ============ ============
principle...............................................
After cumulative effect of change in accounting $ (0.45) $ (0.48) $ (1.08) $ (2.81)
============ ============ ============ ============
principle ..............................................
Number of shares used in computing per share amounts:
Basic................................................... 15,074 13,567 14,701 13,485
============ ============ ============ ============
Diluted................................................. 15,074 13,567 14,701 13,485
============ ============ ============ ============
*The cumulative effect of change in accounting principle of $$9,973 was
originally reported in our results of operations in the Form 10-Q for the fiscal
quarter ended March 30, 2002, when the amount of the impairment under SFAS 142
was determined. However, because the impairment relates to the effective date of
SFAS 142, or July 1, 2001 for Adept, the cumulative effect of change in
accounting principle is properly included in the first quarter of fiscal 2002
and is reflected in the six month period ended December 29, 2001 in the table
above.
See accompanying notes.
4
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended
-------------------------------------
December 28, December 29,
2002 2001
---- ----
Operating activities
Net loss $ (15,828) $ (37,943)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle -- 9,973
Depreciation 1,417 1,960
Amortization 348 360
Asset impairment charges 15 5,601
Loss on disposal of property and equipment -- 137
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 2,111 8,106
Inventories 1,008 (948)
Prepaid expenses and other current assets (2,042) 449
Other assets 213 119
Accounts payable 1,160 (3,600)
Other accrued liabilities (1,586) 23
Accrued restructuring charges (855) 5,529
Other long term liabilities 857 26
--------------- ---------------
Net cash used in operating activities (13,182) (10,208)
--------------- ---------------
Investing activities
Business acquisitions, net of cash acquired (198) (9,809)
Purchase of property and equipment, net (282) (106)
Purchases of short-term available-for-sale investments (9,275) (5,200)
Sales of short-term available-for-sale investments 13,581 4,250
-------------- --------------
Net cash used in investing activities (3,826) (10,865)
--------------- ---------------
Financing activities
Proceeds from employee stock incentive program and employee
stock purchase plan, net of repurchases and cancellations 153 2,500
-------------- --------------
Net cash provided by financing activities 153 27,500
-------------- --------------
Increase (decrease) in cash and cash equivalents (9,203) 6,427
Cash and cash equivalents, beginning of period 17,375 18,700
-------------- --------------
Cash and cash equivalents, end of period $ 8,172 $ 25,127
============== ==============
Supplemental disclosure of non-cash financing activities:
Issuance of common stock pursuant to terms of HexaVision acquisition agreement $ -- $ 1,226
Issuance of common stock pursuant to terms of Meta acquisition agreement $ 825 $ --
Issuance of common stock into escrow pursuant to terms of line of credit
agreement with former Meta shareholder $ 113 $ --
Issuance of common stock pursuant to terms of Chad acquisition agreement $ 425 $ --
See accompanying notes.
5
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in this report reflects all
adjustments that, in the opinion of management, are necessary for a fair
statement of the consolidated financial position, results of operations and cash
flows as of and for the interim periods. Such adjustments consist of items of a
normal recurring nature. The condensed consolidated financial statements
included in this quarterly report on Form 10-Q should be read in conjunction
with the audited financial statements and notes thereto for the fiscal year
ended June 30, 2002 included in the Company's Form 10-K as filed with the
Securities and Exchange Commission on September 25, 2002, and amended by Form
10-K/A filed on September 27, 2002 and February 5, 2003, as well as the Form
10-K/A filed under cover of Form 8-K on February 5, 2003 which contains updated
segment information for the Company.
The results for such periods are not necessarily indicative of the results to be
expected for the full fiscal year or for any other future period.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles 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 condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Net Loss per Share
Basic net loss per share is based on the weighted average number of shares of
common stock outstanding during the period, excluding restricted stock, while
diluted net loss per share is based on the weighted average number of shares of
common stock outstanding during the period and the dilutive effects of common
stock equivalents (mainly stock options and convertible preferred stock),
determined using the treasury stock method, outstanding during the period,
unless the effect of including the common stock equivalents is anti-dilutive.
There were no differences between basic and diluted net loss per share for any
periods presented.
Derivative Financial Instruments
A foreign currency hedging program is used to hedge the Company's exposure to
foreign currency exchange risk on international operational assets and
liabilities. Realized and unrealized gains and losses on forward currency
contracts that are effective as hedges of assets and liabilities are recognized
in income. Adept recognized losses of $35,000 and $129,000 for the three and six
months ended December 28, 2002, and losses of $126,000 and $480,000 for the
three and six months ended December 29, 2001, respectively. Realized and
unrealized gains and losses on instruments that hedge firm commitments are
deferred and included in the measurement of the subsequent transaction; however,
losses are deferred only to the extent of expected gains on the future
commitment at December 28, 2002. The Company has deferred recognition of a
transaction loss of $84,000, relating to foreign exchange contracts. The Company
will realize this transaction loss in the third fiscal quarter of 2003, as an
offset to the related foreign exchange gain.
2. Financial Instruments
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term investments
consist principally of commercial paper and tax exempt municipal bonds with
maturities between three and 12 months, market auction rate preferred stock and
auction rate notes with maturities of 12 months or less. Investments are
classified as held-to-maturity, trading, or available-for-sale at the time of
purchase.
6
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Mergers and Acquisitions
On August 30, 2002, the Company completed the acquisition of a controlling
interest in Meta Control Technologies, Inc. (Meta), a Delaware corporation. Meta
develops, designs, manufactures and markets products that automate a wide range
of manufacturing processes requiring precise motion, accurate machine vision and
rapid process instrumentation. Some of the applications that make use of the
Company's technology include semiconductor and electronics assembly,
micro-mechanical and fiber optic assembly, laboratory automation and discrete
process automation. The acquisition of Meta extends the Company's controls
architecture to include two axis, low power controls in small packages allowing
remote placement of motion and sensor controls that directly plug into Adept's
new architecture using IEEE 1394 Firewire technology. In addition, Meta has a
line of programmable cameras that when combined with the low power controller
and Adept's HexSight software can be packaged as a very low cost, competitive
OEM product. The results of Meta's operations have been included in Adept's
consolidated financial statements since August 30, 2002.
Upon the closing of the acquisition transaction with Meta, the Company acquired
a 67% ownership interest in Meta, with the remaining 33% ownership interest in
Meta being held by one shareholder. The agreement provides that Adept will
acquire all of these remaining shares in return for the payment of discounts to
the shareholder and its affiliates as described in the paragraph below but will,
in any event and regardless of whether discounts are paid, acquire 100% of the
stock of Meta no later than August 2008.
Under terms of the Meta acquisition agreement, the Company issued 730,000 shares
of its common stock to the shareholders of Meta with a value of $825,000. The
value of the 730,000 shares was determined based on the average closing price of
the Company's stock on the period of three trading days ended September 3, 2002.
Of the 730,000 shares of common stock, 10% have been placed into escrow for the
term of one year pending certain contingencies pursuant to the terms of the
acquisition agreement. Additionally, the Company has agreed to provide up to
$1.7 million of discounts and royalties through August 2008 to a shareholder of
Meta based upon future sales to that shareholder or certain of its affiliates.
Such amounts will be charged to operations when incurred. As of December 28,
2002 the Company has not incurred any expenses related to discounts and
royalties. In connection with the acquisition, the Company assumed a $500,000
line of credit with Meta's lender terminating in September 2003 and bearing
interest at 1% plus the prime rate announced by the Wall Street Journal (See
Note 6). Additionally, the Company entered into a loan agreement for up to
$800,000 with a former shareholder of Meta, which, in the absence of a material
change in financial condition or impairment of ability to repay as determined in
good faith by the lender and subject to registration of shares issued to the
lender, permits quarterly borrowings in increments of up to $200,000 after
December 15, 2002, at a rate of 1% plus the prime rate announced by the Wall
Street Journal. In connection with the loan agreement, 100,000 shares of the
Company's common stock valued at $113,000 were issued to the lender, subject to
certain cancellation rights. The value of the 100,000 shares issued was
determined based on the closing price of the Company's stock on the period of
three trading days ended September 3, 2002, and has been classified as other
assets in the accompanying balance sheet. As amounts are borrowed and shares
released, the value of such shares will be amortized to interest expense over
the life of the loan agreement. Any amounts borrowed under this loan agreement
are due and payable by August 2006. No amounts are currently outstanding under
the $800,000 loan agreement.
Adept's management is primarily responsible for determining purchase price
allocations. Adept considered a number of factors, including independent
valuations, in determining the purchase price of Meta, which was allocated to
tangible assets, goodwill and other intangible assets. Goodwill represents the
excess of the purchase price of the net tangible and intangible assets acquired
over their fair value.
Below is a table of the acquisition cost and purchase price allocation.
7
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Acquisition Cost:
Stock issued at closing....................... $ 825
Long term debt assumed........................ 511
Transaction costs............................. 232
----------
Total acquisition cost...................... $ 1,568
==========
Purchase Price Allocation:
Net book value of assets acquired............. $ 6
Identified intangible assets.................. 780
Goodwill...................................... 782
----------
Total....................................... $ 1,568
==========
Pro forma results for the three and six months ended December 29, 2001 and for
the period from July 1, 2002 through August 30, 2002 (date of acquisition) have
been omitted as such effects would not differ materially from the Company's
actual results.
4. Inventories
Inventories are stated at the lower of standard cost, which approximates actual
(first-in, first-out method) or market (estimated net realizable value). The
components of inventory are as follows:
December 28, June 30,
(in thousands) 2002 2002
---- ----
Raw materials....................... $ 4,128 $ 4,952
Work-in-process..................... 3,103 3,049
Finished goods...................... 3,015 3,188
-------- --------
$ 10,246 $ 11,189
======== ========
5. Warranties
The Company offers a 2 year parts and 1 year labor limited warranty for all of
its products. The specific terms and conditions of those warranties are set
forth in the Company's "Terms and Conditions of Sale", which is published in
sales catalogs and on each Sales Order Acknowledgment. The Company estimates the
costs that may be incurred under its limited warranty, and records a liability
at the time product revenue is recognized. Factors that affect the Company's
warranty liability include the number of installed units, historical and
anticipated rates of warranty claims, and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
Changes in The Company's product liability during the six months ended December
28, 2002 is as follows:
(in thousands)
Balance at June 30, 2002 $ 1,566
Warranties issued 546
Additional warranty provision 94
Warranty claims (753)
Changes in liability for pre-existing
warranties including expirations 276
Balance at December 28, 2002 $ 1,729
The Company's warranty liability is classified as Accrued warranty in the
accompanying balance sheet.
8
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
December 28, June 30,
(in thousands) 2002 2002
---- ----
Cost:
Machinery and equipment......................... $ 3,352 $ 3,042
Computer equipment.............................. 5,948 5,806
Office furniture and equipment.................. 3,938 3,840
---------- ----------
13,238 12,688
Accumulated depreciation and amortization 8,493 6,965
---------- ----------
Net property and equipment...................... $ 4,745 $ 5,723
========= ==========
7. Credit Facilities
On August 30, 2002, upon the closing of the acquisition transaction with Meta,
the Company assumed a $500,000 revolving line of credit with Meta's lender,
Paragon Commercial Bank, terminating in September 2003 and bearing interest at
1% plus the prime rate announced by the Wall Street Journal. Of this line of
credit, $494,000 was outstanding at the time of acquisition and at December 28,
2002. The credit facility does not contain any financial covenants and is
secured by a $500,000 cash deposit with Paragon Commercial Bank. The cash
deposit is recorded as other current assets in the accompanying balance sheet.
Pursuant to the terms of the CHAD acquisition agreement, the Company paid $2.6
million to the shareholders of CHAD on October 9, 2002. On December 13, 2002,
CHAD and Adept amended the second anniversary promissory note due to a former
shareholder of CHAD and released to Adept the funds currently held in escrow in
the amount of the $1.6 million note. All outstanding principal of and accrued
interest on this second anniversary promissory note was paid in full in January
2003.
8. Restructuring Charges
Fiscal 2002
During the year ended June 30, 2002, Adept implemented a plan to restructure
certain of its operations across all three of its reportable business segments.
Adept adopted a restructuring plan during the three months ended September 30,
2001 and due to market conditions, was required to implement additional
restructuring measures during the third quarter of fiscal 2002. Significant
items comprising the September 30, 2001 restructuring plan included the
following: exit of non-strategic product lines including SILMA inspection
software sales and maintenance, factory automation consulting and Multi-bus
controller support; consolidation of excess manufacturing and support
facilities; consolidation of the Company's European operations; reductions in
force and other salary reduction measures. The major actions comprising the
third quarter of fiscal 2002 restructuring plan included the following:
suspending current efforts focused on precision assembly automation; closure of
the Company's Tucson, Arizona facility; the exit from manufacturing lease
commitments in Europe; and additional reductions in force.
For fiscal 2002, the Company recorded total restructuring charges of $17.7
million related to the actions identified. Of the $17.7 million restructuring
charge, Adept recorded $5.3 million in the three months ended March 30, 2002 and
$12.4 million in the three months ended September 30, 2001.
The restructuring charges include employee severance costs, lease commitments
for idle facilities and asset impairment charges and are as follows:
9
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Amounts Amounts Amounts Amounts
Charges Utilized Utilized Utilized Utilized
------- Q1 Fiscal Q1 Fiscal Q2 Fiscal Q2 Fiscal
(in thousands) 2002 2002 2002 2002
---- ---- ---- ----
Cash Non Cash Cash Non Cash
---- -------- ---- --------
Employee severance costs........... $ 1,692 $ 555 $ --- $ 370 $ ---
Lease commitments.................. 6,800 88 98 94 ---
Asset impairment charges........... 9,167 --- 5,601 --- ---
----------- ------------ ----------- ----------- -----------
Total............................ $ 17,659 $ 643 $ 5,699 $ 464 $ ---
=========== =========== =========== =========== ===========
Amounts Amounts Amounts Amounts
Utilized Utilized Utilized Utilized Balance
Q3 Fiscal Q3 Fiscal Q4 Fiscal Q4 Fiscal June 30,
(in thousands) 2002 2002 2002 2002 2002
---- ---- ---- ---- ----
Cash Non Cash Cash Non Cash
---- -------- ---- --------
Employee severance costs........... $ 187 $ --- $ 454 $ --- $ 126
Lease commitments.................. 336 2,573 472 --- 3,139
Asset impairment charges........... --- 3,472 --- --- 94
----------- ----------- ----------- ---------- -----------
Total............................ $ 523 $ 6,045 $ 926 $ --- $ 3,359
=========== =========== =========== ========== ===========
Employee severance costs of $1.7 million represent a reduction of approximately
114 employees in most functional areas across all the reportable business
segments, and at June 30, 2002 all of the affected employees had ceased
employment with the Company. The Company paid the remaining accrued severance as
of September 30, 2002. Lease commitments of $6.8 million consist of $4.2 million
in charges resulting from the consolidation of manufacturing facilities in San
Jose and Livermore, California into Adept's technology center in Livermore,
California, plus the consolidation of certain support facilities in Europe. The
remaining $2.6 million in lease commitments relates to a non-cash charge for
excess production facilities for which the Company exchanged a prepaid
commitment fee in order to settle future obligations on excess production
facilities. The consolidation of these facilities has resulted in operating
lease commitments in excess of the Company's current and projected needs for
leased properties. At June 30, 2002, the long term accrued restructuring charges
related to future rent commitments on non-cancelable lease agreements. Payments
against these lease commitments are expected to continue for 18 months to three
years based on lease terms. Asset impairment charges of $9.2 million consist of
$6.6 million in abandoned assets resulting from the exiting of certain
non-strategic product lines, consolidation of facilities, and goodwill and other
intangible assets write-off of $2.6 million. The abandoned assets include
leasehold improvements and computer and office equipment related to the exit of
the SILMA inspection software product line as well as leasehold improvements,
machinery and equipment, and computer and office equipment related to the
consolidation of manufacturing and support facilities. The abandoned assets also
include the write off of enterprise resource planning system software associated
with the closure of the Pensar-Tucson facility. The goodwill and other
intangible assets written off resulted from the Company's acquisition of
Pensar-Tucson in April 2000, which no longer has value to the Company due to the
closure of its Tucson, Arizona operations in March 2002.
As described in Note 14, the Company's management reorganized how it currently
measures the Company's businesses into three new business segments: Components,
Solutions, and Services and Support. The full effect of fiscal 2002
restructuring activities on the three new business segments were as follows. The
Components segment experienced annualized reduction in salary, depreciation and
rent-related expenses of approximately $7.6 million over the previous year,
which was offset by a decline in revenues of $2.4 million over the previous
year. The Solutions segment experienced annualized expense reductions of $1.6
million over the previous year with no offsetting decline in revenues. The
Services and Support segment experienced annualized expense reductions of $1.6
million over the previous year with no offsetting decline in revenues.
10
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fiscal 2003
In response to continued weakness in customer demand, the Company implemented
further restructuring measures during the first quarter of fiscal 2003. The
Company recorded total restructuring charges of $1.1 million related primarily
to a reduction in workforce during the three months ended September 28, 2002.
Employee severance costs of $1.0 million represent a reduction of 79 employees
in most functional areas across all the reportable business segments, and at
September 28, 2002, all of the affected employees had ceased employment with the
Company. Lease commitments of $95,000 resulted from the consolidation of the
French operations into the Company's office in Germany. Asset impairment charges
of $15,000 represent write-offs of abandoned assets.
The following table summarizes the significant components of the Company's first
quarter fiscal 2003 restructuring at December 28, 2002:
Additional Amounts Amounts Amounts
Balance Charges Utilized Utilized Utilized Balance
June 30, Q1 Fiscal Q1 Fiscal Q1 Fiscal Q2 Fiscal December 28,
-
(in thousands) 2002 2003 2003 2003 2003 2002
---- ---- ---- ---- ---- ----
Cash Non Cash Cash
Employee severance costs.......... $ 126 $ 1,026 $ 815 $ -- $ 330 $ 7
Lease commitments................. 3,139 95 416 -- 416 2,402
Asset impairment charges.......... 94 15 -- 15 -- 94
----------- ---------- ---------- ----------- ----------- -----------
Total........................... $ 3,359 $ 1,136 $ 1,231 $ 15 $ 746 $ 2,503
=========== ========== ========== =========== =========== ===========
At December 28, 2002, the long term accrued restructuring charges relate to rent
commitments on non-cancelable lease agreements expected to be paid beyond June
30, 2003. The amounts utilized in the second quarter of fiscal 2003 were
comprised entirely of cash charges. The restructuring accrual balance of $2.5
million at December 28, 2002 is comprised entirely of cash charges which are
expected be paid over the next nine quarters against non-cancelable lease
commitments.
9. Redeemable Convertible Preferred Stock
On October 29, 2001, Adept completed a private placement with JDS Uniphase
Corporation of $25.0 million in its convertible preferred stock consisting of
78,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred")
and 22,000 shares of Series B Convertible Preferred Stock (the "Series B
Preferred"), collectively (the "Preferred Stock"). Both the Series A Preferred
and the Series B Preferred are entitled to annual dividends at a rate of $15 per
share. Dividends are cumulative and are payable only in the event of certain
liquidity events as defined in the statement of preferences of the Preferred
Stock, such as a change of control or liquidation or dissolution of Adept. No
dividends on its common stock may be paid until dividends for the fiscal year
and any prior years on the Preferred Stock have been paid or set apart, and the
Preferred Stock will participate in any dividends paid to the common stock on an
as-converted basis. The Preferred Stock may be converted into shares of its
Common Stock at any time, and in the absence of a liquidity event or earlier
conversion or redemption, will be converted into common stock upon October 29,
2004. The Company has agreed to use its reasonable commercial efforts to seek
shareholder approval to extend this automatic conversion date for the Preferred
Stock until October 29, 2005. The Preferred Stock may be converted into shares
of Adept's Common Stock at a rate of the initial purchase price divided by a
denominator equal to the lesser of $8.18, or 75% of the 30 day average closing
price of Adept's Common Stock immediately preceding the conversion date
("Conversion Date Price"). However, as a result of a waiver of events of default
by the preferred stockholder other than in connection with certain liquidity
events that are not approved by the Board of Directors of Adept, in no event
shall the denominator for the determination of the conversion rate with respect
to the Series B Preferred be less than $4.09 and with respect to the Series A
Preferred be less than $2.05. The Preferred Stock shall not be convertible, in
the aggregate, into 20% or more of our outstanding voting securities and no
holder of Preferred Stock may convert shares of Preferred Stock if, after the
conversion, the holder will hold 20% or more of the outstanding voting
securities of Adept. Shares not permitted to be converted remain outstanding,
unless redeemed, and become convertible when such holder holds less than 20% of
Adept's outstanding voting securities. The Preferred Stock has voting rights
equal to the number of shares into which the Preferred Stock
11
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
could be converted subject to the terms of the designation of preferences
assuming a conversion rate of $250.00 divided by $8.18.
The Company has the right, but not the obligation, to redeem shares of Series A
Preferred elected to be converted by the preferred stockholder which, upon
conversion would use the denominator of $2.05 for determination of the
conversion rate, and would result in the issuance of shares of common stock in
excess of the number of shares of common stock issuable upon conversion using a
denominator of $4.09 for determination of the conversion rate. The number of
shares of Series A Preferred that Adept may elect to redeem would be calculated
by subtracting (i) the number of shares of common stock that the shares of
Series A Preferred that have been elected to be converted would be convertible
into based on a denominator of $4.09 from (ii) the number of shares of common
stock that the shares of Series A Preferred that have been elected to be
converted would be convertible into based on a denominator of $2.05, and then
determining the number of shares of Series A Preferred that this number of
shares of common stock represents using a denominator of $4.09. The redemption
price is equal to the sum of the initial Preferred Stock price, plus all
cumulated and unpaid dividends. The redemption shall be paid in the form of a
senior unsecured promissory note bearing interest at a rate of 6% per annum,
maturing in two years. If the Company redeems shares of Preferred Stock using a
promissory note, any indebtedness incurred while the note is outstanding must be
subordinated to the note, other than certain ordinary course financings. In
addition, the holders of the Preferred Stock are entitled to receive, upon
liquidation, the amount equal to $250.00 per share (adjusted for any stock
splits or stock dividends) plus any unpaid dividends. The liquidation preference
may be triggered by several events consisting of a change in control of Adept, a
sale of substantially all of Adept's assets, shareholder approval of any plan of
liquidation or dissolution or the direct or indirect beneficial ownership of
more than 50% of Adept's common stock by any person or entity. Since such events
may be outside of management's control and would trigger the payment of the
Preferred Stock liquidation preference, the Preferred Stock are classified
outside of shareholders' equity as redeemable convertible preferred stock in the
accompanying consolidated balance sheet.
In December 2002, Adept and JDS Uniphase agreed to terminate the supply,
development and license agreement entered into by them in October 2001. Under
this agreement, Adept was obligated to work with JDS Uniphase's internal
automation organization, OPA, to develop solutions for component and module
manufacturing processes for sub-micron tolerance assemblies. JDS Uniphase
retained sole rights for fiberoptic applications developed under this contract.
For non-fiberoptic applications of component and module manufacturing processes
developed by OPA, Adept was obligated to pay up to $1,000,000 each fiscal
quarter for the planned five-quarter effort. Due to changing economic and
business circumstances and the curtailment of development by JDS Uniphase and
shutdown of their OPA operations, both parties determined that these development
services were no longer in their mutual best interests. As part of the
termination, Adept executed a $1,000,000 promissory note in favor of JDS
Uniphase earning interest at a rate of 7% per year payable on or before
September 30, 2004. JDS Uniphase has the right to require Adept to apply any
additional financing received prior to maturity first to repayment of the
outstanding balance under the promissory note. The payments made prior to
termination plus the promissory note represent payment in full by Adept for the
development services performed by JDS Uniphase, and there are no remaining
payment obligations arising from the agreement. All licenses, licensing rights
and other rights and obligations arising from the development work performed
under the contract before termination survive its termination. Adept also agreed
to seek shareholder approval to amend the date that the preferred stock held by
JDS Uniphase automatically converts into Adept common stock from October 29,
2004 to October 29, 2005. The $1.0 million promissory note is included in other
long term liabilities on the accompanying balance sheet.
10. Income Taxes
The Company typically provides for income taxes during interim reporting periods
based upon an estimate of its annual effective tax rate. The Company has ceased
to recognize the current tax benefit of its operating losses because realization
is not assured as required by SFAS No. 109. Adept recorded a tax provision
related to the operations of its French subsidiary in the first quarter of
fiscal 2003. In the second quarter of fiscal 2003, the French subsidiary was in
a loss position and as a result, the Company did not record a tax provision.
11. Goodwill and Intangible Assets
In accordance with SFAS 142, the following is a summary of the gross carrying
amount and accumulated
12
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
amortization, aggregate amortization expense, and estimated amortization expense
for the next five succeeding fiscal years related to the intangible assets
subject to amortization.
(in thousands) As of December 28, 2002
------------------------------------------
Gross Carrying Accumulated Net Carrying
Amortized intangible assets Amount Amortization Amount
Developed technology $ 2,532 $ (1,110) $ 1,422
Non-compete agreements 380 (246) 134
----------- ------------ -----------
Total $ 2,912 $ (1,356) $ 1,556
=========== ============ ===========
The aggregate amortization expense for three and six months ended December 28,
2002 totaled $199,000 and $150,000, respectively, and the estimated amortization
expense for the next five years are as follows:
(in thousands) Amount
-----------------
Remaining for fiscal year ended 2003 $ 363
For fiscal year ended 2004 682
For fiscal year ended 2005 267
For fiscal year ended 2006 195
For fiscal year ended 2007 49
-----------
$ 1,556
===========
The changes in the carrying amount of goodwill for the six months ended December
28, 2002 are as follows:
(in thousands) Components Solutions Totals
Balance at June 30, 2002 $ 2,394 $ 4,495 $ 6,889
Addition to goodwill for the acquisition of Meta (Note 3) 782 -- 782
----------- ---------- ----------
Balance at December 28, 2002 $ 3,176 $ 4,495 $ 7,671
========== ========== ==========
There is no goodwill related to the Services and Support segment.
12. Net Loss per Share
Three months ended Six months ended
----------------------------------------------------------------
(in thousands) December 28, December 29, December 28, December 29,
2002 2001 2002 2001
---- ---- ---- ----
Net loss before cumulative effect of change in
accounting principle................................... $ (6,742) $ (6,552) $ (15,828) $ (27,970)
Cumulative effect of change in accounting principle....... -- -- -- (9,973)
------------ ------------ ----------- -----------
Net loss after cumulative effect of change in
accounting principle................................... $ (6,742) $ (6,552) $ (15,828) $ (37,943)
============ ============ =========== ===========
Basic and diluted shares outstanding...................... 15,074 13,567 14,701 13,485
============ ============ =========== ===========
Basic and diluted loss per common share:
Before cumulative effect of change in accounting
principle............................................ $ (0.45) $ (0.48) $ (1.08) $ (2.07)
============ ============ =========== ===========
Cumulative effect of change in accounting
principle........................................... $ -- $ -- $ -- $ (.74)
============ ============ =========== ===========
Adjusted net loss...................................... $ (0.45) $ (0.48) $ (1.08) $ (2.81)
============ ============ =========== ===========
13
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
13. Impact of Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which is effective for fiscal years ending after December 15, 2002. SFAS 148
amends SFAS 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure in the summary of significant accounting policies of the
effect of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The Company has not yet determined the impact that the
adoption of SFAS 148 will have on its financial position or results of
operations, if any.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness
of Others" (the Interpretation, FIN 45). The Interpretation elaborates on the
existing disclosure requirements for most guarantees, including product
warranties. The Interpretation 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 the Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Interpretation's disclosure requirements 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 the
Interpretation's scope, including guarantees issued prior to the issuance of the
Interpretation. The Company adopted the Interpretation effective for the fiscal
quarter ended December 28, 2002. As the Company has not made any significant
financial guarantees other than product warranties, the adoption of FIN 45 did
not have a material impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities", which is effective for exit or disposal activities
that are initiated after December 31, 2002. SFAS 146, which nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (Including Certain Costs Incurred in a
Restructuring)," requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. The Company does not expect that the adoption of SFAS
146 will have a significant effect on its financial position or results of
operations.
14. Segment Information
The Company completed several acquisitions over the past few years. Evolution of
the business resulting partially from these acquisitions combined with the
changing business environment has rendered the Company's previously reported
business segments less meaningful. As such, effective July 1, 2002, the
previously reported segments, Assembly and Material Handling ("AMH"),
Semiconductor, and SILMA Software segments were reorganized into three new
business segments to reflect how management currently measures it's the
Company's businesses: Components, Solutions, and Services and Support. Of the
previously reported segments, Semiconductor's business was reorganized into
separate businesses that are now categorized in both Components and Solutions.
Additionally, the AMH and SILMA businesses are now categorized in the Components
segment. Service and support for all of our products are now categorized in the
Services and Support segment. Accordingly, segment information for the three and
six months ended December 29, 2001 has been restated to conform to the current
presentation.
The Components segment provides intelligent automation software and hardware
component products externally and internally to the other two business segments
for support and integration into higher level assemblies.
The Solutions segment takes products purchased from the Components segment
together with raw materials from third parties, and produced an integrated
family of process ready platforms for the semiconductor, electronics and
photonics markets which are driven towards standard offerings.
The Services and Support segment provides support services to our customers
including providing information on the use of our automation equipment,
assisting with the ongoing support of installed systems, consulting services for
14
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
applications, and training courses ranging from system operation and maintenance
to advanced programming geared for manufacturing engineers who design and
implement automation lines.
The Company evaluates performance and allocates resources based on segment
revenues and segment operating (loss) income. Segment operating (loss) income is
comprised of income before unallocated research and development expenses,
unallocated selling, general and administrative expenses, interest income, and
interest and other expenses.
Management does not fully allocate research and development expenses and
selling, general and administrative expenses when making capital spending
decisions, expense funding decisions or assessing segment performance. There is
no inter-segment revenue recognized. Transfers between segments are recorded at
cost.
Segment information for total assets and capital expenditures is not presented
as such information is not used in measuring segment performance or allocating
resources among segments.
Three months ended Six months ended
December 28, December 29, December 28, December 29,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Revenue:
Component......................................... $ 5,863 $ 8,889 $ 11,883 $ 17,259
Solutions......................................... 1,328 1,833 2,306 3,130
Services and Support.............................. 3,557 3,709 6,834 7,427
---------- ---------- ---------- ----------
Total revenue..................................... $ 10,748 $ 14,431 $ 21,023 $ 27,816
========== ========== ========== ==========
Operating income (loss):
Components........................................ $ (1,839) $ (120) $ (4,249) $ (3,203)
Solutions......................................... (965) (927) (2,170) (1,883)
Services and Support.............................. 955 979 1,389 2,115
---------- ---------- ---------- ----------
Segment loss...................................... (1,849) (68) (5,030) (2,971)
Unallocated research, development
and engineering and selling,
general and administrative..................... (4,923) (6,554) (9,840) (12,736)
Restructuring charges............................. -- -- (1,136) (12,336)
Interest income................................... 41 137 223 221
Interest expense.................................. (11) (1) (14) (2)
---------- ---------- ---------- ----------
Loss before income taxes and cumulative
effect of change in accounting principle........ $ (6,742) $ (6,486) $ (15,797) $ (27,824)
========== ========== ========== ==========
15. Comprehensive Loss
For the three and six months ended December 28, 2002 and December 29, 2001,
there were no significant differences between Adept's comprehensive loss and its
net loss.
16. Reclassifications
Certain amounts presented in the financial statements for prior periods have
been reclassified to conform to the presentation for fiscal 2003.
15
ADEPT TECHNOLOGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
o our estimates regarding our capital requirements and our needs for
additional financing;
o plans for future products and services and for enhancements of
existing products and services;
o marketing and commercialization of our products under development;
o our ability to attract customers and market our products;
o sources of revenues and anticipated revenues, including the
contribution from the growth of new products and markets.
o our intellectual property;
o our ability to establish relationships with suppliers, systems
integrators and OEMs for the supply and distribution of our products;
and
o plans for future acquisitions and for the integration of recent
acquisitions;
In some cases, forward-looking statements can be identified by terms such as
"may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "estimate," "predict," "potential," or the negative of these terms,
and similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions subject to risks and uncertainties. Given these uncertainties,
undue reliance should not be placed on these forward-looking statements. Also,
these forward-looking statements represent our estimates and assumptions only as
of the date of this report.
OVERVIEW
We provide intelligent production automation solutions to our customers in many
industries including the food, electronics/communications, automotive,
appliance, semiconductor, photonics, original equipment manufacturer, or OEM,
and life sciences industries. During the six months ended December 28, 2002,
product revenues mix was comprised of the following: 23% in foods, 16% in
electronics/communications, 16% in semiconductor, 12% in OEM, 11% in automotive,
11% in appliance, 5% in life sciences, and 6% in all others. This mix can and
does vary considerably from period to period due to a variety of market and
economic factors. We utilize our comprehensive product portfolio of high
precision mechanical components and application development software to deliver
automation solutions that meet our customer's increasingly complex manufacturing
requirements. We offer our customers a comprehensive and tailored automation
solution that we call Rapid Deployment Automation that reduces the time and cost
to design, engineer and launch products into high-volume production. Our
products currently include system design software, process knowledge software,
real-time vision and motion controls, machine vision systems, robot mechanisms,
precision solutions and other flexible automation equipment. In recent years, we
have expanded our robot product lines and developed advanced software and
sensing technologies that have enabled robots to perform a wider range of
functions. We have recently introduced new systems products, including our IEEE
1394 FireWire technology based distributed control architecture. As a result of
our introduction and marketing of these new systems, sales of systems in the
Solutions segment may increase relative to Component sales in future periods,
causing a change in the nature and composition of our revenues over time. Also,
international sales comprise approximately 30% to 60% of our total revenues for
any given quarter.
This discussion summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the six
months ended December 28, 2002. Unless otherwise indicated, references to any
quarter in this Management's Discussion and Analysis of Financial Condition and
Results of Operations refer to our fiscal quarter ended December 28, 2002. This
discussion should be read with the consolidated financial statements and
financial statement footnotes included in this Quarterly Report on Form 10-Q.
16
ADEPT TECHNOLOGY, INC.
Critical Accounting Policies
Management's discussion and analysis of Adept's financial condition and results
of operations are based upon Adept's consolidated financial statements which
have been prepared in conformity with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments and assumptions that affect 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. On an on-going basis, we
evaluate our estimates, including those related to fixed price contracts,
product returns, warranty obligations, bad debt, inventories, cancellation costs
associated with long term commitments, investments, intangible assets, income
taxes, restructuring, service contracts, contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by
their nature, are based on judgment and available information. Therefore, actual
results could differ from those estimates and could have a material impact on
our consolidated financial statements, and it is possible that such changes
could occur in the near term.
We have identified the accounting principles which we believe are most critical
to our reported financial status by considering accounting policies that involve
the most complex or subjective decisions or assessments. These accounting
policies described below include:
o revenue recognition;
o allowance for doubtful accounts;
o inventories including valuation and related services;
o warranty reserve;
o goodwill and other intangible assets;
o long-lived assets; and
o deferred tax valuation allowance.
Revenue Recognition. We recognize product revenue, in accordance with SAB 101,
when persuasive evidence of a non-cancelable arrangement exists, delivery has
occurred and/or services have been rendered, the price is fixed or determinable,
collectibility is reasonably assured, legal title and economic risk is
transferred to the customer, and when an economic exchange has taken place. If a
significant portion of the price is due after our normal payment terms, which
are 30 to 90 days from the invoice date, we account for the price as not being
fixed and determinable. In these cases, if all of the other conditions referred
to above are met, we recognize the revenue as the invoice becomes due. In Japan,
we sell our products through a reseller and we have separate agreements with
this reseller for each of our product lines that it sells. For all RDA Real-Time
Control and RDA Mechanical Components with this reseller, we have a pass-through
arrangement, such that under this arrangement, we defer 100% of the revenue upon
shipment and the reseller is not obligated to remit payment to us until they
receive payment from the end user. When all other aspects of SAB 101 have been
satisfied, we recognize revenue upon payment from the end user. For all other
product lines, no pass through arrangement exists. For these products we follow
our normal revenue recognition policies.
We recognize software revenue, primarily related to our simulation software
products, in accordance with the American Institute of Certified Public
Accountants' Statement of Position 97-2 ("SOP 97-2") on Software Revenue
Recognition, as amended by Statement of Position 98-4 ("SOP 98-4"). License
revenue is recognized on shipment of the product provided that no significant
vendor or post-contract support obligations remain and that collection of the
resulting receivable is deemed probable by management. Insignificant vendor and
post-contract support obligations are accrued upon shipment of the licensed
product. For software that is installed and integrated by the customer, revenue
is recognized upon shipment assuming functionality has already been proven in
prior sales and there are no customizations that would cause a substantial
acceptance risk. For software that is installed and integrated by Adept, revenue
is recognized upon customer signoff of a Final Product Acceptance or FPA form.
Service revenue includes training, consulting and customer support. Revenues
from training and consulting are recognized at the time the service is performed
and the customer has accepted the work.
17
ADEPT TECHNOLOGY, INC.
For long-term, fixed contracts, we recognize revenue and profit as work
progresses using the percentage-of-completion method, which relies on estimates
of total expected contract revenue and costs. We follow this method as
reasonably dependable estimates of the revenue and costs applicable to various
stages of a contract can be made. Revenues recognized but not yet billed to the
customer are classified as earnings in excess of billings, and consist primarily
of recoverable costs. For long-term contracts for which work is less than 75%
complete, revenue recognized equals costs incurred to date for a net margin of
zero. For long-term contracts for which work is more than 75% complete, revenue
and profit are recognized in proportion to costs incurred. Recognized revenues
and profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are charged to income in the period in which the
facts that give rise to the revision become known. We recorded earnings in
excess of billings of $774,000 at December 28, 2002, classified as prepaid and
other current assets in the accompanying balance sheet.
Deferred revenue primarily relates to software support contracts sold. The term
of the software support contract is generally one year, and Adept recognizes the
associated revenue on a straight line basis over the life of the contract, or if
there are milestone payments, upon milestone achievement.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We assess the customer's ability to pay based on a number of
factors, including our past transaction history with the customer and credit
worthiness of the customer. Management specifically analyzes accounts receivable
and historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowances for doubtful accounts. We do not
generally request collateral from our customers. If the financial condition of
our customers were to deteriorate in the future, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Specifically our policy is to record specific reserves against known doubtful
accounts. Additionally, a general reserve is calculated based on the greater of
0.5% of total consolidated accounts receivable or 20% of consolidated accounts
receivable more than 120 days past due. Specific reserves are netted out of the
respective receivable balances for purposes of calculating the general reserve.
On an ongoing basis, we evaluate the credit worthiness of our customers and
should the default rate change or the financial positions of our customers
change, we may increase or decrease, as appropriate the general reserve
percentage.
Inventories. Inventories are stated at the lower of standard cost, which
approximates actual (first-in, first-out method) or market (estimated net
realizable value). We perform a detailed assessment of inventory at each balance
sheet date, which includes, among other factors, a review of component demand
requirements, product lifecycle and product development plans, and quality
issues. As a result of this assessment, we write down inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of the inventory and the estimated net realizable value based upon assumptions
about future demand and market conditions. If actual demand and market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Manufacturing inventory includes raw materials, work-in-process, and finished
goods. All work-in-process inventories with work orders that are open in excess
of 180 days are fully written down. The remaining inventory valuation provisions
are based on an excess and obsolete systems report, which captures all obsolete
parts and products and all other inventory, which have quantities on hand in
excess of one year's projected demand. Individual line item exceptions are
identified by management for either inclusion or exclusion from the inventory
valuation provision. The materials control group and cost accounting function
monitor the line item exceptions and make periodic adjustments as necessary.
Warranty Reserve. We provide for the estimated cost of product warranties at the
time revenue is recognized. While we engage in extensive product quality
programs and processes, including activity monitoring and evaluating the quality
of our components suppliers, our warranty obligation is affected by product
failure rates, material usage and service labor and delivery costs incurred in
correcting a product failure. At the time Adept issues a warranty, it recognizes
an initial liability for the fair value or market value, of the obligations it
assumes under the warranty. Should actual product failure rates, material usage,
service labor or delivery costs differ from our estimates, revisions to the
estimated warranty liability would be required. In November 2002, the FASB
issued Interpretation
18
ADEPT TECHNOLOGY, INC.
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others" (the Interpretation, FIN 45).
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including product warranties. We adopted the Interpretation
effective for the fiscal quarter ended December 28, 2002. As we have not made
any significant financial guarantees other than product warranties, the adoption
of FIN 45 did not have a material impact on our financial position or results of
operations.
Goodwill and Other Intangible Assets. The purchase method of accounting for
acquisitions requires extensive use of accounting estimates and judgments to
allocate the excess of the purchase price over the fair value of identifiable
tangible net assets of acquired companies between other intangible assets and
goodwill. Other intangible assets primarily represent developed technology and
non-compete covenants. As of July 1, 2001, we no longer amortize goodwill in
accordance with SFAS 142. SFAS 142 requires that goodwill be evaluated for
impairment at least annually, and we have chosen April 1 as the date to conduct
this annual evaluation.
Long-Lived Assets. We evaluate long-lived assets used in operations, including
goodwill and purchased intangible assets. The allocation of the acquisition cost
to intangible assets and goodwill has a significant impact on our future
operating results as the allocation process requires the extensive use of
estimates and assumptions, including estimates of future cash flows expected to
be generated by the acquired assets. An impairment review is performed whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include, but are not limited to, significant under-performance relative
to historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for our overall business,
and significant industry or economic trends. When impairment indicators are
identified with respect to previously recorded intangible assets, the values of
the assets are determined using discounted future cash flow techniques using our
weighted average cost of capital. Significant management judgment is required in
the forecasting of future operating results which are used in the preparation of
the projected discounted cash flows and should different conditions prevail,
material write downs of net intangible assets and/or goodwill could occur.
Deferred Tax Valuation Allowance. We record a valuation allowance to reduce
deferred tax assets to the amount that is most likely to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize deferred tax assets
in the future in excess of our net recorded amount, an adjustment to the
deferred tax asset would increase the income in the period such determination
was made. Likewise, should we have a net deferred tax asset and determine that
we would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax assets would be charged to income in
the period that such determination was made.
Results of Operations
Three and Six Month Periods Ended December 28, 2002 and December 29, 2001
Net revenues. Our net revenues decreased 25.5% to $10.7 million for the three
months ended December 28, 2002 from $14.4 million for the three months ended
December 29, 2001. Our net revenues decreased 31.1% to $21.0 million for the six
months ended December 28, 2002 from $27.8 million for the six months ended
December 29, 2001. The decrease is primarily attributable to the continued
decline in overall market conditions contributing to further deterioration of
our business, as our customers reduced capital spending in an effort to deal
with excess manufacturing capacity. Revenues decreased across all three of our
reportable business segments. Components revenue decreased 34.0% to $5.9 million
for the three months ended December 28, 2002 from $8.9 million for the three
months ended December 29, 2001. Components revenue decreased 31.1% to $11.9
million in revenues for the six months ended December 28, 2002 compared to $17.3
million in revenues for the six months ended December 29, 2001.The decrease is
primarily attributable to the downturn in capital expenditures in the
semiconductor and OEM industries. Solutions revenue decreased 27.5% to $1.3
million for the three months ended December 28, 2002 from $1.8 million for the
three ended December 29, 2001. Solutions revenue decreased 26.3% to $2.3 million
for the six months ended December 28, 2002 from $3.1 million for the six months
ended December 29, 2001. Services and Support revenue decreased 4.0% to $3.5
million for the three months ended December 28, 2002 from $3.7 million for the
three months ended December 29, 2001. Services and Support revenue decreased
8.0% to $6.8 million for the six months ended December 28, 2002 from $3.7
million for the three months ended December 29, 2001.
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ADEPT TECHNOLOGY, INC.
Our domestic sales increased 16.9% to $7.6 million for the three months ended
December 28, 2002from $6.5 million for the three months ended December 29, 2001
Domestic sales increased 11.2% to $13.8 million for the six months ended
December 28, 2002 from $12.4 million for the three months ended December 29,
2001. Our international sales decreased 60.2% to $3.1 million for the three
months ended December 28, 2002from $7.9 million for the three months ended
December 29, 2001. International sales decreased 53.2% to $7.2 million for the
six months ended December 28, 2002 from $15.4 million for the six months ended
December 29, 2001.
Gross margin. Gross margin as a percentage of net revenue was 27.7% for the
three months ended December 28, 2002 compared to 36.4% for the three months
ended December 29, 2001. Gross margin as a percentage of net revenue was 23.7%
for the six months ended December 28, 2002 compared to 35.6% for the six months
ended December 29, 2001. This decrease in gross margin percentage was primarily
due to fixed facilities expenses and reduction in production units. Throughout
the first and second quarters of fiscal 2003, we continued to experience excess
fixed capacity, lower margins from pricing pressure and lower volumes. All of
these factors combined to produce an unfavorable manufacturing variance
resulting in lower margins as compared to the same three and six month periods
of fiscal 2002.
Research, Development and Engineering Expenses. Research, development and
engineering expenses decreased 33.0% to $3.1 million, or 28.6% of net revenues,
for the three months ended December 28, 2002 from $4.6 million, or 31.8% of net
revenues, for the three months ended December 29, 2001. Research, development
and engineering expenses decreased 36.7% to $6.6 million, or 31.4% of net
revenues, for the six months ended December 28, 2002 from $10.4 million, or
37.5% of net revenues, for the six months ended December 29, 2001.
The decrease in expense for the three and six months ended December 28, 2002 as
compared to the three and six months ended December 29, 2001 was primarily
attributable to restructuring activities in fiscal 2002 and the first quarter of
fiscal 2003. Cost reduction measures implemented as part of restructuring
activities in fiscal 2002 included significant reductions in headcount,
consolidation of facilities, and the suspension of efforts focused on the
precision assembly automation market. Salary and related expenses were reduced
by approximately $0.8 million and $1.5 million for the three and six months
ended December 28, 2002 as compared to the three and six months ended December
29, 2001 as a result of headcount reductions. Depreciation and rent-related
expenses were reduced by approximately $0.1 million and $0.3 million for the
three and six months ended December 28, 2002 as compared to the three and six
months ended December 29, 2001 due to consolidation of our facilities. We expect
that research, development and engineering expenses will continue to decrease or
remain flat for the remainder of fiscal 2003.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 15.0% to $6.5 million, or 60.3% of net
revenues, for the three months ended December 28, 2002, as compared with $7.1
million, or 49.3% of net revenues, for the three months ended December 29, 2001.
Selling, general and administrative expenses decreased 12.9% to $12.9 million,
or 61.5% of net revenues, for the six months ended December 28, 2002, as
compared with $14.8 million, or 53.3% of net revenues, for the six months ended
December 29, 2001.
The decrease in expense for the three and six months ended December 28, 2002 as
compared to the three and six months ended December 29, 2001 was primarily
attributable to restructuring activities in fiscal 2002 and the first quarter of
fiscal 2003. Cost reduction measures implemented as a result of restructuring
activities in fiscal 2002 included significant reductions in headcount,
consolidation of facilities, elimination of some excess capacity and the sale of
certain non-strategic assets. Salary and related expenses were reduced by
approximately $0.3 million and $0.8 million for the three and six months ended
December 28, 2002 as compared to the three and six months ended December 29,
2001 as a result of headcount reductions. Depreciation and rent-related expenses
were reduced by approximately $0.2 and $0.4 million for the three and six months
ended December 28, 2002 as compared to the three and six months ended December
29, 2001 due to consolidation of facilities. In fiscal 2003, restructuring
activities were undertaken which resulted in additional headcount reductions.
Salary and related expenses were reduced by approximately $0.4 million and $0.7
million for the three and six months ended December 28, 2002 as compared to the
three and six months ended December 29, 2001 as a result of these reductions. We
expect that selling, general and administrative expenses will continue to
decrease or remain flat for the remainder of fiscal 2003.
20
ADEPT TECHNOLOGY, INC.
Restructuring Charge. We did not incur any restructuring charges during the
three months ended December 28, 2002 and December 29, 2001. Restructuring
charges were $1.1 million and $12.3 million for the six months ended December
28, 2002 and December 29, 2001, respectively. The restructuring charges of $1.1
million for the six months ended December 28, 2002 are attributable to severance
costs related to a 24% reduction in headcount, related asset impairment charges
and the consolidation of our France office into our Germany office. The
restructuring charges of $12.3 million for the six months ended December 29,
2001 relate to the exiting of certain non-strategic product lines and the
consolidation of certain manufacturing and support facilities.
Six months ended, Six months ended,
(in thousands) December 28, 2002 December 29, 2001
Employee severance costs....................... 1,026 $ 1,372
Lease termination costs........................ 95 5,363
Asset impairment charges....................... 15 5,601
-------------- -------------
Total........................................ $ 1,136 $ 12,336
============== =============
The Company anticipates that when the first quarter of fiscal 2003 restructuring
activities take full effect, the Components business segment will experience
annualized reduction in expenses of approximately $3.2 million as compared to
fiscal 2002 with no offsetting decline in revenues. The Company anticipates that
the Solutions segment will experience annualized reduction in expenses of
approximately $0.4 million as compared to fiscal 2002 with no offsetting decline
in revenues. The Services and Support segment will experience annualized
reduction in expenses of approximately $0.2 million as compared to fiscal 2002
with no offsetting decline in revenues
Amortization of Intangible Assets. We incurred non-cash amortization of
intangible asset expenses of $0.2 million for each of the three month periods
ended December 28, 2002 and December 29, 2001. We incurred non-cash amortization
of intangible asset expenses of $0.3 million and $0.4 million for the six months
ended December 28, 2002 and December 29, 2001, respectively.
Interest Income, Net. Interest income, net was $30,000 for the three months
ended December 30, 2002 and $137,000 for the three months ended December 29,
2001. Interest income, net was $209,000 for the six months ended December 28,
2002, as compared to $219,000 for the six months ended December 29, 2001. The
decrease was due to the combination of lower interest rates and a lower average
cash balance.
Provision for Income Taxes. Our effective tax rate was less than 1% for the
three and six months ended December 28, 2002 and December 29, 2001,
respectively. We expect to be in a loss position for U.S. tax purposes for the
tax year ending June 30, 2003. However, we estimate that our French subsidiary
will be in a taxable position and recorded a provision for such taxes for the
first quarter of fiscal 2003, resulting in a 1% overall tax rate. For the three
and six months ended December 28, 2002, the effective tax rate was based on
estimates of the annual effective tax rate.
Derivative Financial Instruments. Our foreign currency hedging program is used
to hedge our exposure to foreign currency exchange risk on local international
operational assets and liabilities. Realized and unrealized gains and losses on
forward currency contracts that are effective as hedges of assets and
liabilities are recognized in income. We recognized losses of $35,000 and
$129,000 for the three and six months ended December 28, 2002, respectively, and
losses of $126,000 and $480,000 for the three and six months ended December 29,
2001, respectively. Realized and unrealized gains and losses on instruments that
hedge firm commitments are deferred and included in the measurement of the
subsequent transaction; however, losses are deferred only to the extent of
expected gains on the future commitment at December 28, 2002. We have deferred
recognition of a transaction loss of $84,000 relating to foreign exchange
contracts. We will realize this transaction loss in the third fiscal quarter of
2003 as an offset to the related foreign exchange gain.
21
ADEPT TECHNOLOGY, INC.
Impact of Inflation
The effect of inflation on our business and financial position has not been
significant to date.
Liquidity and Capital Resources
As of December 28, 2002, we had working capital of approximately $13.0 million,
including $8.2 million in cash and cash equivalents.
Cash and cash equivalents decreased $13.5 million from June 30, 2002. Net cash
used in operating activities of $13.2 million was primarily attributable to our
net loss and decrease in other accrued liabilities offset in part by a decrease
in accounts receivable and inventories and increase in accounts payable. The
decrease in accounts receivable of $2.1 million reflects a decline in revenues
in recent quarters. Cash provided by investing activities during the six months
ended December 28, 2002 was $3.8 million, due to the sale of short-term
investments of $4.3 million, which was partially offset by property and
equipment purchases of $0.3 million and business acquisition costs of $0.2
million. Cash provided by financing activities of $0.2 million was related to
proceeds from our employee stock incentive plan.
On August 30, 2002, upon the acquisition of Meta, we assumed a $500,000
revolving line of credit with Meta's lender, Paragon Commercial Bank,
terminating in September 2003 and bearing interest at 1% plus the prime rate
announced from time to time by the Wall Street Journal. Of this line of credit,
$494,000 was outstanding at the time of acquisition and at December 28, 2002.
The credit facility does not contain any financial covenants and is secured by a
$500,000 cash deposit with Paragon Commercial Bank. The cash deposit is
classified as other current assets.
On October 29, 2001, we completed a private placement with JDS Uniphase
Corporation of $25.0 million in our convertible preferred stock consisting of
78,000 shares of Series A Convertible Preferred Stock and 22,000 shares of
Series B Convertible Preferred Stock . Both the Series A Preferred and the
Series B Preferred are entitled to annual dividends at a rate of $15 per share.
Dividends are cumulative and are payable only in the event of certain liquidity
events as defined in the statement of preferences of the Preferred Stock, such
as a change of control or liquidation or dissolution of Adept. No dividends on
our common stock may be paid until dividends for the fiscal year and any prior
years on the Preferred Stock have been paid or set apart, and the Preferred
Stock will participate in any dividends paid to the common stock on an
as-converted basis. The Preferred Stock may be converted into shares of our
Common Stock at any time, and in the absence of a liquidity event or earlier
conversion or redemption, will be converted into common stock upon October 29,
2004. We have agreed to use our reasonable commercial efforts to seek
shareholder approval to extend this automatic conversion date for the Preferred
Stock until October 29, 2005. The Preferred Stock may be converted into shares
of our Common Stock at a rate of the initial purchase price divided by a
denominator equal to the lesser of $8.18, or 75% of the 30 day average closing
price of our Common Stock immediately preceding the conversion date. However, as
a result of a waiver of events of default by the preferred stockholder other
than in connection with certain liquidity events that are not approved by the
Board of Directors of Adept, in no event shall the denominator for the
determination of the conversion rate with respect to the Series B Preferred be
less than $4.09 and with respect to the Series A Preferred be less than $2.05,
other than in connection with certain liquidity events that are not approved by
the Board of Directors of Adept. The Preferred Stock shall not be convertible,
in the aggregate, into 20% or more of our outstanding voting securities and no
holder of Preferred Stock may convert shares of Preferred Stock if, after the
conversion, the holder will hold 20% or more of our outstanding voting
securities. Shares not permitted to be converted remain outstanding, unless
redeemed, and become convertible when such holder holds less than 20% of our
outstanding voting securities. The Preferred Stock has voting rights equal to
the number of shares into which the Preferred Stock could be converted as
determined in the designation of preferences assuming a conversion rate of
$250.00 divided by $8.18.
We have the right, but not the obligation, to redeem shares of the Series A
Preferred elected to be converted by the preferred stockholder which, upon
conversion would use the denominator of $2.05 for determination of the
conversion rate would result in the issuance of shares of common stock in excess
of the number of shares of common stock issuable upon conversion using a
denominator of $4.09 for determination of the conversion rate. The number of
shares of Series A Preferred that Adept may elect to redeem would be calculated
by subtracting (i) the number of shares of common stock that the shares of
Series A Preferred that have been elected to be converted would be convertible
into based on a denominator of $4.09 from (ii) the number of shares of common
stock that the shares of Series A Preferred that have been elected to be
converted would be convertible into based on a denominator of $2.05, and then
determining the number of shares of Series A Preferred that this number of
shares of common stock represents using a denominator of $4.09. The redemption
price is equal to the sum of the initial
22
ADEPT TECHNOLOGY, INC.
Preferred Stock price, plus all cumulated and unpaid dividends. The redemption
shall be paid in the form of a senior unsecured promissory note bearing interest
at a rate of 6% per annum, maturing in two years. If we redeem shares of
Preferred Stock using a promissory note, any indebtedness incurred while the
note is outstanding must be subordinated to the note, other than certain
ordinary course financings. In addition, the holders of the Preferred Stock are
entitled to receive, upon liquidation, the amount equal to $250.00 per share
(adjusted for any stock splits or stock dividends) plus any unpaid dividends.
The liquidation preference may be triggered by several events consisting of a
change in control of Adept, a sale of substantially all of Adept's assets,
shareholder approval of any plan of liquidation or dissolution or the direct or
indirect beneficial ownership of more than 50% of Adept's common stock by any
person or entity. Since such changes may be outside of management's control and
would trigger payment of the Preferred Stock liquidation preference, the
Preferred Stock are classified outside of shareholders' equity as redeemable
convertible preferred stock in the accompanying consolidated balance sheet.
In December 2002, Adept and JDS Uniphase agreed to terminate the supply,
development and license agreement entered into by them in October 2001. Under
this agreement, we were obligated to work with JDS Uniphase's internal
automation organization, referred to as Optical Process Automation, or OPA, to
develop solutions for component and module manufacturing processes for
sub-micron tolerance assemblies. JDS Uniphase retained sole rights for
fiberoptic applications developed under this contract. For non-fiberoptic
applications of component and module manufacturing processes developed by OPA,
we were obligated to pay up to $1,000,000 each fiscal quarter for the planned
five-quarter effort. Due to changing economic and business circumstances and the
curtailment of development by JDS Uniphase and termination of their OPA
operations, both parties determined that these development services were no
longer in their mutual best interests. As part of the termination, Adept
executed a $1,000,000 promissory note in favor of JDS Uniphase earning interest
at a rate of 7% per year payable on or before September 30, 2004. JDS Uniphase
has the right to require Adept to apply any additional financing received prior
to maturity first to repayment of the outstanding balance under the promissory
note. The payments made prior to termination plus the promissory note represent
payment in full by Adept for the development services performed by JDS Uniphase,
and there are no remaining payment obligations arising from the agreement. All
licenses, licensing rights and other rights and obligations arising from the
development work performed under the contract before termination survive its
termination. Adept also agreed to seek shareholder approval to amend the date
that the preferred stock held by JDS Uniphase automatically converts into Adept
common stock from October 29, 2004 to October 29, 2005.
Pursuant to the terms of the CHAD acquisition agreement, we paid $2.6 million to
the shareholders of CHAD on October 9, 2002. On December 13, 2002, CHAD and
Adept amended the second anniversary promissory note due to a former shareholder
of CHAD and released to Adept the funds held in escrow to secure the note. All
outstanding principal of and accrued interest on this second anniversary was
paid in full in January 2003.
We do not anticipate additional capital expenditures for the remainder of fiscal
2003. We are currently pursuing various debt and equity financing alternatives
in order to improve our liquidity. If adequate funds are not available on
acceptable terms or at all, we expect to use substantially all of our cash
during fiscal 2003.
Acquisitions
On August 30, 2002, we completed the acquisition of a controlling interest in
Meta Control Technologies, Inc. (Meta), a Delaware corporation. Meta develops,
designs, manufactures and markets products that automate a wide range of
manufacturing processes requiring precise motion, accurate machine vision and
rapid process instrumentation. Some of the applications that make use of our
technology include semiconductor and electronics assembly, micro-mechanical and
fiber optic assembly, laboratory automation and discrete process automation. The
acquisition of Meta extends our controls architecture to include two axis, low
power controls in small packages allowing remote placement of motion and sensor
controls that directly plug into our new architecture using IEEE 1394 Firewire
technology. In addition, Meta has a line of programmable cameras that when
combined with the low power controller and our HexSight software can be packaged
as a very low cost, competitive OEM product. The results of Meta's operations
have been included in our consolidated financial statements since August 30,
2002.
Under terms of the acquisition agreement, we issued 730,000 shares of our common
stock to the shareholders of Meta with a value of $825,000. The value of the
730,000 shares was determined based on the average closing price of Adept's
stock for the period of three trading days ended September 3, 2002. Of the
730,000 shares of common stock, 10% have been place into escrow for one year
pending certain contingencies under the terms of the
23
ADEPT TECHNOLOGY, INC.
acquisition agreement. Additionally, Adept has agreed to provide up to $1.7
million of discounts and royalties through August 2008 to a shareholder of Meta
based upon future sales to that shareholder or certain of its affiliates. Such
amounts will be charged to operations when incurred. As of December 28, 2002 we
have not incurred any expenses related to the discounts and royalties. In
connection with the acquisition, we assumed a $500,000 line of credit with
Meta's lender terminating in September 2003 and bearing interest at 1% plus the
prime rate announced from time to time by the Wall Street Journal. Additionally,
we entered into a loan agreement for up to $800,000 with a former shareholder of
Meta, which, in the absence of a material change in financial condition or
impairment of ability to repay as determined in good faith by the lender and
subject to registration of shares issued to the lender, permits quarterly
borrowings in increments of up to $200,000 after December 15, 2002, at a rate of
1% plus the prime rate announced by the Wall Street Journal. In connection with
the loan agreement, 100,000 shares of the Company's common stock valued at
$113,000 were issued to the lender, subject to certain restrictions on transfer
and cancellation rights. The value of the 100,000 shares issued was determined
based on the period of three trading days ended September 3, 2002, and has been
classified as other assets on the accompanying balance sheet. As amounts are
borrowed and shares released, the value of such shares will be amortized to
interest expense over the life of the loan agreement. Any amounts borrowed under
this loan agreement are due and payable by August 2006. No amounts are currently
outstanding under this loan agreement.
New Accounting Pronouncements.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which is effective for fiscal years ending after December 15, 2002. SFAS 148
amends SFAS 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure in the summary of significant accounting policies of the
effect of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. We have not yet determined the impact that the adoption of
SFAS 148 will have on our financial position or results of operations, if any.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness
of Others" (the Interpretation, FIN 45). The Interpretation elaborates on the
existing disclosure requirements for most guarantees, including product
warranties. The Interpretation 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 the Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Interpretation's disclosure requirements 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 the
Interpretation's scope, including guarantees issued prior to the issuance of the
Interpretation. We adopted the Interpretation effective for the fiscal quarter
ended December 28, 2002. As we have not made any significant financial
guarantees other than product warranties, the adoption of FIN 45 did not have a
material impact on our financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities", which is effective for exit or disposal activities
that are initiated after December 31, 2002. SFAS 146, which nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (Including Certain Costs Incurred in a
Restructuring)," requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. We do not expect that the adoption of SFAS 146 will
have a significant effect on our financial position or results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
You should not rely on our past results to predict our future performance
because our operating results fluctuate due to factors, which are difficult to
forecast, are often out of our control and which can be extremely volatile.
24
ADEPT TECHNOLOGY, INC.
Our past revenues and other operating results may not be accurate indicators of
our future performance. Our operating results have been subject to significant
fluctuations in the past, and we expect this to continue in the future. The
factors that may contribute to these fluctuations include:
o fluctuations in aggregate capital spending, cyclicality and other
economic conditions domestically and internationally in one or more
industries in which we sell our products;
o changes or reductions in demand in the communications, semiconductor,
electronics, and photonics industries and other markets we serve;
o a change in market acceptance of our products or a shift in demand for
our products;
o new product introductions by us or by our competitors;
o changes in product mix and pricing by us, our suppliers or our
competitors;
o pricing and related availability of components and raw materials for
our products;
o our failure to manufacture a sufficient volume of products in a timely
and cost-effective manner;
o our failure to anticipate the changing product requirements of our
customers;
o changes in the mix of sales by distribution channels;
o exchange rate fluctuations;
o extraordinary events such as litigation or acquisitions;
o decline or slower than expected growth in those industries requiring
precision assembly automation; and
o slower than expected adoption of distributed controls architecture or
the adoption of alternative automated technologies.
Our gross margins may vary greatly depending on the mix of sales of lower margin
hardware products, particularly mechanical subsystems purchased from third party
vendors, volume variances driven by substantially lower production volumes, and
higher margin software products.
Our operating results are also affected by general economic and other conditions
affecting the timing of customer orders and capital spending. For example, our
operations during the third and fourth quarters of fiscal 1998, the first three
quarters of fiscal 1999, the first quarter of fiscal 2000, all of fiscal 2001
and 2002, and the first half of fiscal 2003 were adversely affected by a
continuing downturn in hardware purchases by customers in the electronics
industry, particularly disk-drive manufacturers and to a lesser extent
communication manufacturers. In addition, we have experienced significantly
reduced demand during fiscal 2002 and 2003 in our base industries, especially
the electronics and semiconductor industry, as our customers reduced inventories
as they adjusted their businesses from a period of high growth to lower rates of
growth or downsizing. We cannot estimate when or if a sustained revival in these
key hardware markets and the semiconductor and electronics industry will occur.
We generally recognize product revenue upon shipment or, for certain
international sales, upon receipt and acceptance by the customers. As a result,
our net revenues and results of operations for a fiscal period will be affected
by the timing of orders received and orders shipped during the period. A delay
in shipments near the end of a fiscal period, for example, due to product
development delays or delays in obtaining materials may cause sales to fall
below expectations and harm our operating results for the period.
In addition, our continued investments in research and development, capital
equipment and ongoing customer service and support capabilities result in
significant fixed costs that we cannot reduce rapidly. As a result, if our sales
for a particular fiscal period are below expected levels, our operating results
for the period could be materially adversely affected.
25
ADEPT TECHNOLOGY, INC.
In the event that in some fiscal quarter our net revenues or operating results
fall below the expectations of public market analysts and investors, the price
of our common stock may fall. We may not be able to increase or sustain our
profitability on a quarterly or annual basis in the future.
We have limited cash resources, and our recurring operating losses and negative
cash flow could soon exhaust these cash resources. We are attempting to raise
additional capital, but we may not be able to obtain adequate funds to continue
our operations.
As of December 28, 2002, our cash and cash equivalents totaled $8.2 million. We
have generated, and may continue to generate in the future, operating losses and
negative cash flow. We cannot predict with any degree of certainty when, or if,
such operating and net losses will cease and we will begin to realize operating
and net profits. We are pursuing various debt and equity financing alternatives
to improve our cash position. If our capital requirements vary from those
currently forecasted or if our expectations regarding cash flow are not
realized, or if adequate funds are not available on acceptable terms or at all,
we may not be able to take advantage of market opportunities, develop or enhance
new products, pursue acquisitions that would complement our existing product
offerings or enhance our technical capabilities, execute our business plan or
otherwise respond to competitive pressures or unanticipated requirements.
Additionally, if adequate funds are not available on acceptable terms or at all,
we expect to use substantially all of our cash in fiscal 2003, and our business,
results of operations, financial condition and continued viability will be
materially adversely affected and our common stock may lose some or all of its
value.
Sales of our products depend on the capital spending patterns of our customers,
which tend to be cyclical; we are currently experiencing reduced demand in the
electronics and semiconductor industries, which may continue to adversely affect
our revenues.
Intelligent automation systems using our products can range in price from
$75,000 to several million dollars. Accordingly, our success is directly
dependent upon the capital expenditure budgets of our customers. Our future
operations may be subject to substantial fluctuations as a consequence of
domestic and foreign economic conditions, industry patterns and other factors
affecting capital spending. Although the majority of our international customers
are not in the Asia-Pacific region, we believe that any instability in the
Asia-Pacific economies could also have a material adverse effect on the results
of our operations as a result of a reduction in sales by our customers to those
markets. Domestic or international recessions or a downturn in one or more of
our major markets, such as the food, communications, automotive, electronic,
appliance, semiconductor, photonics and life sciences industries, and resulting
cutbacks in capital spending would have a direct, negative impact on our
business. Evidencing the weakness in the photonics industry, the supply and
development agreement between the Company and JDS Uniphase was recently
terminated largely as a result of the termination of JDS Uniphase's OPA
operations. We are currently experiencing reduced demand in most of the
industries we serve including the electronics and semiconductor industries and
expect this reduced demand to adversely affect our revenues for at least the
third quarter of fiscal 2003 or beyond. During fiscal 2001 and 2002, and the
first and second quarter of fiscal 2003, we received significantly fewer orders
than expected, experienced delivery schedule postponements on several existing
orders and had some order cancellations. Such changes in orders may adversely
affect revenue for future quarters.
We sell some of our products to the semiconductor industry, which is subject to
sudden, extreme, cyclical variations in product supply and demand. The timing,
length and severity of these cycles are difficult to predict. In some cases,
these cycles have lasted more than a year. The industry is currently
experiencing a significant downturn due to decreased worldwide demand for
semiconductors. Semiconductor manufacturers may contribute to these cycles by
misinterpreting the conditions in the industry and over- or under-investing in
semiconductor manufacturing capacity and equipment. We may not be able to
respond effectively to these industry cycles.
Downturns in the semiconductor industry often occur in connection with, or
anticipation of, maturing product cycles for both semiconductor companies and
their customers and declines in general economic conditions. Industry downturns
have been characterized by reduced demand for semiconductor devices and
equipment, production over-capacity and accelerated decline in average selling
prices. During a period of declining demand, we must be able to quickly and
effectively reduce expenses and motivate and retain key employees. We
implemented a worldwide restructuring program in fiscal 2002 to realign our
businesses to the changes in our industry and our customers' decrease in capital
spending. We made further cost reductions in the first two quarters of fiscal
2003 to further realign our business. Despite this restructuring, our ability to
reduce expenses in response to any downturn in the
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ADEPT TECHNOLOGY, INC.
semiconductor industry is limited by our need for continued investment in
engineering and research and development and extensive ongoing customer service
and support requirements. The long lead time for production and delivery of some
of our products creates a risk that we may incur expenditures or purchase
inventories for products that we cannot sell. We believe our future performance
will continue to be affected by the cyclical nature of the semiconductor
industry, and thus, any future downturn in the semiconductor industry could
therefore harm our revenues and gross margin if demand drops or average selling
prices decline.
Industry upturns have been characterized by abrupt increases in demand for
semiconductor devices and equipment and production under-capacity. During a
period of increasing demand and rapid growth, we must be able to quickly
increase manufacturing capacity to meet customer demand and hire and assimilate
a sufficient number of qualified personnel. Our inability to ramp-up in times of
increased demand could harm our reputation and cause some of our existing or
potential customers to place orders with our competitors.
Because our product sales are seasonal, we may not be able to maintain a steady
revenue stream.
Our product sales are seasonal. We have historically had higher bookings for our
products during the June quarter of each fiscal year and lower bookings during
the September quarter of each fiscal year, due primarily to the slowdown in
sales to European markets and summer vacations. In the event bookings for our
products in the June fiscal quarter are lower than anticipated and our backlog
at the end of the June fiscal quarter is insufficient to compensate for lower
bookings in the September fiscal quarter, our results of operations for the
September fiscal quarter and future quarters will suffer.
A significant percentage of our product shipments occur in the last month of
each fiscal quarter. Historically, this has been due in part, at times, to our
inability to forecast the level of demand for our products or of the product mix
for a particular fiscal quarter. To address this problem we periodically stock
inventory levels of completed robots, machine controllers and certain strategic
components. If shipments of our products fail to meet forecasted levels, the
increased inventory levels and increased operating expenses in anticipation of
sales that do not materialize could adversely affect our business.
Changes in delivery schedules and customer cancellations of orders constituting
our backlog may result in lower than expected revenues.
Backlog should not be relied on as a measure of anticipated demand for our
products or future revenues, because the orders constituting our backlog are
subject to changes in delivery schedules and in certain instances are subject to
cancellation without significant penalty to the customer. Increasingly, our
business is characterized by short-term order and shipment schedules. We have in
the past experienced changes in delivery schedules and customer cancellations
that resulted in our revenues in a given quarter being materially less than
would have been anticipated based on backlog at the beginning of the quarter. We
experienced greater customer delays and cancellations in fiscal 2002 and the
first and second quarters of fiscal 2003, compared to prior periods, and this
increase may continue in future periods. Similar delivery schedule changes and
order cancellations may adversely affect our operating results in the future.
Because we do not have long-term contracts with our customers, our future sales
are not guaranteed.
We generally do not have long-term contracts with our customers and existing
contracts may be cancelled. As a result, our agreements with our customers do
not provide any assurance of future sales. Accordingly our customers are not
required to make minimum purchases and may cease purchasing our products at any
time without penalty. Because our customers are free to purchase products from
our competitors, we are exposed to competitive price pressure on each order. Any
reductions, cancellations or deferrals in customer orders could have a negative
impact on our financial condition and results of operations.
We have recently begun to sell our new distributed controls architecture, and we
may not achieve customer acceptance of these new products.
We have recently begun to sell to customers our new distributed controls
architecture based on IEEE 1394 FireWire(TM) technology. IEEE 1394 is a standard
defining a high speed multimedia connection protocol that enables simple, low
cost, high-bandwidth, real-time data interfacing between computers and
intelligent devices. We are
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ADEPT TECHNOLOGY, INC.
devoting, and expect to devote in the future significant financial, engineering
and management resources to expand our development, marketing and sales of these
products. Commercial success of these products depends upon our ability to,
among other things:
o accurately determine the features and functionality that our controls
customers require or prefer;
o successfully design and implement intelligent automation solutions
that include these features and functionality;
o enter into agreements with system integrators, manufacturers and
distributors; and
o achieve market acceptance for our design and approach.
Our distributed controls strategy may not achieve broad market acceptance for a
variety of reasons including:
o companies who use machine controls may continue to use their current
design and may not adopt our distributed architecture;
o companies may decide to adopt a different technology than IEEE 1394
FireWire for their distributed controls;
o companies may determine that the costs and resources required to
switch to our distributed architecture are unacceptable to them;
o system integrators, manufacturers, and OEMs may not enter into
agreements with us; and
o competition from traditional, well-established controls solutions.
If we do not achieve market acceptance of these products, our business and
operating results will suffer.
Some of our solution products have a fixed price which makes us vulnerable to
cost overruns.
We charge a fixed price for certain of our solutions products, including the
products that we have added as a result of our acquisitions. Our ability to
achieve a reasonably accurate estimate of the costs of these products will have
a direct impact on the profit we obtain from these products. If the costs we
incur in completing a customer order for these products exceed our expectations,
we generally cannot pass those costs on to our customer. Competitive price
reductions generally characterize the intelligent automation solutions business.
Our gross margins can vary significantly from quarter to quarter based on
factors which are not always in our control.
Our operating results fluctuate when our gross margins vary. Our gross margins
vary for a number of reasons, including:
o the mix of products we sell;
o the average selling prices of products we sell including changes in
the average discounts offered;
o the costs to manufacture, service and support our new products and
enhancements;
o the costs to customize our systems;
o the volume of products produced;
o our efforts to enter new markets; and
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ADEPT TECHNOLOGY, INC.
o certain inventory related costs including obsolescence of products &
components resulting in excess inventory.
Because our significant fixed costs are not easily reduced, we may be unable to
adequately reduce expenditures to offset decreases in revenue to avoid operating
losses.
While we have reduced our absolute amount of expenses in all areas of our
operations in connection with our restructuring, we continue to invest in
research and development, capital equipment and extensive ongoing customer
service and support capability worldwide. These investments create significant
fixed costs that we may be unable to reduce rapidly if we do not meet our sales
goals. Moreover, if we fail to obtain a significant volume of customer orders
for an extended period of time, we may have difficulty planning our future
production and inventory levels, utilizing our relatively fixed capacity, which
could also cause fluctuations in our operating results.
We cannot control the procurement, sales or marketing efforts of the systems
integrators and OEMs who sell our products which may result in lower revenues if
they do not successfully market and sell our products or choose instead to
promote competing products.
We believe that our ability to sell products to system integrators and OEMs will
continue to be important to our success. Our relationships with system
integrators and OEMs are generally not exclusive, and some of our system
integrators and OEMs may expend a significant amount of effort or give higher
priority to selling products of our competitors. In the future, any of our
system integrators or our OEMs may discontinue their relationships with us or
form additional competing arrangements with our competitors. The loss of, or a
significant reduction in revenues from, system integrators or OEMs to which we
sell a significant amount of our product could negatively impact our business,
financial condition or results of operations.
As we enter new geographic and applications markets, we must locate and
establish relationships with system integrators and OEMs to assist us in
building sales in those markets. It can take an extended period of time and
significant resources to establish a profitable relationship with a system
integrator or OEM because of product integration expenses training in product
and technologies and sales training. We may not be successful in obtaining
effective new system integrators or OEMs or in maintaining sales relationships
with them. In the event a number of our system integrators and/or OEMs
experience financial problems, terminate their relationships with us or
substantially reduce the amount of our products they sell, or in the event we
fail to build or maintain an effective systems integrator or OEM channel in any
existing or new markets, our business, financial condition and results of
operations could be adversely affected.
In addition, a substantial portion of our sales is to system integrators that
specialize in designing and building production lines for manufacturers. Many of
these companies are small operations with limited financial resources, and we
have from time to time experienced difficulty in collecting payments from
certain of these companies. As a result, we perform ongoing credit evaluations
of our customers. To the extent we are unable to mitigate this risk of
collections from system integrators, our results of operations may be harmed. In
addition, due to their limited financial resources, during extended market
downturns, the viability of some system integrators may be in question, which
would also result in a reduction in our revenues.
The long sales cycles and implementation periods of our products may increase
costs of obtaining orders and reduce predictability of our earnings.
Our products are technologically complex. Prospective customers generally must
commit significant resources to test and evaluate our products and to install
and integrate them into larger systems. Orders expected in one quarter may shift
to another quarter or be cancelled with little advance notice as a result of the
customers' budgetary constraints, internal acceptance reviews, and other factors
affecting the timing of customers' purchase decisions. In addition, customers
often require a significant number of product presentations and demonstrations,
in some instances evaluating equipment on site, before reaching a sufficient
level of confidence in the product's performance and compatibility with the
customer's requirements to place an order. As a result, our sales process is
often subject to delays associated with lengthy approval processes that
typically accompany the design and testing of new products. The sales cycles of
our products often last for many months or even years. In addition, the time
required for our customers to incorporate our products into their systems can
vary significantly with the needs of our customers and generally exceeds several
months, which further complicates our planning processes and reduces the
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predictability of our operating results. Longer sales cycles require us to
invest significant resources in attempting to make sales, which may not be
realized in the near term and therefore may delay or prevent the generation of
revenue.
Our reliance on single source suppliers with lengthy lead procurement times or
limited supplies for our key components and materials may render us unable to
meet product demand and we may lose customers and suffer decreased revenue.
We obtain many key components and materials and some significant mechanical
subsystems from sole or single source suppliers with whom we have no guaranteed
supply arrangements. In addition, some of our sole or single sourced components
and mechanical subsystems incorporated into our products have long procurement
lead times. Our reliance on sole or single source suppliers involves certain
significant risks including:
o loss of control over the manufacturing process;
o potential absence of adequate supplier capacity;
o potential inability to obtain an adequate supply of required
components, materials or mechanical subsystems; and
o reduced control over manufacturing yields, costs, timely delivery,
reliability and quality of components, materials and mechanical
subsystems.
We depend on Sanmina Corporation for the supply of our circuit boards, NSK
Corporation for the supply of our linear modules, which are mechanical devices
powered by an electric motor that move in a straight line, and which can be
combined as building blocks to form simple robotic systems, Yaskawa Electric
Corp. for the supply of our 6-axis robots, Samsung Electronics Co., Ltd. for the
supply of semiconductor robots, Hirata Corporation for the supply of our Adept
Cobra 600 robot mechanism and Adept Cobra 800 robot mechanisms and Matrox
Electronic Systems Ltd. for the supply of our computer vision processors, which
are used to digitize images from a camera and perform measurements and analysis.
If any one of these significant sole or single source suppliers were unable or
unwilling to manufacture the components, materials or mechanical subsystems we
need in the volumes we require, we would have to identify and qualify acceptable
replacements. The process of qualifying suppliers may be lengthy, and additional
sources may not be available to us on a timely basis, on acceptable terms or at
all. If sufficient quantities of these items were not available from our
existing suppliers and a relationship with an alternative vendor could not be
developed in a timely manner, shipments of our products could be interrupted and
reengineering of these products could be required. In the past, we have
experienced quality control or specification problems with certain key
components provided by sole source suppliers, and have had to design around the
particular flawed item. In addition, some of the components that we use in our
products are in short supply. We have also experienced delays in filling
customer orders due to the failure of certain suppliers to meet our volume and
schedule requirements. Some of our suppliers have also ceased manufacturing
components that we require for our products, and we have been required to
purchase sufficient supplies for the estimated life of its product line.
Problems of this nature with our suppliers may occur in the future.
Disruption or termination of our supply sources could require us to seek
alternative sources of supply, and could delay our product shipments and damage
relationships with current and prospective customers, any of which could have a
material adverse effect on our business. If we incorrectly forecast product mix
for a particular period and we are unable to obtain sufficient supplies of any
components or mechanical subsystems on a timely basis due to long procurement
lead times, our business, financial condition and results of operations could be
substantially impaired. Moreover, if demand for a product for which we have
purchased a substantial amount of components fails to meet our expectations, we
would be required to write off the excess inventory. A prolonged inability to
obtain adequate timely deliveries of key components could have a material
adverse effect on our business, financial condition and results of operations.
If we cannot identify and make acquisitions, our ability to expand our
operations and increase our revenue may be impaired.
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ADEPT TECHNOLOGY, INC.
In the latter half of fiscal 2000, a significant portion of our growth was
attributable to acquisitions of other businesses and technologies. In October
2001, we acquired CHAD Industries, Inc., and in the first quarter of fiscal
2003, we acquired control of Meta Control Technologies, Inc. We expect that
acquisitions of complementary companies, products and technologies in the future
will play an important role in our ability to expand our operations and increase
our revenue. We are continually reviewing acquisition candidates as part of our
strategy to market intelligent automation solutions targeted at the precision
assembly industry. If we are unable to identify suitable targets for acquisition
or complete acquisitions on acceptable terms, our ability to expand our service
offerings and increase our revenue may be impaired. Even if we are able to
identify and acquire acquisition candidates, we may be unable to realize the
benefits anticipated as a result of these acquisitions.
Any acquisition we make could disrupt our business, increase our expenses and
adversely affect our financial condition or operations.
During fiscal 2000, we acquired Pensar, NanoMotion and BYE/Oasis. In July 2000,
we acquired HexaVision. In October 2001, we acquired CHAD Industries and, in the
first quarter of fiscal 2003, we acquired control of Meta Control Technologies,
Inc. These acquisitions introduced us to industries and technologies in which we
have limited previous experience. In the future we may make material
acquisitions of, or large investments in, other businesses that offer products,
services, and technologies that management believes will further our strategic
objectives. We cannot be certain that we would successfully integrate any
businesses, technologies or personnel that we might acquire, and any
acquisitions might divert our management's attention away from our core
business. Any future acquisitions or investments we might make would present
risks commonly associated with these types of transactions, including:
o difficulty in combining the product offerings, operations, or work
force of an acquired business;
o potential loss of key personnel of an acquired business;
o adverse effects on existing relationships with suppliers and
customers;
o disruptions of our on-going businesses;
o difficulties in realizing our potential financial and strategic
objectives through the successful integration of the acquired
business;
o difficulty in maintaining uniform standards, controls, procedures and
policies;
o potential negative impact on results of operations due to amortization
of goodwill, other intangible assets acquired or assumption of
anticipated liabilities;
o risks associated with entering markets in which we have limited
previous experience;
o potential negative impact of unanticipated liabilities or litigation;
and
o the diversion of management attention.
The risks described above, either individually or in the aggregate, could
significantly harm our business, financial condition and results of operations.
We expect that future acquisitions, if any, could provide for consideration to
be paid in cash, shares of our common stock, or a combination of cash and common
stock. In addition, we may issue additional equity in connection with future
acquisitions, which could result in dilution of our shareholders' equity
interest. Fluctuations in our stock price may make acquisitions more expensive
or prevent us from being able to complete acquisitions on terms that are
acceptable to us.
Our international operations and sales subject us to divergent regulatory
requirements and other financial and operating risks outside of our control that
may harm our operating results.
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International sales were $3.2 million for the quarter ended December 28, 2002,
$31.8 million for the fiscal year ended June 30, 2002, $36.4 million for the
fiscal year ended June 30, 2001, and $44.9 million for the fiscal year ended
June 30, 2000. This represented 39.2%, 55.7%, 36.3%, and 45.2% of net revenues
for the respective periods. We also purchase some components and mechanical
subsystems from foreign suppliers. As a result, our operating results are
subject to the risks inherent in international sales and purchases, which
include the following:
o unexpected changes in regulatory requirements;
o political, military and economic changes and disruptions;
o transportation costs and delays;
o foreign currency fluctuations;
o export/import controls;
o tariff regulations and other trade barriers;
o higher freight rates;
o difficulties in staffing and managing foreign sales operations;
o greater difficulty in accounts receivable collection in foreign
jurisdictions; and
o potentially adverse tax consequences.
Foreign exchange fluctuations may render our products less competitive relative
to locally manufactured product offerings, or could result in foreign exchange
losses. In order to maintain a competitive price for our products in Europe, we
may have to provide discounts or otherwise effectively reduce our prices,
resulting in a lower margin on products sold in Europe. Continued change in the
values of European currencies or changes in the values of other foreign
currencies could have a negative impact on our business, financial condition and
results of operations.
We sell standard components for products to original equipment manufacturers, or
OEMs, who deliver products to Asian markets, such as Japan, Malaysia, Korea and
China.
Past turmoil in Asian financial markets and the deterioration of underlying
economic conditions in certain Asian countries may continue to impact our sales
to our OEM customers who deliver to, are located in, or whose projects are based
in, Asian countries due to the impact of restrictions on government spending
imposed by the International Monetary Fund on those countries receiving the
IMF's assistance. In addition, customers in those countries may face reduced
access to working capital to fund component purchases, such as our products, due
to higher interest rates, reduced bank lending due to contractions in the money
supply or the deterioration in the customer's or our bank's financial condition
or the inability to access local equity financing. In the past, as a result of
this lack of working capital and higher interest rates, we have experienced a
significant decline in sales to OEMs serving the Asian market.
Maintaining operations in different countries requires us to expend significant
resources to keep our operations coordinated and subjects us to differing laws
and regulatory regimes that may affect our offerings and revenue.
We may incur currency exchange-related losses in connection with our reliance on
our single or sole source foreign suppliers.
We make yen-denominated purchases of certain components and mechanical
subsystems from certain of our sole or single source Japanese suppliers. We
remain subject to the transaction exposures that arise from foreign exchange
movements between the dates foreign currency export sales or purchase
transactions are recorded and the dates cash is received or payments are made in
foreign currencies. We experienced losses on instruments that hedge our foreign
currency exposure in fiscal 2002 and the first and second quarters of fiscal
2003 and may experience a loss
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on such instruments in the future. Our current or any future currency exchange
strategy may not be successful in avoiding exchange-related losses. Any
exchange-related losses or exposure may negatively affect our business,
financial condition or results of operations.
If our hardware products do not comply with standards set forth by the European
Union, we will not be able to sell them in Europe.
Our hardware products are required to comply with European Union Low Voltage,
Electro-Magnetic Compatibility, and Machinery Safety Directives. The European
Union mandates that our products carry the CE mark denoting that these products
are manufactured in strict accordance to design guidelines in support of these
directives. These guidelines are subject to change and to varying
interpretation. New guidelines impacting machinery design go into effect each
year. To date, we have retained TUV Rheinland to help certify that our
controller-based products, including some of our robots, meet applicable
European Union directives and guidelines. Although our existing certified
products meet the requirements of the applicable European Union directives, we
cannot provide any assurance that future products can be designed, within market
window constraints, to meet the future requirements. If any of our robot
products or any other major hardware products do not meet the requirements of
the European Union directives, we would be unable to legally sell these products
in Europe. Thus, our business, financial condition and results of operations
could be harmed. Such directives and guidelines could change in the future,
forcing us to redesign or withdraw from the market one or more of our existing
products that may have been originally approved for sale.
Our hardware and software products may contain defects that could increase our
expenses and exposure to liabilities and or harm our reputation and future
business prospects.
Our hardware and software products are complex and, despite extensive testing,
our new or existing products or enhancements may contain defects, errors or
performance problems when first introduced, when new versions or enhancements
are released or even after these products or enhancements have been used in the
marketplace for a period of time. We may discover product defects only after a
product has been installed and used by customers. We may discover defects,
errors or performance problems in future shipments of our products. These
problems could result in expensive and time consuming design modifications or
large warranty charges, expose us to liability for damages, damage customer
relationships and result in loss of market share, any of which could harm our
reputation and future business prospects. In addition, increased development and
warranty costs could reduce our operating profits and could result in losses.
The existence of any defects, errors or failures in our products could also lead
to product liability claims or lawsuits against us or against our customers. A
successful product liability claim could result in substantial cost and divert
management's attention and resources, which could have a negative impact on our
business, financial condition and results of operations. Although we are not
aware of any product liability claims to date, the sale and support of our
products entail the risk of these claims.
The success of our business depends on our key employees and without their
continued service to Adept, our business may suffer.
We are highly dependent upon the continuing contributions of our key management,
sales, and product development personnel. In particular, we would be adversely
affected if we were to lose the services of Brian Carlisle, Chief Executive
Officer and Chairman of the Board of Directors, who has provided significant
leadership to us since our inception, Bruce Shimano, Vice President, Research
and Development and a Director, who has guided our research and development
programs since inception or Michael Overby, Vice President of Finance and Chief
Financial Officer, who oversees the financial operations of our business. In
addition, the loss of the services of key senior technical or sales personnel
could impair our business, financial condition, and results of operations. We do
not have employment contracts with any of our executive officers and do not
maintain key man life insurance on the lives of any of our key personnel.
If we become subject to unfair hiring claims, we could be prevented from hiring
needed personnel, incur liability for damages and incur substantial costs in
defending ourselves.
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ADEPT TECHNOLOGY, INC.
Companies in our industry whose employees accept positions with competitors
frequently claim that these competitors have engaged in unfair hiring practices
or that the employment of these persons would involve the disclosure or use of
trade secrets. These claims could prevent us from hiring personnel or cause us
to incur liability for damages. We could also incur substantial costs in
defending ourselves or our employees against these claims, regardless of their
merits. Defending ourselves from these claims could divert the attention of our
management away from our operations.
Our failure to protect our intellectual property and proprietary technology may
significantly impair our competitive advantage.
Our success and ability to compete depend in large part upon protecting our
proprietary technology. We rely on a combination of patent, trademark and trade
secret protection and nondisclosure agreements to protect our proprietary
rights. The steps we have taken may not be sufficient to prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. The patent and trademark law and trade secret protection may not be
adequate to deter third party infringement or misappropriation of our patents,
trademarks and similar proprietary rights. In addition, patents issued to Adept
may be challenged, invalidated or circumvented. Our rights granted under those
patents may not provide competitive advantages to us, and the claims under our
patent applications may not be allowed. We may be subject to or may initiate
interference proceedings in the United States Patent and Trademark Office, which
can demand significant financial and management resources. The process of
seeking patent protection can be time consuming and expensive and patents may
not be issued from currently pending or future applications. Moreover, our
existing patents or any new patents that may be issued may not be sufficient in
scope or strength to provide meaningful protection or any commercial advantage
to us.
We may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
We may face costly intellectual property infringement claims.
We have from time to time received communications from third parties asserting
that we are infringing certain patents and other intellectual property rights of
others or seeking indemnification against such alleged infringement. For
example, some end users of our products have notified us that they have received
a claim of patent infringement from the Jerome H. Lemelson Foundation, alleging
that their use of our machine vision products infringes certain patents issued
to Mr. Lemelson. In addition, we have been notified that other end users of our
AdeptVision VME line and the predecessor line of Multibus machine vision
products have received letters from the Lemelson Foundation which refer to Mr.
Lemelson's patent portfolio and offer the end user a license to the particular
patents. As claims arise, we evaluate their merits. Any claims of infringement
brought by third parties could result in protracted and costly litigation, that
damages for infringement, and the necessity of obtaining a license relating to
one or more of our products or current or future technologies, which may not be
available on commercially reasonable terms or at all. Litigation, which could
result in substantial cost to us and diversion of our resources, may be
necessary to enforce our patents or other intellectual property rights or to
defend us against claimed infringement of the rights of others. Any intellectual
property litigation and the failure to obtain necessary licenses or other rights
could have a material adverse effect on our business, financial condition and
results of operations. Some of our end users have notified us that they may seek
indemnification from us for damages or expenses resulting from any claims made
by the Jerome H. Lemelson Foundation. We cannot predict the outcome of this or
any similar litigation which may arise in the future. Litigation of this kind
may have a material adverse effect on our business, financial condition or
results of operations.
Our future success depends on our continuing ability to attract, retain and
motivate highly-qualified managerial, technical and sales personnel.
Competition for qualified technical personnel in the intelligent automation
industry is intense. Our inability to recruit and train adequate numbers of
qualified personnel on a timely basis would adversely affect our ability to
design, manufacture, market and support our products.
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In addition, our success will depend on our ability to hire and retain qualified
and experienced engineers, senior management, sales and marketing personnel and
key personnel within other functional organizations. Competition for these
personnel is intense, particularly in geographic areas recognized as high
technology centers such as the Silicon Valley area, where our principal offices
are located, and other locations where we maintain offices. To attract and
retain individuals with the requisite expertise, we may be required to grant
large option or other stock-based incentive awards, which may be dilutive to
shareholders. We may also be required to pay significant base salaries and cash
bonuses, which could harm our operating results. If we do not succeed in hiring
and retaining candidates with appropriate qualifications, we will not be able to
grow our business and our operating results will be harmed.
Risks Related to Our Industry
Intense competition in the market for intelligent automation products will cause
our revenues and business to suffer if our products are seen as more attractive
by customers than other products in the marketplace.
The market for intelligent automation products is highly competitive. We believe
that the principal competitive factors affecting the market for our products
are:
o product functionality and reliability;
o price;
o customer service;
o delivery; and
o product features such as flexibility, programmability and ease of use.
We compete with a number of robot companies, motion control companies, machine
vision companies and simulation software companies. Many of our competitors have
substantially greater financial, technical and marketing resources than us. In
addition, we may in the future face competition from new entrants in one or more
of our markets.
Many of our competitors in the robot market are integrated manufacturers of
products that produce robotics equipment internally for their own use and may
also compete with our products for sales to other customers. Some of these large
manufacturing companies have greater flexibility in pricing because they
generate substantial unit volumes of robots for internal demand and may have
access through their parent companies to large amounts of capital. Any of our
competitors may seek to expand their presence in other markets in which we
compete.
Our current or potential competitors may develop products comparable or superior
in terms of price and performance features to those developed by us or adapt
more quickly than we can to new or emerging technologies and changes in customer
requirements. We may be required to make substantial additional investments in
connection with our research, development, engineering, marketing and customer
service efforts in order to meet any competitive threat, so that we will be able
to compete successfully in the future. We expect that in the event the
intelligent automation market expands, competition in the industry will
intensify, as additional competitors enter our markets and current competitors
expand their product lines. Increased competitive pressure could result in a
loss of sales or market share, or cause us to lower prices for our products, any
of which could harm our business.
If we are unable to effectively support the distinct needs of the multiple
industries of our customers, the demand for our products may decrease and our
revenues will decline.
We market products for the food, communications, electronics, automotive,
appliance, semiconductor, photonics and life sciences industries. Because we
operate in multiple industries, we must work constantly to understand the needs,
standards and technical requirements of several different industries and must
devote significant resources to developing different products for these
industries. Our results of operations are also subject to the cyclicality and
downturns in these markets. Product development is costly and time consuming.
Many of our products are used by
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our customers to develop, manufacture and test their own products. As a result,
we must anticipate trends in our customers' industries and develop products
before our customers' products are commercialized. If we do not accurately
predict our customers' needs and future activities, we may invest substantial
resources in developing products that do not achieve broad market acceptance.
Our decision to continue to offer products to a given market or to penetrate new
markets is based in part on our judgment of the size, growth rate and other
factors that contribute to the attractiveness of a particular market. If our
product offerings in any particular market are not competitive or our analyses
of a market are incorrect, our business and results of operations could be
harmed.
Our business will decline if we cannot keep up with the rapid pace of
technological change and new product development that characterize the
intelligent automation industry.
The intelligent automation industry is characterized by rapid technological
change and new product introductions and enhancements. Our ability to remain
competitive depends greatly upon the technological quality of our products and
processes compared to those of our competitors and our ability both to continue
to develop new and enhanced products and to introduce those products at
competitive prices and on a timely and cost-effective basis. We may not be
successful in selecting, developing and manufacturing new products or in
enhancing our existing products on a timely basis or at all. Our new or enhanced
products may not achieve market acceptance. Our failure to successfully select,
develop and manufacture new products, or to timely enhance existing technologies
and meet customers' technical specifications for any new products or
enhancements on a timely basis, or to successfully market new products, could
harm our business. If we cannot successfully develop and manufacture new
products or meet specifications, our products could lose market share, our
revenues and profits could decline, or we could experience operating losses. New
technology or product introductions by our competitors could also cause a
decline in sales or loss of market acceptance for our existing products or force
us to significantly reduce the prices of our existing products.
From time to time we have experienced delays in the introduction of, and certain
technical and manufacturing difficulties with, some of our products, and we may
experience technical and manufacturing difficulties and delays in future
introductions of new products and enhancements. Our failure to develop,
manufacture and sell new products in quantities sufficient to offset a decline
in revenues from existing products or to successfully manage product and related
inventory transitions could harm our business.
Our success in developing, introducing, selling and supporting new and enhanced
products depends upon a variety of factors, including timely and efficient
completion of hardware and software design and development, implementation of
manufacturing processes and effective sales, marketing and customer service.
Because of the complexity of our products, significant delays may occur between
a product's initial introduction and commencement of volume production.
The development and commercialization of new products involve many difficulties,
including:
o the identification of new product opportunities;
o the retention and hiring of appropriate research and development
personnel;
o the determination of the product's technical specifications;
o the successful completion of the development process;
o the successful marketing of the product and the risk of having
customers embrace new technological advances; and
o additional customer service costs associated with supporting new
product introductions and/or effecting subsequent potential field
upgrades.
The development of new products may not be completed in a timely manner, and
these products may not achieve acceptance in the market. The development of new
products has required, and will require, that we expend
36
ADEPT TECHNOLOGY, INC.
significant financial and management resources. If we are unable to continue to
successfully develop new products in response to customer requirements or
technological changes, our business may be harmed.
If we fail to adequately invest in research and development, we may be unable to
compete effectively and sales of our products will decline.
Over the past year, our total expenditures for research and development have
declined. We have limited resources to allocate to research and development and
must allocate our resources among a wide variety of projects. Because of intense
competition in our industry, the cost of failing to invest in strategic products
is high. If we fail to adequately invest in research and development, we may be
unable to compete effectively in the intelligent automation markets in which we
operate.
If we do not comply with environmental regulations, we may incur significant
costs causing our overall business to suffer.
We are subject to a variety of environmental regulations relating to the use,
storage, handling, and disposal of certain hazardous substances used in the
manufacturing and assembly of our products. We believe that we are currently in
compliance with all material environmental regulations in connection with our
manufacturing operations, and that we have obtained all necessary environmental
permits to conduct our business. However, our failure to comply with present or
future regulations could subject us to a variety of consequences that could harm
our business, including:
o the imposition of substantial fines;
o suspension of production; and
o alteration of manufacturing processes or cessation of operations.
Compliance with environmental regulations could require us to acquire expensive
remediation equipment or to incur substantial expenses. Our failure to control
the use, disposal, removal, storage, or to adequately restrict the discharge of,
or assist in the cleanup of, hazardous or toxic substances, could subject us to
significant liabilities, including joint and several liability under certain
statutes. The imposition of liabilities of this kind could harm our financial
condition.
If we fail to obtain export licenses, we would be unable to sell any of our
software products overseas and our revenues would decline.
We must comply with U.S. Department of Commerce regulations in shipping our
software products and other technologies outside the United States. Any
significant future difficulty in complying could harm our business, financial
condition and results of operations.
Risks Related to our Stock
If we are unable to transfer to the Nasdaq SmallCap Market or are unable to
maintain a Nasdaq SmallCap Market quotation, our common stock may become even
more illiquid and the value of our securities may decline.
In the second quarter of this fiscal year, the Nasdaq National Market, or Nasdaq
informed Adept that it was not in compliance with Nadsaq's listing requirements.
Adept determined that its ability to comply with Nasdaq National Market listing
requirements was unlikely. As such, on December 4 2002, we applied to transfer
from The Nasdaq National Market to The Nasdaq SmallCap Market. In January 2003,
Nasdaq informed Adept that its application for transfer to the Nasdaq SmallCap
Market was denied and that that its common stock is subject to delisting as a
result of its failure to meet Nasdaq's minimum listing standards. Adept has
requested a hearing to appeal the delisting decision to a Nasdaq Listing
Qualifications Panel. Nasdaq stated in its letter that a hearing request will
stay the delisting of Adept's securities pending the Panel's decision. There can
be no assurance the Panel will grant Adept's request for continued listing on
Nasdaq and its application to list its common stock on The Nasdaq SmallCap
Market.
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ADEPT TECHNOLOGY, INC.
If the Nasdaq does not approve our request to transfer our common stock to The
Nasdaq SmallCap Market, Nasdaq will delist our common stock. If this occurs, our
common stock will likely trade on the National Association of Securities
Dealers' OTC Bulletin Board or in the over-the-counter market in the so-called
"pink sheets" maintained by Pink Sheets LLC. Such alternative trading markets
are generally considered less liquid and efficient than Nasdaq, and although
trading in our stock is already relatively thin and sporadic, the liquidity of
our common stock may decline further because smaller quantities of share would
likely be bought and sold, transactions could be delayed and securities
analysts' and news media coverage of Adept would diminish. These factors could
result in lower prices and larger spreads in the bid and ask prices for our
common stock. Reduced liquidity may reduce the value of our common stock and our
ability to generate additional funding.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price of our common stock has fluctuated substantially in the past.
The market price of our common stock will continue to be subject to significant
fluctuations in the future in response to a variety of factors, including:
o the business environment, including the operating results and stock
prices of companies in the industries we serve;
o future announcements concerning our business or that of our
competitors or customers;
o the introduction of new products or changes in product pricing
policies by us or our competitors;
o litigation regarding proprietary rights or other matters;
o change in analysts' earnings estimates;
o developments in the financial markets;
o quarterly fluctuations in operating results;
o general conditions in the intelligent automation industry; and
o perceived dilution from stock issuances for acquisitions, our
convertible preferred stock and other transactions.
Furthermore, stock prices for many companies, and high technology companies in
particular, fluctuate widely for reasons that may be unrelated to their
operating results. Those fluctuations and general economic, political and market
conditions, such as recessions, terrorist actions or other military actions, or
international currency fluctuations, as well as public perception of equity
values of publicly traded companies may adversely affect the market price of our
common stock. If Nasdaq does not grant our request to transfer our common stock
to The Nasdaq SmallCap Market, our common stock will no longer be traded on
Nasdaq.
The ability of our Board of Directors to issue preferred stock and our
outstanding preferred stock could delay or impede a change of control of our
company and may adversely affect the price an acquirer is willing to pay for our
common stock.
The Board of Directors has the authority to issue, without further action by the
shareholders, up to 5,000,000 shares of preferred stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by Adept's shareholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of Adept without further action by the
shareholders and may adversely affect the market price of, and the voting and
other rights of, the holders of common stock. Additionally, the conversion of
preferred stock into common stock will have a dilutive effect on the holders of
common stock.
38
ADEPT TECHNOLOGY, INC.
We have issued 100,000 shares of our convertible preferred stock for
consideration of $25.0 million with a liquidation preference that may be
triggered by events such as a change of control of our common stock. The
preferred stock may be converted into shares of Adept's common stock at the per
share rate equal to the initial preferred price, $250, divided by the lower of
$8.18 or 75% of the price of Adept's stock on the conversion date , provided
that the denominator in such conversion rate will never be lower than $4.09 for
the Series B preferred stock and $2.05 for the Series A preferred stock, other
than for certain liquidity events not approved by the Board of Directors. The
preferred stock shall not be convertible into 20% or more of the outstanding
voting securities of Adept and no holder of preferred stock may convert shares
of preferred stock if, after the conversion, the holder will hold 20% or more of
our outstanding voting securities. Shares not permitted to be converted remain
outstanding and become convertible when such holder holds less than 20% of the
Adept's outstanding voting securities. The liquidation preference of the
preferred stock or the ability of a preferred shareholder to convert shares of
preferred stock into common stock may affect the price an acquirer or investor
is willing to pay for our common stock and the trading price of our common
stock.
We may be subject to securities class action litigation if our stock price is
volatile, which could result in substantial costs, distract management and
damage our reputation.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. Companies, like us, that are involved in rapidly changing technology
markets are particularly subject to this risk. We may be the target of
litigation of this kind in the future. Any securities litigation could result in
substantial costs, divert management's attention and resources from our
operations and negatively affect our public image and reputation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. We maintain an investment policy designed to ensure
the safety and preservation of our invested funds by limiting default risk,
market risk and reinvestment risk. The table below presents principal amounts
and related weighted-average interest rates by year of maturity for our
investment portfolio.
Fiscal Fiscal Fiscal Fair
(in thousands) 2003 2004 2005 Total Value
-------------- ---- ---- ---- ----- -----
Cash equivalents
Fixed rate...................... $ 8,172 -- -- $ 8,172 $ 8,172
Average rate.................... 0.66% -- -- 0.66%
Total Investment Securities. $ 8,172 -- -- $ 8,172 $ 8,172
--------- -- -- ---------- ----------
Average rate.................... 0.66% -- -- 0.66%
We mitigate default risk by investing in high credit quality securities and by
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. Our portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity and maintains a prudent amount of diversification. We
conduct business on a global basis. Consequently, we are exposed to adverse or
beneficial movements in foreign currency exchange rates.
Our foreign currency hedging program is used to hedge our exposure to foreign
currency exchange risk on local international operational assets and
liabilities. We enter into foreign currency forward contracts to minimize the
impact of exchange rate fluctuations on certain foreign currency commitments and
balance sheet positions and may enter into foreign exchange forward contracts in
the future. Realized and unrealized gains and losses on instruments that hedge
firm commitments are deferred and included in the measurement of the subsequent
transaction; however, losses are deferred only to the extent of expected gains
on future commitments.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the company carried
out an evaluation, under the supervision and with the participation of the
company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures
39
ADEPT TECHNOLOGY, INC.
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the company (including its consolidated
subsidiaries) required to be included in its periodic SEC filings. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
In addition, Adept reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
40
ADEPT TECHNOLOGY, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings or claims, either
asserted or unasserted, which arise in the ordinary course of our business. We
have reviewed pending legal matters and believe that the resolution of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
Adept has in the past received communications from third parties asserting that
we have infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement. While it is not
feasible to predict or determine the likelihood or outcome of any actions
against us, we believe the ultimate resolution of these matters will not have a
material adverse effect on our financial position, results of operations or cash
flows.
Some end users of our products have notified us that they have received a claim
of patent infringement from the Jerome H. Lemelson Foundation, alleging that
their use of our machine vision products infringes certain patents issued to Mr.
Lemelson. In addition, we have been notified that other end users of our
AdeptVision VME line and the predecessor line of Multibus machine vision
products have received letters from Mr. Lemelson which refer to Mr. Lemelson's
patent portfolio and offer the end user a license to the particular patents.
Some of these end users have notified us that they may seek indemnification from
us for any damages or expenses resulting from this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 9, 2002, in connection with our acquisition of Chad Industries, Inc.,
Adept issued 20,035 shares of its common stock to former employees of Chad
Industries, Inc. pursuant to an exemption from registration under Regulation D
under the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS
At Adept's 2002 Annual Meeting of Shareholders, held on November 5, 2002, the
shareholders of Adept approved the following actions:
a) Election of six (6) directors to serve until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified:
Brian R. Carlisle: For: 16,666,885 Withheld: 309,692
Bruce E. Shimano: For: 16,675,174 Withheld: 301,403
Ronald E.F. Codd: For: 16,720,102 Withheld: 256,475
Michael P. Kelly: For: 16,721,263 Withheld: 255,314
Cary R. Mock: For: 16,589,456 Withheld: 387,121
John E. Pomeroy: For: 16,589,756 Withheld: 386,821
b) Ratification of the appointment of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending June 30, 2003.
For: 16,801,226 Against: 159,841 Abstain: 0 Broker Non-Vote: 960,378
ITEM 5. OTHER INFORMATION
Effective January 15, 2003 John Pomeroy resigned from Adept's Board of
Directors.
41
ADEPT TECHNOLOGY, INC.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report.
3.1 Bylaws of the Registrant, as amended to date.
10.1 Letter Agreement effective as of November 30, 2002 between the Registrant
and JDS Uniphase Corporation (incorporated by reference to the Registrant's
Form 8-K as filed with the Securities and Exchange Commission on January
22, 2003).
10.2 Amended Second Anniversary Note Agreement effective as of December 13, 2002
between the Registrant and the Holcomb Family Trust.
b) Reports on Form 8-K.
On October 23, 2002, a Form 8-K was filed by Adept announcing its financial
results for its first quarter ended September 28, 2002.
On November 12, 2002, a Form 8-K was filed by Adept announcing that pursuant to
Section 906 of the Sarbanes -Oxley Act of 2002, its Form 10-Q for the first
quarter ended September 28, 2002 was accompanied by a certification of its CFO
and CEO.
On December 27, 2002, a Form 8-K was filed by Adept announcing that it has
applied to The Nasdaq Stock Market, Inc. to transfer the listing of its common
stock from the Nasdaq National Market to the Nasdaq SmallCap Market.
On January 22, 2003, a Form 8-K was filed by Adept announcing that it has
entered into an agreement to terminate the Supply, Development and License
Agreement between JDS Uniphase Corporation and Adept.
On January 22, 2003, a Form 8-K was filed by Adept announcing its financial
results for its second quarter ended December 28, 2002.
On February 4, 2003, a Form 8-K was filed by Adept announcing that its has been
notified by The Nasdaq Stock Market, Inc. that its application to transfer the
listing of its common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market has been denied as a result of its failure to meet certain
minimum listing requirements and that its common stock is subject to delisting.
On February 5, 2003, a Form 8-K was filed by Adept to provide its amended annual
report on Form 10-K/A, conformed to reflect segment changes occuring in Adept's
reportable business segments in the first quarter of fiscal 2003.
On February 6, 2003, a Form 8-K was filed by Adept announcing that pursuant to
Section 906 of the Sarbanes -Oxley Act of 2002, its Form 10-K/A for the fiscal
year ended June 30, 2002 and Form 10-Q/A for the first quarter ended September
28, 2002 were accompanied by a certification of its CFO and CEO.
42
ADEPT TECHNOLOGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADEPT TECHNOLOGY, INC.
By: /s/ Michael W. Overby
---------------------------------------------
Michael W. Overby
Vice President, Finance and
Chief Financial Officer
By: /s/ Brian R. Carlisle
---------------------------------------------
Brian R. Carlisle
Chairman of the Board of Directors and
Chief Executive Officer
Date: February 10, 2003
43
ADEPT TECHNOLOGY, INC.
CERTIFICATIONS
I, Brian R. Carlisle, Chairman of the Board of Directors and Chief Executive
Officer of Adept Technology, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Adept
Technology, 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 we 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
person's 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: February 10, 2003
By: /s/ Brian R. Carlisle
Brian R. Carlisle
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
44
ADEPT TECHNOLOGY, INC.
I, Michael W. Overby, Vice President of Finance and Chief Financial Officer of
Adept Technology, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Adept
Technology, 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 we 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
person's 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: February 10, 2003
By: /s/ Michael W. Overby
Michael W. Overby
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
35
ADEPT TECHNOLOGY, INC.
INDEX TO EXHIBITS
3.1 Bylaws of the Registrant, as amended to date
10.2 Amended Second Anniversary Note Agreement effective as of December
13, 2002 between the Registrant and the Holcomb Family Trust
46