UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 [ ]
The number of shares of the Registrant's common stock outstanding as of
November 4, 2002 was 15,225,480.
ADEPT TECHNOLOGY, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
September 28, 2002 and June 30, 2002..................................... 3
Condensed Consolidated Statements of Operations
Three months ended September 28, 2002 and September 29, 2001............. 4
Condensed Consolidated Statements of Cash Flows
Three months ended September 28, 2002 and September 29, 2001............. 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 14
Item 3. Qualitative and Quantitative Disclosures About Market Risk.......... 34
Item 4. Controls and Procedures............................................. 34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 35
Item 2. Changes in Securities and Use of Proceeds........................... 35
Item 6. Exhibits and Reports on Form 8-K.................................... 35
Signatures.................................................................. 37
Certifications.............................................................. 38
Index to Exhibits........................................................... 40
ADEPT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in thousands)
September 28, June 30,
2002 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 15,498 $ 17,375
Short-term investments ................................................... 806 4,306
Accounts receivable, less allowance for doubtful accounts of $817 at
September 28, 2002 and $832 at June 30, 2002 ........................ 11,107 12,500
Inventories .............................................................. 10,610 11,189
Deferred tax assets and other current assets ............................. 1,374 854
--------- ---------
Total current assets ................................................. 39,395 46,224
Property and equipment at cost ................................................ 13,114 12,688
Less accumulated depreciation and amortization ................................ 7,810 6,965
--------- ---------
Property and equipment, net ................................................... 5,304 5,723
Goodwill ...................................................................... 7,562 6,889
Other intangibles ............................................................. 1,754 1,124
Other assets .................................................................. 4,282 2,534
--------- ---------
Total assets ......................................................... $ 58,297 $ 62,494
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 8,617 $ 6,561
Accrued payroll and related expenses ..................................... 2,099 2,463
Accrued warranty ......................................................... 1,669 1,566
Deferred revenue ......................................................... 974 637
Accrued restructuring charges ............................................ 2,140 1,909
Accrued taxes ............................................................ 2,695 2,730
Other accrued liabilities ................................................ 1,887 1,516
--------- ---------
Total current liabilities ............................................ 21,718 18,898
Long term liabilities:
Restructuring charges .................................................... 1,109 1,450
Deferred income tax and other long term liabilities ...................... 2,715 1,242
Commitments and contingencies
Redeemable convertible preferred stock, no par value:
5,000 shares authorized, 100 shares issued and outstanding at
September 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, 14,881 and 14,051 shares issued and outstanding 108,321 107,384
at September 28, 2002 and June 30, 2002, respectively
Accumulated deficit .......................................................... (100,566) (91,480)
--------- ---------
Total shareholders' equity ........................................... 7,755 15,904
--------- ---------
Total liabilities, redeemable convertible preferred stock and
shareholders'
Equity ............................................................. $ 58,297 $ 62,494
========= =========
See accompanying notes.
2
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended
------------------
September 28, September 29,
------------- -------------
2002 2001
---- ----
Net revenues ........................................................ $ 10,275 $ 13,385
Cost of revenues .................................................... 8,256 8,737
-------- --------
Gross margin ........................................................ 2,019 4,648
Operating expenses:
Research, development and engineering ......................... 3,522 5,838
Selling, general and administrative ........................... 6,445 7,714
Restructuring charges ......................................... 1,136 12,336
Amortization of goodwill and other intangibles ................ 150 180
-------- --------
Total operating expenses ............................................ 11,253 26,068
-------- --------
Operating loss ...................................................... (9,234) (21,420)
Interest income, net ................................................ 179 83
-------- --------
Loss before income taxes and cumulative effect of change in
accounting principle .............................................. (9,055) (21,337)
Provision for income taxes .......................................... 31 81
-------- --------
Net loss before cumulative effect of change in accounting principle . (9,086) (21,418)
Cumulative effect of change in accounting principle* ................ -- (9,973)
-------- --------
Net loss ............................................................ $ (9,086) $(31,391)
======== ========
Basic and diluted net loss per share:
Before cumulative effect of change in accounting principle ... $ (0.63) $ (1.63)
======== ========
After cumulative effect of change in accounting principle .... $ (0.63) $ (2.38)
======== ========
Number of shares used in computing per share amounts:
Basic ......................................................... 14,327 13,169
======== ========
Diluted ....................................................... 14,327 13,169
======== ========
* The cumulative effect of change in accounting principle of $10.0 million 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 Technology, Inc., the cumulative effect of
change in accounting principle is properly reflected in the fiscal quarter ended
September 29, 2001 in the table above.
See accompanying notes
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended
------------------
September 28, September 29,
------------- -------------
2002 2001
---- ----
Operating activities
Net loss $ (9,086) $(31,391)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle -- 9,973
Depreciation 720 1,152
Amortization 150 180
Asset impairment charges 15 --
Write-off of property and equipment -- 5,601
Loss on disposal of property and equipment 1 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 1,407 4,342
Inventories 644 (326)
Other current assets (628) (622)
Other assets (1,523) 138
Accounts payable 1,921 (2,901)
Other accrued liabilities (127) 792
Accrued restructuring charges (110) 5,994
Deferred income tax and other long term liabilities 1,473 (13)
-------- --------
Net cash used in operating activities (5,143) (7,081)
-------- --------
Investing activities
Business acquisitions (89) 34
Purchase of property and equipment (145) (845)
Purchases of short-term available-for-sale investments (9,275) (1,400)
Sales of short-term available-for-sale investments 12,775 4,200
-------- --------
Net cash provided by investing activities 3,266 1,989
-------- --------
Financing activities
Proceeds from employee stock incentive program and employee
stock purchase plan, net of repurchases and cancellations -- 70
-------- --------
Net cash provided by financing activities -- 70
-------- --------
Decrease in cash and cash equivalents (1,877) (5,022)
Cash and cash equivalents, beginning of period 17,375 18,700
-------- --------
Cash and cash equivalents, end of period $ 15,498 $ 13,678
======== ========
Supplemental disclosure of non-cash activities:
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 Meta shareholder $ 113 $ --
See accompanying notes.
4
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 which, 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.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. 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), 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
The Company's product sales are predominantly denominated in U.S. dollars.
However, certain international operating expenses are paid in their respective
local currency. The Company uses a foreign currency hedging program to hedge its
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. The Company recognized a loss relating to forward currency contracts
of $93,600 for the three months ended September 28, 2002 and a loss of $354,000
for the three months ended September 29, 2001. The Company does not engage in
currency speculation. Market value gains and losses on contracts are recognized
currently, offsetting gains or losses on the associated receivables. Foreign
currency transaction gains and losses are included in current earnings. Foreign
exchange contracts totaled $1,660,050 at September 28, 2002, and $3,588,800 at
September 29, 2001.
5
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.
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 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 discounts paid, acquire 100% of the stock of Meta
no later than August 2008.
Under terms of the 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. 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 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 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.
6
Below is a table of the acquisition cost and purchase price allocation.
Acquisition Cost:
Stock issued at closing....................... $ 825
Long term debt assumed........................ 511
Transaction costs............................. 123
----------
Total acquisition cost...................... $ 1,459
==========
Purchase Price Allocation:
Net book value of assets acquired............. $ 6
Identified intangible assets.................. 780
Goodwill...................................... 673
----------
Total....................................... $ 1,459
==========
Pro forma results for the three months ended September 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:
September 28, June 30,
(in thousands) 2002 2002
---- ----
Raw materials......... $ 4,113 $ 4,952
Work-in-process....... 3,110 3,049
Finished goods........ 3,387 3,188
-------- --------
$ 10,610 $ 11,189
======== ========
5. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
September 28, June 30,
(in thousands) 2002 2002
---- ----
Cost:
Machinery and equipment......................... $ 3,283 $ 3,042
Computer equipment.............................. 5,887 5,806
Office furniture and equipment.................. 3,944 3,840
---------- ----------
13,114 12,688
Accumulated depreciation and amortization 7,810 6,965
---------- ----------
Net property and equipment...................... $ 5,304 $ 5,723
---------- ==========
6. Credit Facilities
On August 30, 2002, upon the closing of the acquisition of 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 September 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 assets in the accompanying balance sheet.
7
On April 9, 2001, the Company entered into agreements establishing a revolving
line of credit, consisting of two facilities, with the CIT Group/Business
Credit, Inc. to borrow up to the lesser of $25.0 million or the sum of 85% of
eligible domestic accounts receivables, plus 90% of eligible foreign accounts
receivables, less a dilution reserve equivalent to one percent of eligible
domestic and foreign accounts receivables for every one percentage point in
excess of a standard five percent dilution rate. Effective as of August 26,
2002, Adept and CIT terminated Adept's revolving line of credit with CIT. The
line of credit was terminated as a result of a dispute with the lender and a
termination fee of $100,000 was a paid by Adept. Prior to termination, the
Company had made no borrowings under this revolving line of credit and at the
end of the first quarter of fiscal 2003, the Company had not replaced this line
of credit.
7. 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, implemented 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; shut down 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: (in
thousands)
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 2002 Q4 Fiscal 2002 Q4 Fiscal 2002 June 30,
--------- -------------- -------------- --------------
(in thousands) 2002 2002 2002 2002 2002
---- ---- ---- ---- ----
Cash 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 three of the reportable
business segments and at June 30, 2002 all of the affected employees had ceased
employment with the Company. The Company expects to pay the remaining accrued
severance by 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 relate to future rent commitments on non-cancelable lease
agreements. Payments against these lease commitments are expected to continue
for eighteen 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
8
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.
Once the full effect of all restructuring activities was realized, the Assembly
and Material Handling business segment experienced a reduction in salary,
depreciation and rent related expenses of approximately $1.9 million a quarter
with no offsetting decline in revenues. The SILMA Software business segment
experienced expense reductions of $0.6 million a quarter, which was offset by a
decline in revenues of $0.6 million a quarter. The Semiconductor business
segment experienced expense reductions of $0.2 million a quarter with no
offsetting decline in revenues.
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 three of 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 Company's office in France into the Company's office in Germany. Asset
impairment charges of $14,000 represent write-offs of abandoned assets.
The following table summarizes the significant components of the Company's first
quarter fiscal 2003 restructuring at September 28, 2002:
Additional Amounts
Balance Charges Utilized Balance
June 30, Q1 Fiscal Q1 Fiscal September 28,
(in thousands) 2002 2003 2003 2002
---- ---- ---- ----
Employee severance costs........... $ 126 $ 1,026 $ 815 $ 337
Lease commitments.................. 3,139 95 416 2,818
Asset impairment charges........... 94 15 15 94
-------- ----------- ----------- -----------
Total............................ $ 3,359 $ 1,136 $ 1,246 $ 3,249
======== =========== =========== ===========
At September 28, 2002, the long term accrued restructuring charges related to
rent commitments on non-cancelable lease agreements expected to be paid beyond
June 30, 2003.
8. Redeemable Convertible Preferred Stock
On October 29, 2001, Adept completed a private placement with an accredited
investor of $25.0 million in Adept 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 accrued and unpaid dividends are payable
only in the event of certain liquidity events as defined in the designation of
preferences of the Preferred Stock, such as a change of control or a liquidation
or dissolution of the Company. 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 Adept's common stock at any time after the
earlier of October 29, 2002, the public announcement of a liquidity event, or an
event of default, such as bankruptcy, or the reporting by the Company of a cash
balance of less than $15.0 million at the end of any fiscal quarter through
September 30, 2002, and, in the absence of a liquidity event or earlier
conversion or redemption, will be converted into common stock upon October 29,
2004 (the "Automatic Conversion Date"). 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 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, even if the Conversion Date Price is less
than $4.09 and $2.05, respectively. With respect to Series A Preferred, the
conversion price could
9
potentially be less than the fair value of the common stock at the date the
preferred stock was issued. The resulting beneficial conversion amount, if any,
would be recorded as a preferred stock dividend and shown as a reduction in net
income applicable to common shareholders. The Series A Preferred and the Series
B Preferred shall not be convertible, in the aggregate, 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 the Company's outstanding voting securities. Shares not permitted
to be converted remain outstanding, unless redeemed, and become convertible when
such holder holds less than 20% of the Company's outstanding voting securities.
The Preferred Stock has voting rights equal to the number of shares into which
the Preferred Stock could be converted subject to terms of the designation of
preferences assuming a conversion rate of $250.00 divided by $8.18.
Barring the occurrence of certain liquidity events that are not approved by the
Board of Directors of Adept, if the Conversion Date Price on the Automatic
Conversion Date is lower than $2.05, then the denominator for the calculation of
the conversion of the Preferred Stock described above will be $4.09 for the
Series B Preferred Stock and $2.05 for the Series A Preferred Stock. In
addition, because accrued and unpaid dividends are payable only in the event of
certain liquidity events as defined in the designation of preferences of the
Preferred Stock, as described above, barring the prior occurrence of such a
liquidity event, no cash dividends will be payable at the Automatic Conversion
Date.
Adept 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 Adept 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.
The Company entered into an automation development alliance for optical
component and module manufacturing with JDS Uniphase in October 2001. As part of
this agreement, the Company will work with the JDS Uniphase's internal
automation organization, Optical Process Automation (OPA), to develop solutions
for component and module manufacturing processes and specifically sub-micron
tolerance assemblies. JDS Uniphase will have sole rights for fiberoptic
application of new products and technologies developed pursuant to this
alliance, while the Company will retain the right to market such products and
technologies for use in other high precision industries. As part of this
agreement, the Company has agreed to fund up to $1.0 million per quarter for the
next five quarters for development provided by OPA of products and technologies
that might be applicable to other high precision industries. At September 28,
2002, two of five quarterly expenditures of $1.0 million have been paid pursuant
to the joint development agreement with the accredited investor.
9. Income Taxes
The Company 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. For the quarter ended September 28,
2002, the Company has recorded a tax provision related to the operations of its
French subsidiary.
10
10. Goodwill and Intangible Assets
In accordance with SFAS 142, the following is a summary of the gross carrying
amount and accumulated 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 September 28, 2002
-----------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amortized intangible assets Amount Amortization Amount
Developed technology $ 2,531 $ (935) $ 1,596
Non-compete agreements 380 (222) 158
--------------- ---------------- ----------------
Total $ 2,911 $ (1,157) $ 1,754
=============== ================ ================
The aggregate amortization expense for three months ended September 28, 2002
totaled $150,000 and the estimated amortization expense for the next five years
are as follows:
(in thousands) Amount
------------
Remaining for fiscal year ended 2003 $ 610
For fiscal year ended 2004 747
For fiscal year ended 2005 332
For fiscal year ended 2006 65
-----------
$ 1,754
===========
The changes in the carrying amount of goodwill for the quarter ended September
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) 673 -- 673
---------- ---------- ----------
Balance at September 28, 2002 $ 3,067 $ 4,495 $ 7,562
========== ========== ==========
There is no goodwill related to the Services and Support segment.
11. Net Loss per Share
Three months ended
-------------------------------
(in thousands) September 28, September 29,
2002 2001
---- ----
Net loss before cumulative effect of change in accounting principle $ (9,086) $(21,418)
Cumulative effect of change in accounting principle ............... -- (9,973)
--------- --------
Net loss after cumulative effect of change in accounting principle $ (9,086) $(31,391)
========= ========
Basic and diluted shares outstanding .............................. 14,327 13,169
========= ========
Basic and diluted loss per common share:
Before cumulative effect of change in accounting principle ..... $ (0.63) $ (1.63)
========= ========
Cumulative effect of change in accounting principle ............ $ -- $ (.75)
========= ========
Adjusted net loss .............................................. $ (0.63) $ (2.38)
========= ========
11
12. Impact of Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board (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
have not yet determined the impact that the adoption of SFAS 146 will have on
our financial position or results of operations, if any.
13. 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 have been reorganized into three new
business segments to reflect how management currently measures its 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
business is now categorized in the Components segment and the SILMA business has
been reorganized into the Solutions segment. Service and support for all of our
products are now categorized in the Services and Support segment. Segment
information for the quarter ended September 29, 2001 has been restated to
conform to the current presentation.
The Components operations 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 operations 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 operations 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 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
------------------
September 28, September 29,
------------- -------------
(in thousands) 2002 2001
---- ----
Revenue:
Components ....................................... $ 6,020 $ 8,370
Solutions ........................................ 978 1,297
Services & Support ............................... 3,277 3,718
-------- --------
Total revenue .................................... $ 10,275 $ 13,385
======== ========
Operating (loss) income:
Components ....................................... $ (2,410) $ (3,082)
Solutions ........................................ (1,205) (956)
Service and Support .............................. 434 1,136
-------- --------
Segment loss ..................................... (3,181) (2,902)
Unallocated research, development and engineering
and selling, general and administrative ........ (4,917) (6,182)
Restructuring charges ............................ (1,136) (12,336)
Interest income .................................. 182 84
Interest expense ................................. (3) (1)
-------- --------
Loss before income taxes and cumulative effect of
change in accounting principle ................. $ (9,055) $(21,337)
======== ========
12
14. Comprehensive Income
For the three months ended September 28, 2002 and September 29, 2001, there were
no significant differences between the Company's comprehensive loss and its net
loss.
15. Reclassification
Certain amounts presented in the financial statements for prior periods have
been reclassified to conform to the presentation for fiscal 2003.
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 marketing and commercialization of our products under development;
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 our ability to attract customers and market our products;
o our intellectual property;
o our ability to establish relationships with suppliers, systems integrators and
OEMs for the supply and distribution of our products;
o plans for future acquisitions and for the integration of recent acquisitions;
and
o sources of revenues and anticipated revenues, including the contribution from
the growth of new products and markets.
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, communications, automotive, appliance,
semiconductor, photonics, and life sciences industries. We utilize our
comprehensive product portfolio of high precision mechanical components and
application development software to deliver automation solutions that meet our
customer's
13
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 1394 FireWire based distributed
control architecture. As a result of our introduction and marketing of these new
systems, sales of systems may increase relative to our component sales in future
periods, causing a change in the nature and composition of our revenues over
time. Also, international sales comprise approximately 40% to 60% of our total
revenues for any given quarter.
Continued, weak global economic conditions have affected our customers'
businesses across the board and have resulted in unprecedented delays and
cutbacks in capital equipment spending. As a result, we implemented further
cost-cutting measures during the first quarter of fiscal 2003 to restructure our
businesses and reduce our cost structure to bring it more in line with our
revenue outlook. In the three months ended September 28, 2002, we recorded
restructuring charges of $1.1 million related primarily to a 24.0% reduction in
workforce. Employee severance costs of $1.0 million represent a reduction of 79
employees in most functional areas across all three of the reportable business
segments and at September 28, 2002, all of the affected employees had ceased
employment with Adept. Lease commitments of $95,000 resulted from the
consolidation of Adept's office in France into Adept's office in Germany. Asset
impairment charges of $14,000 represent write-offs of abandoned assets.
This discussion summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the
quarter ended September 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 September 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.
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;
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
14
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. 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 (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.
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. 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.
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 pro rata 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 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 market 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 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. 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.
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
net assets of acquired companies
15
allocated to 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
annual date to conduct this 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 Months Ended September 28, 2002 and September 29, 2001
Net revenues. Our net revenues decreased by 23.2% to $10.3 million for the three
months ended September 28, 2002 from $13.4 million for the three months ended
September 29, 2001. The decrease is primarily attributable to a decline of our
Components business due to continued weakness in the global economy.
Additionally, we experienced a 94.0% decline in software revenue due to our sale
of the Cimstation Inspection line of the Component business. Lastly, the
decrease is attributable to a 10.0% decline in Solutions revenue partly due to
closure of our Tucson operations.
Our domestic sales totaled $6.3 million for the three months ended September 28,
2002, compared with $6.0 million for the three months ended September 29, 2001,
an increase of 5.0%. The increase is primarily due to additional revenue from
our CHAD acquisition in October 2001 and Meta acquisition in the first quarter
of fiscal 2003.
Our international sales totaled $4.0 million for the three months ended
September 28, 2002, compared with $7.4 million for the three months ended
September 29, 2001, a decrease of 46.0%. The decrease is primarily attributable
to a combination of our restructuring plan implemented in Europe and a softening
of the European economy, negatively affecting demand for our products by our
European customers.
Gross margin. Gross margin as a percentage of net revenue was 19.6% for the
three months ended September 28, 2002 compared to 34.7% for the three months
ended September 29, 2001. We continued to experience lower volumes through
excess fixed capacity. These factors, combined with shifts in product mix with
lower average selling prices contributed to unfavorable cost variances,
resulting in lower margins as compared to the same quarter a year ago.
Research, Development and Engineering Expenses. Research, development and
engineering expenses decreased by 39.7% to $3.5 million, or 34.3% of net
revenues, for the three months ended September 28, 2002 from $5.8 million, or
43.6% of net revenues, for the three months ended September 29, 2001. The
decrease is mainly attributable to a reduction in headcount as a result of cost
reduction efforts implemented in fiscal 2002 and a streamlining of research and
development projects to maximize efficiency and reduce expenses. We expect that
research, development and engineering expenses will continue to decrease as a
result of additional cost-cutting strategies implemented during the first
quarter of fiscal 2003.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $6.4 million, or 62.7% of net revenues, for the
three months ended September 28, 2002, as compared with $7.7 million, or 57.6%
of net revenues, for the three months ended September 29, 2001. The decrease in
expense 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 $0.5 million from the prior year as a
result of headcount reductions. Depreciation and rent-related expenses were
reduced by approximately $0.2 million from the prior year due to
16
consolidation of facilities. In the first quarter of fiscal 2003, restructuring
activities were undertaken which resulted in additional headcount reductions.
Salary and related expenses were reduced by approximately $0.3 million quarter
over quarter as a result of these reductions. We expect that selling, general
and administrative expenses will continue to decrease as a result of additional
cost cutting strategies implemented during the first quarter of fiscal 2003.
Restructuring Charge. Restructuring charges were $1.1 million and $12.3 million
for the three months ended September 28, 2002 and September 29, 2001,
respectively. The restructuring charges of $1.1 million for the three months
ended September 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 three months ended September 29, 2001 relate to the exiting of
certain non-strategic product lines and the consolidation of certain
manufacturing and support facilities.
Three months ended, Three months ended,
(in thousands) September 28, 2002 September 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
============== =============
Amortization of Goodwill and Other Intangibles. We incurred non-cash expenses of
$150,000 in amortization of other intangibles relating to the acquisitions of
CHAD, HexaVision and Nanomotion for the three months ended September 28, 2002 as
compared to non-cash expenses of $180,000 in amortization of other intangibles
relating to the acquisition of HexaVision, Nanomotion and Pensar for the three
months ended September 29, 2001. Effective July 1, 2001, we no longer amortize
goodwill under the terms of the new accounting standard, Statement of Financial
Accounting Standards No. 142.
Interest Income, Net. Interest income for the three months ended September 28,
2002 was $179,000 compared to $83,000 for the three months ended September 29,
2001. The increase was attributable to additional interest earned by Adept from
a long-term deposit placed in escrow during the first quarter of fiscal 2002 for
obligations due and paid to shareholders of HexaVision in the first quarter of
fiscal 2003.
Provision for (Benefit) from Income Taxes. Our effective tax rate of less than
1% was the same for both the three months ended September 28, 2002 and September
29, 2001. We expect to be in a loss position for U.S. tax purposes for the tax
year ended 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 quarter
ended September 28, 2002, resulting in a 1% overall tax rate. For the three
months ended September 28, 2002, the effective tax rate was based on estimates
of the annual effective tax rate.
Derivative Financial Instruments. Our product sales are predominantly
denominated in U.S. dollars. However, certain international operating expenses
are predominately paid in their respective local currency. We use a foreign
currency hedging program 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 a loss
of $93,600 for the three months ended September 28, 2002 and a loss of $354,000
for the three months ended September 29, 2001.
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 September 28, 2002, we had working capital of approximately $17.7 million,
including $15.5 million in cash and cash equivalents.
Cash and cash equivalents decreased $1.9 million from June 30, 2002. Net cash
used in operating activities of $5.1 million was primarily attributable to the
net loss adjusted by increases in accounts payable and other long-term
liabilities and decreased accounts receivable. The decrease in accounts
receivable reflects a combination of increased collection activities and a
decline in revenues in recent quarters. The decrease in accounts receivable was
partially offset by an increase in other assets. Additionally, an increase in
short term restructuring accruals and decrease in long term restructuring
accruals resulted in a net decrease in restructuring accruals, which is
primarily attributable to payments against restructuring accruals related to
facilities consolidations. Cash provided by investing activities during the
quarter was $3.3 million, which was mainly attributable to sales of short-term
investments of $12.8
17
million partially offset by purchases of short-term investments of $9.3 million,
which resulted in a net decrease in short-term investments of $3.5 million. The
decrease in short-term investments is attributable to transfers of investments
to our cash accounts for use in operating activities. Additionally, investing
activities reflect increases in goodwill and other intangibles and net assets
acquired from our acquisition of Meta.
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 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 September 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 assets in the accompanying balance sheet.
On April 9, 2001, we entered into agreements establishing a revolving line of
credit, consisting of two facilities, with the CIT Group/Business Credit, Inc.
to borrow up to the lesser of $25.0 million or the sum of 85% of our eligible
domestic accounts receivables, plus 90% of eligible foreign accounts
receivables, less a dilution reserve equivalent to one percent of eligible
domestic and foreign accounts receivables for every one percentage point in
excess of a standard five percent dilution rate. Effective as of August 26,
2002, Adept and CIT terminated Adept's revolving line of credit with CIT. The
line of credit was terminated as a result of a dispute with the lender and a
termination fee of $100,000 was a paid by Adept. Prior to termination, the
Company had made no borrowings under this revolving line of credit and at the
end of the first quarter of fiscal 2003, the Company had not replaced this line
of credit.
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 (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 accrued and unpaid are payable only in the
event of certain liquidity events as defined in the designation 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 after the earlier
of October 29, 2002 , the public announcement of a liquidity event, or an event
of default, such as bankruptcy, or the reporting by Adept of a cash balance of
less than $15.0 million at the end of any fiscal quarter through September 30,
2002, and, in the absence of a liquidity event or earlier conversion or
redemption, will be converted into common stock upon October 29, 2004 (the
"Automatic Conversion Date"). 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 ("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, even if the Conversion Date Price is less than $4.09 and
$2.05, respectively. With respect to Series A Preferred, the conversion price
could potentially be less than the fair value of the common stock at the date
the preferred stock was issued. The resulting beneficial conversion amount, if
any, would be recorded as a preferred stock dividend and shown as a reduction in
net income applicable to common shareholders. 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.
Barring the occurrence of certain liquidity events that are not approved by the
Board of Directors of Adept, if the Conversion Date Price on the Automatic
Conversion Date is lower than $2.05, then the denominator for the calculation of
the conversion of the Preferred Stock described above will be $4.09 for the
Series B Preferred Stock and $2.05 for the Series A Preferred Stock. In
addition, because accrued and unpaid dividends are payable only in the event of
certain liquidity events as defined in the designation of preferences of the
Preferred Stock, as described above, barring the prior occurrence of such a
liquidity event, no cash dividends will be payable at the Automatic Conversion
Date.
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 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
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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.
The Company entered into an automation development alliance for optical
component and module manufacturing with JDS Uniphase in October 2001. As part of
this agreement, the Company will work with the JDS Uniphase's internal
automation organization, Optical Process Automation (OPA), to develop solutions
for component and module manufacturing processes and specifically sub-micron
tolerance assemblies. JDS Uniphase will have sole rights for fiberoptic
application of new products and technologies developed pursuant to this
alliance, while the Company retains the right to market such products and
technologies for use in other high precision industries. As part of this
agreement, the Company has agreed to fund up to $1.0 million per quarter for the
next five quarters for development provided by OPA of products and technologies
that might be applicable to other high precision industries. At September 28,
2002, two of five quarterly expenditures of $1.0 million have been paid pursuant
to the joint development agreement with the accredited investor.
Pursuant to the terms of the CHAD acquisition agreement, we paid $2.6 million to
the shareholders of CHAD on October 9, 2002. Adept is obligated for a remaining
payment of $1.6 million to be paid on October 9, 2003.
We currently anticipate net capital expenditures of approximately $0.5 million
for the remainder of fiscal 2003. We believe that our existing cash and cash
equivalent balances as well as short-term investments and cash flow from
operations will be sufficient to meet our working capital and other capital
requirements for at least the next 12 months.
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 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 pursuant to the terms of the acquisition
agreement. Additionally, Adept has agreed to provide up to $1.7 million of
discounts and royalties through August 2008 to a former shareholder of Meta
based upon future sales to that shareholder or certain of its affiliates. Such
amounts will be charged to operations when incurred. 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 by
the Wall Street Journal. Additionally, we entered into a loan agreement for up
to $800,000 with a 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 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 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
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fair value only when the liability is incurred. We have not yet determined the
impact that the adoption of SFAS 146 will have on our financial position or
results of operations, if any.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Risks Related to Our Business
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, and which can be extremely volatile.
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 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.
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, 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 quarter 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 continuing in this fiscal year 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.
20
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.
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 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. 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 second quarter
of fiscal 2003 or beyond. During fiscal 2001 and 2002, and the first 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 quarter of fiscal 2003 to
further realign our business. Despite this restructuring, our ability to reduce
expenses in response to any downturn in the 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.
Many of the key components and materials of our products come from single source
suppliers; their procurement requires lengthy lead times or supplies of such
components are limited.
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.
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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.
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.
Orders constituting our backlog are subject to changes in delivery schedules and
customer cancellations resulting 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 quarter 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, they may cease
purchasing our products at any time.
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.
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We have recently begun to sell to customers our new distributed controls
architecture based on 1394 FireWire technology. We are 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.
We charge a standard price most of our products which may make us vulnerable to
cost overruns.
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 our efforts to enter new markets; and
o certain inventory related costs including obsolescence of products &
components resulting in excess inventory.
We charge a standard price for certain of our products, including the products
that we have added as a result of our acquisitions. 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.
We have significant fixed costs which are not easily reduced during a downturn.
While we have reduced our absolute amount of expenses in several 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 rely on systems integrators and OEMs to sell our 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.
23
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 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.
Our products generally have long sales cycles and implementation periods, which
increase our costs in obtaining orders and reduces the 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
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.
If we are unable to identify and make acquisitions, our ability to expand our
operations and increase our revenue may suffer.
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 acquisitions 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;
24
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 may subject us to divergent regulatory
requirements and other financial and operating risks that may harm our operating
results.
International sales were $4.0 million for the quarter ended September 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.
In addition, duty, tariff and freight costs can materially increase the cost of
crucial components for our products. We anticipate that past turmoil in Asian
financial markets and the deterioration of the underlying economic conditions in
certain Asian countries may continue to have an impact on our sales to customers
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 International Monetary Fund'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.
25
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 quarter of fiscal 2003 and may
experience a loss 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.
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 managerial, 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.
26
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.
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
We face intense competition in the market for intelligent automation products.
The market for intelligent automation products is highly competitive. We believe
that the principal competitive factors affecting the market for our products
are:
27
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.
We offer products for multiple industries and must face the challenges of
supporting the distinct needs of each of our markets.
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 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.
We may not be able to 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.
28
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 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.
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, our business may be harmed.
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.
Failure to obtain export licenses could harm our business.
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 maintain a Nasdaq National Market listing or transfer to
Nasdaq SmallCap Market listing, our common stock may become even more illiquid
and the value of our securities may decline.
29
We received a letter, dated October 16, 2002, from the Nasdaq Stock Market,
Inc., notifying us of our failure to meet Nasdaq's minimum $1.00 bid price
requirement. If we do not comply with Nasdaq's listing requirements by January
14, 2003, our common stock will be delisted from the Nasdaq National Market. We
may apply for transfer of our common stock listing to the Nasdaq SmallCap
Market. To transfer, we would need to satisfy all of the continued listing
requirements for the Nasdaq SmallCap Market, which makes available an extended
grace period for the minimum $1.00 per share bid price requirement. At the
present time, we do not meet these continued listing requirements.
If we submit a transfer application and pay the applicable listing fees to
Nasdaq by January 14, 2003, initiation of delisting proceedings will be stayed
pending Nasdaq's review of our transfer application. If the transfer application
is approved, we will probably be afforded a 180 calendar day grace period within
which we must meet the Nasdaq SmallCap Market's continued listing requirements.
This grace period would end in mid-April 2003. We may also be eligible for an
additional 180 calendar day grace period if we maintain net tangible assets in
excess of $4.0 million.
If we continue to fail to meet the Nasdaq National Market's listing requirements
and our transfer application is not approved, Nasdaq will delist our common
stock. If this occurs, our common stock will likely trade in the
over-the-counter market in the so-called "pink sheets" maintained by Pink Sheets
LLC or on the National Association of Securities Dealers' OTC Bulletin Board.
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 would probably 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.
Between September 29, 2001 and September 29, 2002, the sales price of our common
shares, as reported on the Nasdaq National Market, ranged from a low of $0.35 to
a high of $5.40. 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 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. Failure of the reported price of our common stock to meet the
minimum trading prices required by the Nasdaq National Market or our failure to
meet other listed company requirements, such as minimum shareholder's equity or
aggregate market value of the company's securities, among others, may result in
shares of our common stock no longer being traded on Nasdaq National Market.
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.
30
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on acceptable terms, we may be unable to execute our
business plan or take advantage of future opportunities essential to our long
term strategy.
If our capital requirements vary significantly from those currently planned, we
may require additional financing sooner than anticipated, or in greater amounts.
If our existing cash balances and cash flow expected from future operations are
not sufficient to meet our liquidity needs, we will need to raise additional
funds. 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.
The ability of our Board of Directors to issue preferred stock could delay or
impede a change of control of the 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 the Company'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 the Company 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. 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 and that is currently convertible into shares of
common stock as described in "Liquidity and Capital Resources", which may affect
the price an acquirer or investor is willing to pay for our common stock and the
trading price of our common stock.
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.
Fair
2002 2003 2004 Total Value
---- ---- ---- ----- -----
(in thousands)
--------------
Cash equivalents
Fixed rate...................... $ 5,498 -- -- $ 15,498 $ 15,498
Average rate.................... 1.31% -- -- 1.31%
Short term marketable securities
Fixed rate...................... $ 806 -- -- $ 806 $ 806
Average rate.................... 2.05% -- -- 2.05%
Total Investment Securities.. $ 6,304 -- -- $ 16,304 $ 16,304
======== == == ========= ========
Average rate.................... 1.35% -- -- 1.35%
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 of 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.
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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 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.
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
In connection with our acquisition of Meta Control Technologies, Inc. on August
30, 2002, we issued 730,000 shares of our common stock to the former
shareholders of Meta pursuant to an exemption from registration under Regulation
D of the Securities Exchange Act of 1933, as amended. On August 30, 2002, we
also issued 100,000 shares of our common stock to a Meta shareholder who is an
accredited investor, in connection with our entry into a line of credit with the
shareholder pursuant to an exemption from registration under Regulation D.
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 (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 28, 2002 (the "2003 First Quarter 10-Q")
10.1 1998 Employee Stock Purchase Plan, as amended to date (incorporated by
reference to Exhibit 10.1 to the 2003 First Quarter 10-Q)*
* Management contract or compensatory plan or arrangement
b) Reports on Form 8-K.
On August 1, 2002, a Form 8-K was filed by Adept announcing its financial
results for its fourth quarter and fiscal year ended June 30, 2002.
On August 15, 2002, a Form 8-K was filed by Adept to announcing a definitive
agreement to acquire a controlling interest in Meta Control Technologies, Inc.
On September 13, 2002, a Form 8-K was filed by Adept announcing the completion
of the acquisition of Meta Control Technologies.
32
On September 24, 2002, a Form 8-K was filed by Adept announcing a revision on
its revenue guidance for the first quarter of fiscal year 2003 and that it has
engaged Broadview International, an investment bank, to explore strategic
alternatives for Adept.
On September 25, 2002, a Form 8-K was filed by Adept, announcing that it has
filed with the Securities and Exchange Commission its Annual Report on Form 10-K
for the fiscal year ended June 30, 2002 and pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the Form-10-K was accompanied by a certification of
its Chief Executive Officer and Chief Financial Officer.
On September 25, 2002, a Form 8-K was filed by Adept announcing that Adept and
the CIT Group/Business Credit Inc., have mutually terminated Adept's revolving
line of credit with CIT.
On October 23, 2002, a Form 8-K was filed by Adept announcing its financial
results for its first quarter ended September 28, 2002.
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: March 19, 2003
33
CERTIFICATION
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 amended quarterly report on Form 10-Q/A of Adept
Technology, Inc.;
2. Based on my knowledge, this quarterly report, as amended, 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, as amended;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, as amended, 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, as amended;
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, as amended, 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, as amended (the "Evaluation Date"); and
c. Presented in this quarterly report, as amended, 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, as amended, 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: March 19, 2003
By: /s/ Brian R. Carlisle
---------------------
Brian R. Carlisle
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
34
I,Michael W. Overby, Vice President of Finance and Chief Financial Officer of
Adept Technology, Inc., certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Adept
Technology, Inc.;
2. Based on my knowledge, this quarterly report, as amended, 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, as amended;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, as amended, 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, as amended;
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, as amended, 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, as amended (the "Evaluation Date"); and
c. Presented in this quarterly report, as amended, 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, as amended, 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: March 19, 2003
By: /s/ Michael W. Overby
---------------------
Michael W. Overby
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
35
INDEX TO EXHIBITS
3.1 Bylaws of the Registrant, as amended to date (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 28, 2002 (the "2003 First Quarter 10-Q")
10.1 1998 Employee Stock Purchase Plan, as amended date (incorporated by
reference to Exhibit 10.1 to the 2003 First Quarter 10-Q)*
* Management contract or compensatory plan or arrangement.
36