UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
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)
3011 Triad Drive, Livermore, California 94550
(Address of Principal Executive Offices) (Zip Code)
(925) 245-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES [_] NO [X ]
The number of shares of the Registrant's common stock outstanding as of November
6, 2003 was 15,447,911.
1
ADEPT TECHNOLOGY, INC.
Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 27, 2003 and June 30, 2003 ..................................... 3
Condensed Consolidated Statements of Operations
Three months ended September 27, 2003 and September 28, 2002 ............. 4
Condensed Consolidated Statements of Cash Flows
Three months ended September 27, 2003 and September 28, 2002 ............. 5
Notes to Condensed Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 35
Item 4. Controls and Procedures .......................................... 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 36
Item 2. Changes in Securities and Use of Proceeds ....................... 36
Item 6. Exhibits and Reports on Form 8-K ................................. 36
Signatures ............................................................... 38
Index to Exhibits ........................................................ 39
2
ADEPT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 27, June 30,
2003 2003
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 2,643 $ 3,234
Accounts receivable, less allowance for doubtful accounts of $1,364 at
September 27, 2003 and $1,124 at June 30, 2003 ..................................... 12,104 10,948
Inventories ............................................................................. 7,198 7,122
Prepaid assets and other current assets ................................................. 1,040 717
--------- ---------
Total current assets ................................................................ 22,985 22,021
Property and equipment at cost ............................................................... 11,657 11,751
Less accumulated depreciation and amortization ............................................... 9,025 8,591
--------- ---------
Property and equipment, net .................................................................. 2,632 3,160
Goodwill ..................................................................................... 7,671 7,671
Other intangibles, net ....................................................................... 998 1,176
Other assets ................................................................................. 1,662 1,753
--------- ---------
Total assets ........................................................................ $ 35,948 $ 35,781
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
(DEFICIT) Current liabilities:
Accounts payable ........................................................................ $ 7,612 $ 6,094
Accrued payroll and related expenses .................................................... 1,168 1,535
Accrued warranty ........................................................................ 2,006 1,833
Deferred revenue ........................................................................ 959 1,145
Accrued restructuring charges ........................................................... 3,040 3,122
Accrued liabilities related to business acquisitions .................................... 113 135
Short term debt ......................................................................... 936 97
Other accrued liabilities ............................................................... 598 879
--------- ---------
Total current liabilities ........................................................... 16,432 14,840
Long term liabilities:
Restructuring charges ................................................................... 274 383
Subordinated convertible note ........................................................... 3,000 3,000
Income tax payable ...................................................................... 1,890 1,988
Other long term liabilities ............................................................. 2,189 2,153
Commitments and contingencies
Redeemable convertible preferred stock, no par value:
5,000 shares authorized, 100 shares issued and outstanding at
September 27, 2003 and June 30, 2003 (liquidation preference - $25,000) ................... 25,000 25,000
Shareholders' equity (deficit):
Preferred stock, no par value:
5,000 shares authorized, none issued and outstanding ................................... -- --
Common stock, no par value:
70,000 shares authorized, 15,410 and 15,392 shares issued and outstanding
at September 27, 2003 and June 30, 2003, respectively .................................. 108,874 108,868
Accumulated deficit ......................................................................... (121,711) (120,451)
--------- ---------
Total shareholders' equity (deficit) ................................................... (12,837) (11,583)
--------- ---------
Total liabilities, redeemable convertible preferred stock and shareholders'
equity (deficit) ..................................................................... $ 35,948 $ 35,781
========= =========
See accompanying notes.
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended
September 27, September 28,
2003 2002
-------- --------
Net revenues ..................................... $ 11,817 $ 10,275
Cost of revenues ................................. 7,445 8,256
-------- --------
Gross margin ..................................... 4,372 2,019
Operating expenses:
Research, development and engineering ...... 1,862 3,522
Selling, general and administrative ........ 3,447 6,445
Restructuring charges ...................... -- 1,136
Amortization of intangible assets .......... 178 150
-------- --------
Total operating expenses ......................... 5,487 11,253
-------- --------
Operating loss ................................... (1,115) (9,234)
Interest income (expense), net ................... (132) 179
-------- --------
Loss before income taxes ......................... (1,247) (9,055)
Provision for income taxes ....................... 13 31
-------- --------
Net loss ......................................... $ (1,260) $ (9,086)
======== ========
Basic and diluted net loss per share ............. $ (0.08) $ (0.63)
======== ========
Number of shares used in computing per share
amounts:
Basic ...................................... 15,395 14,327
======== ========
Diluted .................................... 15,395 14,327
======== ========
See accompanying notes
4
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended
---------------------------
September 27, September 28,
2003 2002
-------- --------
Operating activities
Net loss $ (1,260) $ (9,086)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 543 720
Amortization of intangibles 178 150
Asset impairment charges -- 15
Loss on disposal of property and equipment 21 1
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (1,155) 1,407
Inventories (76) 644
Prepaid expenses and other current assets (324) (628)
Other assets 91 (1,523)
Accounts payable 1,518 1,921
Other accrued liabilities 156 (127)
Accrued restructuring charges (191) (110)
Other long term liabilities (62) 1,473
-------- --------
Net cash used in operating activities (561) (5,143)
-------- --------
Investing activities
Business acquisitions, net of cash acquired -- (89)
Purchase of property and equipment, net (36) (145)
Purchases of short-term available-for-sale investments -- (9,275)
Sales of short-term available-for-sale investments -- 12,775
-------- --------
Net cash provided by (used in) investing activities (36) 3,266
-------- --------
Financing activities
Proceeds from employee stock incentive program and employee
stock purchase plan, net of repurchases and cancellations 6 --
-------- --------
Net cash provided by financing activities 6 --
-------- --------
Decrease in cash and cash equivalents (591) (1,877)
Cash and cash equivalents, beginning of period 3,234 17,375
-------- --------
Cash and cash equivalents, end of period $ 2,643 $ 15,498
======== ========
Supplemental disclosure of cash flow activity:
Cash paid for interest $ 30 $ 3
Cash paid for income taxes $ 22 $ --
Supplemental disclosure of non-cash financing activity:
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
*On March 10, 2003, the Company and the former shareholder of Meta terminated
the $800,000 loan agreement and the Company cancelled the 100,000 shares, valued
at $113,000, issued into escrow
See accompanying notes.
5
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in this report reflects all
adjustments that, in the opinion of management, are necessary for a fair
statement of the consolidated financial position, results of operations and cash
flows as of and for the interim periods. Such adjustments consist of items of a
normal recurring nature, except as discussed in these notes. 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, 2003 included in Adept Technology,
Inc.'s ("Adept" or the "Company") Form 10-K as filed with the Securities and
Exchange Commission on September 29, 2003 and amended by Forms 10-K/A filed on
October 8, 2003 and November 12, 2003.
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.
Although revenue increase in the first quarter of fiscal 2004, the Company has
experienced declining revenues in each of the last two fiscal years and has
incurred operating losses in the first quarter of fiscal 2004 and in each of the
last four fiscal years. During these periods, the Company has also consumed
significant cash and other financial resources, and presently has minimal
liquidity. The Company had a net capital deficiency of $12.8 million at
September 27, 2003. In response to these conditions, the Company reduced
operating costs and employee headcount, and restructured certain operating lease
commitments in fiscal 2002 and fiscal 2003. These adjustments to its operations
have also significantly reduced its cash consumption. Finally, the Company has
accelerated the phase-in of newer generation products, which the Company expects
will increase margins and reduce the amount of inventory that Adept will need to
maintain. In addition, the Company is seeking various debt and equity financing
alternatives to improve its near term liquidity, and continues to pursue
additional outside sources of financing to address future working capital
requirements.
The Company is currently litigating with the landlord of its San Jose facility
regarding its lease obligations for that facility. The Company has vacated and
no longer pays rent on this facility. As of June 30, 2003, the Company had
recorded expenses in the amount of $2.3 million for the remaining unpaid rent
associated with this lease; however, it has not reserved the cash associated
with such unpaid rent expenses. The Company's cash usage for the first quarter
of fiscal 2004 and its expectations for cash usage for the second quarter of
fiscal 2004 are significantly impacted by its nonpayment of rent for this
facility. The landlord has claimed that damages exceed $2.9 million. If the
Company receives a material adverse judgment or interim ruling in the San Jose
lease litigation and does not have control of the timing of the payments of any
such judgment, it would not have sufficient cash to meet its obligations and
therefore, it may be required to cease operations.
Even if the Company does not receive an adverse judgment or interim ruling in,
or successfully settle, the San Jose lease litigation, if the results of its
search for additional outside sources of financing are unsuccessful, or if
adequate funds are not available on acceptable terms or at all, the Company will
be forced to curtail its operations and the Company would not be able to take
advantage of market opportunities, develop or enhance new products to an extent
desirable to execute its strategic growth plan, pursue acquisitions that would
complement its existing product offerings or enhance its technical capabilities
to fully execute its business plan or otherwise adequately respond to
competitive pressures or unanticipated requirements. Even if the Company
completes a financing, the transaction is likely to involve the incurrence of
debt or issuance of debt or equity securities of Adept, which would dilute the
outstanding equity.
In April 2003, as a result of the delisting and the resulting additional cost
and administrative requirements of maintaining the ESPP, the Board of Directors
suspended future offering periods until a further determination could be made to
recommence offering periods under the ESPP in compliance with applicable law. In
September 2003, the Board of Directors reopened offerings under the ESPP to
participation by employees effective for a 12 month offering subject to
compliance with applicable federal and state securities laws.
The condensed consolidated financial statements have been prepared assuming that
Adept will continue as a going concern. However, Adept has incurred recurring
operating losses, has a net capital deficiency and has experienced a declining
cash balance, which has adversely affected its liquidity and these conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
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
6
during the reporting period. Actual results could differ from those estimates.
Certain amounts presented in the financial statements for prior periods have
been reclassified to conform to the presentation for fiscal 2003.
Net Loss per Share
Basic net loss per share is based on the weighted average number of shares of
common stock outstanding during the period, excluding restricted stock, while
diluted net loss per share is based on the weighted average number of shares of
common stock outstanding during the period and the dilutive effects of common
stock equivalents (mainly stock options and convertible preferred stock),
determined using the treasury stock method, outstanding during the period,
unless the effect of including the common stock equivalents is anti-dilutive.
There were no differences between basic and diluted net loss per share for any
periods presented.
Derivative Financial Instruments
A foreign currency hedging program was used to hedge the Company's exposure to
foreign currency exchange risk on international operational assets and
liabilities. Realized and unrealized gains and losses on forward currency
contracts that are effective as hedges of assets and liabilities are recognized
in income. Adept recognized losses of $93,600 for the three months ended
September 28, 2002. As of March 2003, the Company determined that its
international activities held or conducted in foreign currency did not warrant
the cost associated with a hedging program due to decreased exposure of foreign
currency exchange risk on international operational assets and liabilities. As a
result, the Company suspended its foreign currency hedging program in March
2003.
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. The Company held no investments at September 27, 2003.
3. 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 27, June 30,
(in thousands) 2003 2003
------ ------
Raw materials .......................... $3,051 $2,422
Work-in-process ........................ 2,655 1,858
Finished goods ......................... 1,492 2,842
------ ------
$7,198 $7,122
====== ======
4. Warranties
The Company offers a two year parts and one year labor limited warranty for all
of its hardware component products. The specific terms and conditions of those
warranties are set forth in the Company's "Terms and Conditions of Sale", which
is published in sales catalogs and on each sales order acknowledgement. The
Company estimates the costs that may be incurred under its limited warranty, and
records a liability at the time product revenue is recognized. Factors that
affect the Company's warranty liability include the number of installed units,
historical and anticipated rates of warranty claims, and costs per claim. The
Company periodically assesses the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.
Changes in the Company's product liability during fiscal 2004 are as follows:
Three months ended
-----------------------
September 27, September 28,
(in thousands) 2003 2003
------- -------
Balance at beginning of fiscal year $ 1,833 $ 1,566
Warranties issued 323 252
Additional warranty provision -- --
Warranty claims (150) (163)
Changes in liability for pre-existing
warranties including expirations -- (15)
------- -------
Balance at end of period $ 2,006 $ 1,669
======= =======
7
5. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
September 27, June 30,
(in thousands) 2003 2003
------- -------
Cost:
Machinery and equipment .......................... $ 2,958 $ 3,023
Computer equipment ............................... 5,855 5,865
Office furniture and equipment ................... 2,844 2,863
------- -------
11,657 11,751
Accumulated depreciation and amortization ........ 9,025 8,591
------- -------
Net property and equipment ....................... $ 2,632 $ 3,160
======= =======
6. Financing Arrangements
On March 21, 2003, the Company and Silicon Valley Bank ("SVB") entered into an
Accounts Receivable Purchase Agreement (the "Purchase Agreement"). Under the
Purchase Agreement, the Company may sell certain of its receivables to SVB on a
full recourse basis for an amount equal to 70% of the face amount of such
purchased receivables with the aggregate face amount of purchased receivables
not to exceed $2.5 million. In connection with the Purchase Agreement, the
Company granted to SVB a security interest in substantially all of its assets.
Additionally, the Company issued Silicon Valley Bank a warrant to purchase
100,000 shares of Adept's common stock at a price of $1.00 per share. The
warrant may be exercised on or after September 21, 2003, expires March 21, 2008
and was valued at $20,000 by the Company using the Black Scholes model. As of
September 27, 2003, the warrant has not been exercised. As of September 27,
2003, the Company had $936,000 outstanding under the Purchase Agreement. The
Purchase Agreement includes certain covenants with which the Company must
comply. The Company is required to pay a monthly finance charge equal to 2% of
the average daily gross amount of unpaid purchased receivables. The Company
cannot transfer or grant a security interest in its assets without SVB's
consent, except for certain ordinary course transactions, or make any transfers
to any of its subsidiaries of money or other assets with an aggregate value in
excess of $0.24 million in any fiscal quarter, net of any payments by such
subsidiaries to the Company. Certain of the Company's wholly-owned subsidiaries
were also required to execute a guaranty of all the Company's obligations to
SVB. Since the Company's obligation to repay SVB is not conditioned on the
collection of the related accounts receivable balances, the Company has recorded
the amounts due under this agreement in current liabilities. Adept is required
to meet certain covenants as defined by the Purchase Agreement. Adept was in
compliance with these covenants as of September 27, 2003.
On August 6, 2003, the Company completed a lease restructuring with Tri-Valley
Campus LLC, the landlord for its Livermore, California corporate headquarters
and facilities, which has significantly reduced the Company's quarterly lease
expenses. Under the lease amendment, the Company was released of its lease
obligations for two unoccupied buildings in Livermore and received a rent
reduction on the occupied building from $1.55 to $1.10 per square foot for a
lease term extending until May 31, 2011. In addition, the lease amendment
carries liquidated damages in the event of default on the lease payments
equivalent to one year of rent obligations on the original lease. In the event
of Adept's bankruptcy or a failure to make payments to the landlord of its
Livermore, California facilities within three days after a written notice from
the landlord, a default would be triggered on the lease. Finally, under the
lease amendment the Company agreed to relocate once to another facility anywhere
in the South or East Bay Area between San Jose, California and Livermore,
California at the landlord's option, provided that the new facility is
comparable and upon providing the Company reasonable notice and paying the
Company's moving expenses.
In connection with the lease restructuring, the Company issued a three-year,
$3.0 million convertible subordinated note due June 30, 2006 in favor of the
landlord, bearing an annual interest rate of 6.0%. Principal and interest are
payable in cash, unless the landlord elects to convert the note into the
Company's common stock, in which case interest on the principal amount converted
will be paid, at the election of the Company, in cash, by converting such
interest into principal amount or by issuance of Company common stock. The note
is convertible at any time at the option of the holder into the Company's common
stock at a conversion price of $1.00 per share and the resulting shares carry
certain other rights, including piggyback registration rights, participation
rights and co-sale rights in equity sales by Adept or its management. This
liability was recorded as long term Subordinated Convertible Note in the
accompanying balance sheet. Payment under the note will be accelerated in the
event of a default, including the insolvency or bankruptcy of the Company, the
Company's failure to pay its obligations under the note when due, the Company's
default on certain material agreements, including the Livermore lease, the
occurrence of a material adverse change with respect to the Company's business
or ability to pay its obligations under the note, or a change of control of
Adept without the landlord's consent.
8
7. Accrued Restructuring Charges
The following table summarizes the Company's accrued restructuring costs at
September 27, 2003:
Amounts
Balance Utilized Balance
June 30, Q1 Fiscal September 27,
(in thousands) 2003 2004 2003
------ ------ ------
Cash
Employee severance costs ............. $ 184 $ 45 $ 139
Lease commitments .................... 3,321 146 3,175
------ ------ ------
Total .............................. $3,505 $ 191 $3,314
====== ====== ======
The Company did not incur any restructuring charges for the three months ended
September 27, 2003. At September 27, 2003, the accrued restructuring balance of
$3.3 million consists of restructuring charges taken during fiscal 2002 and
fiscal 2003 and is comprised entirely of cash charges that are expected to be
paid over the next nine quarters, primarily against non-cancelable lease
commitments.
8. Legal Proceedings
In March 2003, Adept vacated its San Jose facility and ceased paying rent on the
lease. In May 2003, DL Rose Orchard, L.P., owner of the property leased by Adept
at 150 Rose Orchard Way and 180 Rose Orchard Way in San Jose, California, filed
an action against Adept in Santa Clara Superior Court (NO. CV817195) alleging
that Adept breached the leases for the Rose Orchard Way properties by ceasing
rent payments and vacating the property. The complaint makes a claim for
unspecified damages for unpaid rent through April 2003, the worth at the time of
the award of rent through the balance of the leases, an award of all costs
necessary to ready the premises to be re-leased and payment of its costs and
attorney's fees. Adept answered the complaint on July 15, 2003 and is vigorously
defending the lawsuit. As the Company has vacated this facility, it recorded
expense in the amount of $2.3 million, in fiscal 2003, for the remaining unpaid
rent associated with this lease; however, the Company has not set aside the cash
associated with such unpaid rent expenses, thus in the event that the Company
receives an adverse judgment or interim ruling in the San Jose lease litigation
in excess of its cash balance and does not have control of the timing of the
payments, the Company would not have sufficient cash to meet such obligations
otherwise due and therefore, it may be required to cease operations. Since
filing the complaint, plaintiff has disclosed in court filings that its
estimated damages exceed $2.9 million.
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, other than the above noted legal action, 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.
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.
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
relating to alleged infringement will not have a material adverse effect on our
financial position, results of operations or cash flows.
9. Redeemable Convertible Preferred Stock
On October 29, 2001, Adept completed a private placement with JDS Uniphase
Corporation of $25.0 million of its convertible preferred stock consisting of
78,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred")
and 22,000 shares of Series B Convertible Preferred Stock (the "Series B
Preferred"), collectively (the "Preferred Stock"). Both the Series A Preferred
and the Series B Preferred are entitled to annual dividends at a rate of $15 per
share. Dividends are cumulative, and accrued and unpaid dividends are payable
only in the event of certain liquidity events as defined in the statement of
preferences of the Preferred Stock, such as a change of control or liquidation
or dissolution of Adept. No dividends on its common stock may be paid until
dividends for the fiscal year and any prior years on the Preferred Stock have
been paid or set apart, and the Preferred Stock will participate in any
9
dividends paid to the common stock on an as-converted basis. The Preferred Stock
may be converted into shares of the Company's common stock at any time, and in
the absence of a liquidity event or earlier conversion or redemption, will be
converted into common stock upon October 29, 2004 (the "Automatic Conversion
Date"). The Company has agreed to use its reasonable efforts to seek shareholder
approval to extend this Automatic Conversion Date for the Preferred Stock until
October 29, 2005. The Preferred Stock may be converted into shares of Adept's
common stock at a rate of the initial purchase price divided by a denominator
equal to the lesser of $8.18, or 75% of the 30 day average closing price of
Adept's common stock immediately preceding the conversion date ("Conversion Date
Price"). However, as a result of a waiver of events of default by the preferred
stockholder other than in connection with certain liquidity events that are not
approved by the Board of Directors of Adept such as a shareholder-approved plan
of liquidation or unapproved takeover, the denominator for the determination of
the conversion rate with respect to the Series B Preferred shall not be less
than $4.09 and with respect to the Series A Preferred shall not be less than
$2.05, even if the Conversion Date Price is less than $4.09 and $2.05,
respectively. With respect to the 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 the
outstanding voting securities of Adept. Shares not permitted to be converted
remain outstanding, unless redeemed, and become convertible when such holder
holds less than 20% of Adept's outstanding voting securities. As a result, as
the number of outstanding shares of Adept increases, including as the result of
the exercise or conversion of options, warrants or convertible notes and as the
number of shares held by the preferred stockholder decreases, the number of
shares into which the preferred stock may be convertible proportionately
increases. The Preferred Stock has voting rights equal to the number of shares
into which the Preferred Stock could be converted subject to the 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, such as a shareholder approved plan of liquidation
or unapproved takeover, 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.
The Company has the right, but not the obligation, to redeem shares of Series A
Preferred elected to be converted by the preferred stockholder which, upon
conversion would use the denominator of $2.05 for determination of the
conversion rate, and would result in the issuance of shares of common stock in
excess of the number of shares of common stock issuable upon conversion using a
denominator of $4.09 for determination of the conversion rate. The number of
shares of Series A Preferred that Adept may elect to redeem would be calculated
by subtracting (i) the number of shares of common stock that the shares of
Series A Preferred that have been elected to be converted would be convertible
into based on a denominator of $4.09 from (ii) the number of shares of common
stock that the shares of Series A Preferred that have been elected to be
converted would be convertible into based on a denominator of $2.05, and then
determining the number of shares of Series A Preferred that this number of
shares of common stock represents using a denominator of $4.09. The redemption
price is equal to the sum of the initial Preferred Stock price, plus all
cumulated and unpaid dividends. The redemption shall be paid in the form of a
senior unsecured promissory note bearing interest at a rate of 6% per annum,
maturing in two years from the date of issuance. If the Company redeems shares
of Preferred Stock using a promissory note, any indebtedness incurred while the
note is outstanding must be subordinated to the note, other than certain
ordinary course financings. In addition, the holders of the Preferred Stock are
entitled to receive, upon liquidation, the amount equal to $250 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 is classified outside of shareholders' equity as redeemable
convertible preferred stock in the accompanying consolidated balance sheet.
In December 2002, Adept and JDS Uniphase agreed to terminate the supply,
development and license agreement entered into by them in October 2001. Under
this agreement, Adept was obligated to work with JDS Uniphase's internal
automation organization, OPA, to develop solutions for component and module
manufacturing processes for sub-micron tolerance assemblies. JDS Uniphase
retained sole rights for fiberoptic applications developed under this contract.
For non-fiberoptic applications of component and module manufacturing processes
developed by OPA, Adept was obligated to pay up to $1.0 million each fiscal
quarter for the planned five-quarter effort. Due to changing economic and
business circumstances and the curtailment of development by JDS Uniphase and
shutdown of their OPA operations, both parties determined that these development
services were no longer in their mutual best interests. As part of the
termination, Adept executed a $1.0 million promissory note in favor of JDS
Uniphase earning interest at a rate of 7% per year payable on or before
September 30, 2004. JDS Uniphase has the right to require Adept to apply any
additional financing received prior to maturity first to repayment of the
outstanding balance under the promissory note. This right was waived by JDS
Uniphase in connection with the Company's line of credit with Silicon Valley
Bank and the convertible note issued by the Company to its landlord. In
addition, in the event of Adept's insolvency or inability to pay its debts when
they become due, an event of default occurs under the promissory note. An event
of default will result in the immediate acceleration of the promissory note and
10
the unpaid balance and all accrued interest will become immediately due and
payable. The payments made prior to termination plus the promissory note
represent payment in full by Adept for the development services performed by JDS
Uniphase, and there are no remaining payment obligations arising from the
agreement. All licenses, licensing rights and other rights and obligations
arising from the development work performed under the contract before
termination survive its termination. Adept also agreed to use its reasonable
efforts to seek shareholder approval to amend the date that the preferred stock
held by JDS Uniphase automatically converts into Adept's common stock from
October 29, 2004 to October 29, 2005 to allow JDS Uniphase an additional year to
maintain its position as a preferred stockholder or convert the Preferred Stock
into shares of Adept's common stock, but JDS Uniphase has waived this right in
connection with the Company's annual meeting. The $1.0 million promissory note
is included in other long-term liabilities on the accompanying balance sheet.
10. Income Taxes
The Company typically provides for income taxes during interim reporting periods
based upon an estimate of its annual effective tax rate. The Company has ceased
to recognize the current tax benefit of its operating losses because realization
is not assured as required by SFAS No. 109. For the quarter ended September 27,
2003, the Company recorded a tax provision related to its state franchise taxes
and the operations of its Singapore branch.
11. 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 successive fiscal years related
to the intangible assets subject to amortization.
(in thousands) As of September 27, 2003
-------------------------------------
Gross Carrying Accumulated Net Carrying
Amortized intangible assets Amount Amortization Amount
------ ------------ ------
Developed technology $ 2,532 $(1,597) $ 935
Non-compete agreements 380 (317) 63
------- ------- -------
Total $ 2,912 $(1,914) $ 998
======= ======= =======
The aggregate amortization expense for three months ended September 27, 2003
totaled $178,000 and the estimated amortization expense for the next five years
are as follows:
(in thousands) Amount
-----------
Remaining for fiscal year 2004 504
For fiscal year 2005 267
For fiscal year 2006 195
For fiscal year 2007 33
-----------
$ 998
===========
The have been no changes to the carrying amount of goodwill for the quarter
ended September 27, 2003:
(in thousands) Components Solutions Total
---------- --------- -----
Balance at June 30, 2003 $3,176 $4,495 $7,671
Changes to goodwill -- -- --
------ ------ ------
Balance at September 27, 2003 $3,176 $4,495 $7,671
====== ====== ======
There is no goodwill related to the Services and Support segment.
12. Net Loss per Share
Basic net loss per share is computed by dividing net loss, the numerator, by the
weighted average number of shares of common stock outstanding, the denominator,
during the period. Diluted net income per share gives effect to equity
instruments considered to be potential common shares, if dilutive, computed
using the treasury stock method of accounting. During the three months ended
September 27, 2003 and September 28, 2002, dilutive net loss per share was
computed without the effect of equity instruments considered to be potential
common shares as the impact would be anti-dilutive.
11
Three months ended
------------------------------
(in thousands) September 27, September 28,
2003 2002
-------- --------
Net loss ..................................... $ (1,260) $ (9,086)
Basic and diluted shares outstanding ......... 15,395 14,327
======== ========
Basic and diluted net loss per share ......... $ (0.08) $ (0.63)
======== ========
13. Impact of Recently Issued Accounting Standards
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133,"Accounting for Derivative Instruments and Hedging
Activities." In particular, SFAS 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
(2) clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45),
and (4) amends certain other existing pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material impact on the Company's
financial position or results of operations.
14. Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in APB Opinion 25 whereby options are granted at market price,
and therefore no compensation costs are recognized. The Company has elected to
retain its current method of accounting as described above and has adopted the
disclosure requirements of SFAS 123 and SFAS 148. If compensation expense for
the Company's stock option plans had been determined based upon fair values at
the grant dates for awards under those plans in accordance with SFAS 123, the
Company's pro forma net earnings, and net earnings per share would be as
follows:
Three months ended
----------------------
(in thousands) September 27, September 28,
2003 2002
-------- --------
Net loss, as reported ............................. $ (1,260) $ (9,086)
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ..... (518) (1,054)
-------- --------
Pro forma net loss ................................ $ (1,778) $(10,140)
======== ========
Basic and diluted loss per common share:
As reported .................................... $ (0.08) $ (0.63)
======== ========
Pro forma ...................................... $ (0.12) $ (0.71)
======== ========
15. Segment Information
Adept's chief operating decision maker is its Chief Executive Officer, or CEO.
Adept's CEO reviews the Company's consolidated results across three segments:
Components, Solutions and Services and Support.
The Components segment provides intelligent automation software and hardware
component products externally to customers and internally to the other two
business segments for support and integration into higher level assemblies.
12
The Solutions segment takes products purchased from the Components segment
together with materials from third parties, and produces an integrated family of
process ready platforms for the semiconductor, electronics and precision
assembly and other markets, which are driven towards standard offerings.
The Services and Support segment provides support services to our customers
including providing information regarding 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 and
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 27, September 28,
(in thousands) 2003 2002
-------- --------
Revenue:
Components ..................................................................... $ 6,384 $ 6,020
Solutions ...................................................................... 1,170 978
Services & Support ............................................................. 4,263 3,277
-------- --------
Total revenue .................................................................. $ 11,817 $ 10,275
======== ========
Operating income (loss):
Components ..................................................................... $ (201) $ (2,296)
Solutions ...................................................................... 146 (1,170)
Service and Support ............................................................ 1,412 435
-------- --------
Segment income (loss) .......................................................... 1,357 (3,031)
Unallocated research, development and engineering
and selling, general and administrative ...................................... (2,294) (4,917)
Restructuring charges .......................................................... -- (1,136)
Amortization of intangibles .................................................... (178) (150)
Interest income ................................................................ 19 182
Interest expense ............................................................... (151) (3)
-------- --------
Loss before income taxes ....................................................... $ (1,247) $ (9,055)
======== ========
16. Comprehensive Income
For the three months ended September 27, 2003 and September 28, 2002, there were
no significant differences between the Company's comprehensive loss and its net
loss.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
o our estimates regarding our capital requirements and our needs
for, and ability to obtain, additional financing;
o our ability to successfully renegotiate certain of our
facilities lease obligations;
o results of our litigation matters;
o plans for future products and services and for enhancements of
existing products and services;
13
o marketing and commercialization of our products under
development;
o our ability to attract customers and market our products;
o sources of revenues and anticipated revenues, including the
contribution from the growth of new products and markets;
o our intellectual property;
o our ability to establish relationships with suppliers, systems
integrators and OEMs for the supply and distribution of our
products; and
o plans for future acquisitions and for the integration of
recent acquisitions.
In some cases, forward-looking statements can be identified by terms such as
"may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "estimate," "predict," "potential," or the negative of these terms,
and similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions subject to risks and uncertainties. Given these uncertainties,
undue reliance should not be placed on these forward-looking statements. Also,
these forward-looking statements represent our estimates and assumptions only as
of the date of this report.
OVERVIEW
We provide intelligent production automation solutions, components and services
to our customers in many industries including the food,
electronics/communications, automotive and industrial, semiconductor, and
original equipment manufacturer, or OEM, industries. During the quarter ended
September 27, 2003, product revenue mix was comprised of the following: 28% in
electronics/communications, 26% in food and pharmaceuticals, 18% in automotive
and industrial, 7% in semiconductor, and 21% in OEM. During the quarter year
ended September 28, 2002, product revenue mix was comprised of the following:
16% in electronics/communications, 24% in food and pharmaceuticals, 24% in
automotive and industrial, 14% in semiconductor, 18% in OEM and 4% in all
others. This mix varies considerably from period to period due to a variety of
market and economic factors. We utilize our comprehensive product portfolio of
high precision mechanical components and application development software to
deliver automation solutions that meet our customer's increasingly complex
manufacturing requirements. We offer our customers a comprehensive and tailored
automation solution that we call Rapid Deployment Automation that reduces the
time and cost to design, engineer and launch products into high-volume
production. Our products currently include system design software, process
knowledge software, real-time vision and motion controls, machine vision
systems, robot mechanisms, precision solutions and other flexible automation
equipment. In recent years, we have expanded our robot product lines and
developed advanced software and sensing technologies that have enabled robots to
perform a wider range of functions. In fiscal 2003, we introduced Amps in Base
(AIB) technology with our line of Cobra robots, which are our highest volume
Scara robots, and we expect this to have a significant positive impact on our
gross margins during fiscal 2004 and beyond, specifically in our Components and
Solutions segments.
International sales generally comprise between 30% and 50% of our total revenues
for any given quarter.
This discussion summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the
quarter ended September 27, 2003. 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 27, 2003. This
discussion should be read with the consolidated financial statements and
financial statement footnotes included in this Quarterly Report on Form 10-Q and
in conjunction with the audited financial statements and notes thereto for the
fiscal year ended June 30, 2003 included in the Company's Form 10-K as filed
with the Securities and Exchange Commission on September 29, 2003, and amended
by Forms 10-K/A filed on October 8, 2003 and November 12, 2003.
On August 6, 2003, we completed a lease restructuring with Tri-Valley Campus
LLC, the landlord for our Livermore, California corporate headquarters and
facilities, which has significantly reduced our quarterly lease expenses. Under
the lease amendment, we were released of our lease obligations for two
unoccupied buildings in Livermore and received a rent reduction on the occupied
building from $1.55 to $1.10 per square foot for a lease term extending until
May 31, 2011. In addition, the lease amendment carries liquidated damages in the
event of default on the lease payments equivalent to one year of rent
obligations on the original lease. In the event of Adept's bankruptcy or a
failure to make payments to the landlord of our Livermore, California facilities
within three days after a written notice from the landlord, a default would be
triggered on the lease. Finally, under the lease amendment we agreed to relocate
once to another facility anywhere in the South or East Bay Area between San
Jose, California and Livermore, California at the landlord's option, provided
that the new facility is comparable and that the landlord gives Adept reasonable
notice and pays our moving expenses.
In connection with the lease restructuring, we issued a three-year, $3.0 million
convertible subordinated note due June 30, 2006 in favor of the landlord bearing
an annual interest rate of 6.0%. Principal and interest are payable in cash,
unless the landlord elects to convert the note into our common stock, in which
case interest on the principal amount converted will be paid, at the election of
the Adept, in cash, by converting such interest into principal amount or by
issuance of our common stock. The note is convertible at any time at the option
of the holder into our common stock at a conversion price of $1.00 per share and
the resulting shares carry certain
14
other rights, including piggyback registration rights, participation rights and
co-sale rights in equity sales by Adept or its management. This liability was
recorded as long term Subordinated Convertible Note in the accompanying balance
sheet. Payment under the note will be accelerated in the event of a default,
including the insolvency or bankruptcy of Adept, Adept's failure to pay our
obligations under the note when due, Adept's default on certain material
agreements, including the Livermore lease, the occurrence of a material adverse
change with respect to Adept's business or ability to pay our obligations under
the note, or a change of control of Adept without the landlord's consent.
In April 2003, as a result of the delisting and the resulting additional cost
and administrative requirements of maintaining the ESPP, the Board of Directors
suspended future offering periods until a further determination could be made to
recommence offering periods under the ESPP in compliance with applicable law. In
September 2003, the Board of Directors reopened offerings under the ESPP to
participation by employees effective for a 12 month offering subject to
compliance with applicable federal and state securities laws.
On November 4, 2003, we announced the appointment of Robert Bucher as our new
Chairman and Chief Executive Officer. He succeeds Brian Carlisle, who had been
Chairman and Chief Executive Officer since he co-founded Adept in 1983. Mr.
Carlisle will continue as a director of Adept and serve as Adept's President,
reporting to Mr. Bucher.
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 identified intangible assets; and
o deferred tax valuation allowance.
Revenue Recognition. We recognize product revenue, in accordance with Staff
Accounting Bulletin 101, ("SAB 101"), when persuasive evidence of a
non-cancelable arrangement exists, delivery has occurred and/or services have
been rendered, the price is fixed or determinable, collectibility is reasonably
assured, legal title and economic risk is transferred to the customer, and when
an economic exchange has taken place. If a significant portion of the price is
due after our normal payment terms, which are 30 to 90 days from the invoice
date, we account for the price as not being fixed and determinable. In these
cases, if all of the other conditions referred to above are met, we recognize
the revenue as the invoice becomes due. In Japan, we sell our products through a
reseller, and we have separate agreements with this reseller for each of our
product lines that it sells. For all RDA Real-Time Control and RDA Mechanical
Components with this reseller, we have a pass-through arrangement, such that
under this arrangement, we defer 100% of the revenue upon shipment and the
reseller is not obligated to remit payment to us until they receive payment from
the end user. When all other aspects of SAB 101 have been satisfied, we
recognize revenue upon payment from the end user. For all other product lines,
no pass-through arrangement exists. For these products we follow our normal
revenue recognition policies.
We recognize software revenue, primarily related to our simulation software
products, in accordance with the American Institute of Certified Public
Accountants' Statement of Position 97-2 ("SOP 97-2") on Software Revenue
Recognition. 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
15
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.
Deferred revenue primarily relates to items deferred under SAB 101.
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 the general reserve percentage.
Inventories. Inventories are stated at the lower of standard cost, which
approximates actual cost (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 allocated to goodwill. Other intangible assets
primarily represent developed technology and non-compete covenants.
Adept accounts for goodwill under SFAS 142, "Goodwill and Other Intangible
Assets," which requires us to review for impairment of goodwill on an annual
basis, and between annual tests whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. This impairment review
involves a two-step process.
Step 1- Compare the fair value of the reporting units to their carrying
amounts. If a unit's fair value exceeds its carrying amount, no further
work is performed and no impairment charge is necessary. For each
reporting unit where the carrying amount exceeds fair value, step 2 is
performed.
Step 2- Compare the implied fair value of the reporting unit to its
carrying amount. If the carrying amount of the reporting unit's
goodwill exceeds its implied fair value, an impairment loss will be
recognized in an amount equal to that excess.
We performed our goodwill impairment tests upon adoption of SFAS 142 and again
during the fourth quarters of fiscal 2002 and 2003. In the fourth quarter of
fiscal 2002, we recorded a goodwill impairment charge of $6.6 million as a
result of the annual impairment update. Results of the fiscal 2003 annual
impairment testing did not indicate an impairment of our then existing goodwill,
16
and therefore we were not required to record a goodwill impairment charge in
fiscal 2003. Upon adoption of SFAS 142 on July 1, 2001, we ceased amortization
of our existing net goodwill balance.
Identified Intangible Assets. Acquisition-related intangibles include developed
technology and non-compete agreements and are amortized on a straight-line basis
over periods ranging from 2-4 years. Identified intangible assets are regularly
reviewed to determine whether facts and circumstances exist which indicate that
the useful life is shorter than originally estimated or the carrying amount of
assets may not be recoverable. The company assesses the recoverability of
identified intangible assets by comparing the projected undiscounted net cash
flows associated with the related asset or group of assets over their remaining
lives against their respective carrying amounts. Impairment, if any, is based on
the excess of the carrying amount over the fair value of those assets.
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 27, 2003 and September 28, 2002
Net revenues. Our net revenues increased by 15.0% to $11.8 million for the three
months ended September 27, 2003 as compared to $10.3 million for the three
months ended September 28, 2002. The increase reflects revenue growth across all
three of our business segments. Solutions revenue grew 20.0% primarily driven by
increased shipments to customers in the semiconductor and disk drive markets.
Components revenue grew 18.6% largely as a result of end of life controller
sales to a major OEM customer. We do not expect similar sales of end of life
products for the remainder of fiscal 2004. Service revenue increased 9.2%
primarily due to increased shipments of remanufactured and end of life products.
These increases were offset in part by declines in applications and training
revenue.
Our domestic sales totaled $6.7 million for the three months ended September 27,
2003, compared with $6.3 million for the three months ended September 28, 2002,
an increase of 7.9%. This increase primarily reflects higher revenues in our
Solutions business segment, primarily driven by activity in the semiconductor
and disk drive markets. Our international sales totaled $5.1 million for the
three months ended September 27, 2003, compared with $4.0 million for the three
months ended September 28, 2002, an increase of 26.1%. This increase primarily
reflects higher revenues in our Services business segment as customers invested
in extending the useful life of existing equipment rather than commit capital
expenditures to purchase new equipment. Domestic and international revenues
between segments for the three months ended September 27, 2003 and September 28,
2002 are as follows:
Three months ended
---------------------------------
September 27, September 28,
2003 2002
----------- -----------
Domestic revenue:
Components $ 3,225 $ 3,304
Solutions 1,134 763
Services 2,379 2,180
----------- -----------
Total $ 6,738 $ 6,247
International revenue:
Components $ 3,159 $ 2,716
Solutions 36 215
Services 1,884 1,097
----------- -----------
Total $ 5,079 $ 4,028
Gross margin. Gross margin as a percentage of net revenue was 37.0% for the
three months ended September 27, 2003 compared to 19.6% for the three months
ended September 28, 2002. The improvement in gross margin primarily reflects
higher standard margins due to increased sales of higher margin products and
lower fixed manufacturing expenses resulting from facilities consolidation and
the restructuring of the lease obligations for our Livermore facilities as
described in Overview.
Research, Development and Engineering Expenses. Research, development and
engineering expenses decreased by 47.1% to $1.9 million, or 15.8% of net
revenues, for the three months ended September 27, 2003 from $3.5 million, or
34.3% of net revenues, for the three months ended September 28, 2002. The
decrease in expense for the three months ended September 27, 2003 as compared to
the
17
three months ended September 28, 2002 was primarily attributable to
restructuring activities in fiscal 2003. Cost reduction measures implemented as
part of restructuring activities in fiscal 2003 included significant headcount
reductions and facilities consolidation and lease restructuring.
Salary and related expenses were reduced by approximately $0.9 million for the
three months ended September 27, 2003 as compared to the three months ended
September 28, 2002 primarily as a result of a 35.8% reduction in headcount
related to restructuring activities. Facilities expenses were reduced by $0.6
million as a result of facilities consolidation and the restructuring of the
company's lease obligations for its Livermore facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.4 million, or 29.2% of net revenues, for the
three months ended September 27, 2003, as compared with $6.4 million, or 62.7%
of net revenues, for the three months ended September 28, 2002.
The decrease in expense for the three months ended September 27, 2003 as
compared to the three months ended September 28, 2002 was primarily attributable
to restructuring activities in fiscal 2003. Cost reduction measures implemented
as part of restructuring activities in fiscal 2003 included significant
headcount reductions and facilities consolidation and lease restructuring.
Salary and related expenses were reduced by approximately $1.8 million for the
three months ended September 27, 2003 as compared to the three months ended
September 28, 2002 primarily as a result of a 30.5% reduction in headcount
related to restructuring activities. Facilities expenses were reduced by $0.8
million as a result of facilities consolidation and the restructuring of the
company's lease obligations for its Livermore facilities. The decrease is also
attributable to a $0.2 million reduction in corporate administrative expenses.
Accrued Restructuring Charges. We did not record any restructuring charges for
the three months ended September 27, 2003. At September 27, 2003, the accrued
restructuring balance of $3.3 million consists of restructuring charges made
during fiscal 2002 and fiscal 2003 and is comprised entirely of cash charges
that are expected to be paid over the next nine quarters, primarily against
non-cancelable lease commitments.
The following table summarizes our accrued restructuring costs at September 27,
2003:
Amounts
Balance Utilized Balance
June 30, Q1 Fiscal September 27,
(in thousands) 2003 2004 2003
------ ------ ------
Cash
Employee severance costs ............. $ 184 $ 45 $ 139
Lease commitments .................... 3,321 146 3,175
------ ------ ------
Total .............................. $3,505 $ 191 $3,314
====== ====== ======
Amortization of Goodwill and Other Intangibles. Other intangibles amortization
was $0.2 million for the three months ended September 27, 2003 compared to $0.2
for the three months ended September 28, 2002. Goodwill is no longer subject to
amortization, but instead is now subject to impairment testing at least on an
annual basis.
Interest Income (Expense). Net interest expense for the three months ended
September 27, 2003 was $132,000 compared to net interest income of $179,000 for
three months ended September 28, 2002. Interest expense for the three months
ended September 27, 2003 primarily reflects charges incurred on advances
received under the Silicon Valley Bank accounts receivable purchase facility.
Interest expense also reflects interest accrued on the convertible note issued
in connection with the Livermore lease restructuring and interest accrued on our
$1.0 million promissory note owed to JDS Uniphase Corporation. Net interest
income for the three months ended September 28, 2002 reflects the combined
effect of higher interest rates and higher average cash balances compared to the
three months ended September 27, 2003.
Provision for (Benefit) from Income Taxes. Our effective tax rate was less than
1% for the three months ended September 27, 2003 and less than 1% for the three
months ended September 28, 2002. We recorded a tax provision related to our
state franchise taxes and our Singapore subsidiary tax for the first quarter
ended September 27, 2003, 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 foreign currency hedging program is used
to hedge our exposure to foreign currency exchange risk on local international
operational assets and liabilities. Realized and unrealized gains and losses on
forward currency contracts that were effective as hedges of assets and
liabilities were recognized in income as a component of selling, general and
administrative expenses. We recognized a loss of $93,600 for the three months
ended September 28, 2002. In March 2003, we determined that our international
activities held or conducted in foreign currency did not warrant the cost
associated with a hedging program due to our decreased aggregate net exposure of
foreign currency exchange risk on international operational assets and
liabilities. As a result, we
18
suspended our foreign currency hedging program in March 2003.
Impact of Inflation
The effect of inflation on our business and financial position has not been
significant to date.
Liquidity and Capital Resources.
Although revenue did increase in the first quarter of fiscal 2004, we have
experienced declining revenues in each of the last two fiscal years and incurred
operating losses in the first quarter of fiscal 2004 and each of the last four
fiscal years. During this period, we have also consumed significant cash and
other financial resources, and presently have minimal liquidity. However, Adept
has incurred recurring operating losses, has a net capital deficiency and has
experienced a declining cash balance, which has adversely affected its liquidity
and these conditions raise substantial doubt about the our ability to continue
as a going concern. In response to these conditions, we reduced operating costs
and employee headcount, and restructured certain operating lease commitments in
fiscal 2002 and fiscal 2003. These adjustments to our operations have
significantly reduced our cash consumption and the aggregate revenue levels
necessary to achieve break-even operating results, but we cannot guarantee that
they will be effective in permitting our ability to continue as a going concern.
In addition, we intend to seek an expansion of our existing working capital
receivables financing facility, or secure an alternative credit facility to
improve our near term liquidity. Furthermore, we continue to pursue outside debt
and equity sources of financing that can provide Adept with a longer term source
of capital and generally improve our balance sheet and financial stability.
We are in a very precarious cash position, and because of certain regulatory
restrictions on our ability to move certain cash reserves from our foreign
operations to our U.S. operations, we may have limited access to a portion of
our existing cash balances. As of September 27, 2003, we had an aggregate cash
balance of $2.6 million, and a short-term receivables financing credit facility
of $1.75 million net, of which $0.9 million was outstanding and $0.8 million
remained available under this facility. We currently depend on funds generated
from operating revenue and the funds available through our accounts receivable
financing arrangement to meet our operating requirements. As a result, if any of
our assumptions, some of which are described below, are incorrect, we may have
insufficient cash resources to satisfy our obligations in a timely manner during
the next twelve months allowing our continued operation. We expect our cash
ending balance to be approximately $1.8 million at December 27, 2003. This cash
forecast and Adept's continued ability to meet operating requirements during any
quarter and as of the end of each quarter are predicated on the following
critical assumptions. Recently, we have managed to finance our operating losses
by converting non-cash working capital items such as accounts receivable and
inventory, to cash, and consequently, these working capital components have been
significantly reduced over the last several quarters. If the company continues
to generate a loss from operations, it will become increasingly difficult to
rely on funding these losses by liquidating working capital. Our ability to
sustain operations through fiscal 2004 is predicated upon certain critical
assumptions, including (i) that our restructuring efforts do effectively reduce
operating costs as estimated by management and do not impair our ability to
generate revenue, (ii) that we are able to favorably settle pending litigation
related to our San Jose lease, including both the aggregate amount and the
timing of any settlement payments, (iii) that we will not incur additional
unplanned capital expenditures in fiscal 2004, (iv) that we will continue to
receive funds under our existing accounts receivable financing arrangement or a
new credit facility, (v) that we will receive continued timely receipt of
payment of outstanding receivables, and not otherwise experience severe cyclical
swings in our receipts resulting in a shortfall of cash available for our
disbursements during any given quarter, and (vi) that we will not incur
unexpected significant cash outlays during any quarter.
Adept is currently litigating with the landlord of our San Jose facility
regarding our lease obligations for that facility. We have vacated and no longer
pay rent on this facility. In fiscal 2003, we recorded expenses in the amount of
$2.3 million for the remaining unpaid rent associated with this lease; however,
we have not reserved the cash associated with such unpaid rent expenses. Our
cash usage for the first quarter of fiscal 2004 and our expectations for cash
usage for the remainder of fiscal 2004 are significantly impacted by our
nonpayment of rent for this facility. The landlord has claimed that damages
exceed $2.9 million. If we receive a material adverse judgment or interim ruling
in the San Jose lease litigation and do not have control of the timing of the
payments of any such judgment, we may not have sufficient cash to meet our
obligations and therefore, we may be required to cease operations. For a
description of this litigation, see "Legal Proceedings."
Even if we do not receive an adverse judgment or interim ruling in the San Jose
lease litigation, if the results of our search for additional outside sources of
financing are unsuccessful, or if adequate funds are not available on acceptable
terms or at all, we will be forced to curtail our operations and we may not be
able to take advantage of market opportunities, develop or enhance new products
to an extent desirable to execute our strategic growth plan, pursue acquisitions
that would complement our existing product offerings or enhance our technical
capabilities to fully execute our business plan or otherwise adequately respond
to competitive pressures or unanticipated requirements. Even if we complete a
financing, the transaction is likely to involve the incurrence of debt or
issuance of debt or equity securities of Adept, which would dilute the
outstanding equity.
As of September 27, 2003, we had working capital of approximately $6.6 million,
including $2.6 million in cash and cash equivalents.
Cash and cash equivalents decreased $590,000 from June 30, 2003. Net cash used
in operating activities of $560,000 was primarily
19
attributable to the net loss and increases in accounts receivable and other
current assets reduced by non-cash charges including depreciation and
amortization offset in part by an increase in accounts payable and a decrease in
restructuring accruals. The increase in accounts receivable reflects increased
revenue from shipments made in the third month of the first quarter ended
September 27, 2003 as compared to the prior quarter. The increase in accounts
payable primarily reflects increased inventory receipts due to higher shipment
volumes. The decrease in restructuring accruals is attributable to payments on
lease commitments for vacated facilities. Cash used in investing activities
during the quarter was $36,000, which is attributable to the purchase of
property and equipment. Cash provided by financing activities of $6,000 is
related to proceeds from the exercise of stock options.
On March 21, 2003, we entered into an Accounts Receivable Purchase Agreement
(the "Purchase Agreement") with Silicon Valley Bank ("SVB"), pursuant to which
SVB may purchase certain of our receivables on a full recourse basis for an
advance amount equal to 70% (such percentage may change at SVB's discretion) of
the face amount of such purchased receivables with the aggregate face amount of
purchased receivables not to exceed $2.5 million. Upon collection of the
receivable and after deducting interest charges and allowed fees SVB will remit
the balance of the remaining 30% of the invoice to the Company. In connection
with the Purchase Agreement, we granted to SVB a security interest in
substantially all of our assets. We also issued SVB a warrant to purchase an
aggregate of 100,000 shares of our common stock at a price of $1.00 per share.
The warrant may be exercised on or after September 21, 2003, expires March 21,
2008 and was valued at $20,000 by the Company using the Black Scholes model. As
of September 27, 2003, the warrant has not been exercised. As of September 27,
2003, $936,000 was outstanding under the Purchase Agreement.
The Purchase Agreement includes certain covenants with which we must comply,
including but not limited to the payment of a monthly finance charge equal to 2%
of the average daily gross amount of unpaid purchased receivables, the payment
of our employee payroll and state and federal tax obligations as and when due,
the provision to SVB of certain financial and other specified information on a
periodic basis, and the maintenance of our deposit and investment accounts with
SVB. In addition, we cannot transfer or grant a security interest in our assets
without SVB's consent, except for certain ordinary course transactions, file a
voluntary petition for bankruptcy or have filed against us an involuntary
petition for relief, or make any transfers to any of our subsidiaries of money
or other assets with an aggregate value in excess of $0.24 million in any fiscal
quarter, net of any payments by such subsidiaries to us. Certain of our
wholly-owned subsidiaries were also required to execute a guaranty of all of our
obligations to SVB and all such guaranties have been executed. We will be deemed
to be in default under the Purchase Agreement if we fail to timely pay any
amount owed to SVB; in the event of our bankruptcy or an assignment for the
benefit of creditors; if we become insolvent or are generally not paying our
debts as they become due or we are left with unreasonably small capital; if any
involuntary lien or attachment is issued against our assets that is not
discharged within ten days; if we materially breach any of our representations
or if we breach any covenant or agreement under the agreement which is not cured
within three business days; if any event of default occurs under any agreement
between us and SVB, any guaranty or subordination agreement executed in
connection with the Purchase Agreement or any agreement between us and JDSU; or
if there is a material adverse change in our business, operations or condition
or a material impairment of our ability to pay our obligations under the
agreement or of the value of SVB's security interest in our assets. In the event
of a default under the Purchase Agreement, SVB may cease buying our receivables,
Adept must repurchase upon SVB's demand any outstanding receivables and pay any
obligations under the agreement, including SVB's costs. As of September 27,
2003, Adept was in compliance with the covenants in the purchase agreement.
On October 29, 2001, we completed a private placement with JDS Uniphase
Corporation of $25.0 million in our convertible preferred stock consisting of
78,000 shares of Series A Convertible Preferred Stock and 22,000 shares of
Series B Convertible Preferred Stock. Both the Series A Preferred and the Series
B Preferred are entitled to annual dividends at a rate of $15 per share.
Dividends are cumulative, and accrued and unpaid dividends are payable only in
the event of certain liquidity events as defined in the statement of preferences
of the Preferred Stock, such as a change of control or liquidation or
dissolution of Adept. No dividends on our common stock may be paid until
dividends for the fiscal year and any prior years on the Preferred Stock have
been paid or set apart, and the Preferred Stock will participate in any
dividends paid to the common stock on an as-converted basis. The Preferred Stock
may be converted into shares of our common stock at any time, and in the absence
of a liquidity event or earlier conversion or redemption, will be converted into
common stock upon October 29, 2004 (the "Automatic Conversion Date"). We have
agreed to use our reasonable commercial efforts to seek shareholder approval to
extend this Automatic Conversion Date for the Preferred Stock until October 29,
2005. The Preferred Stock may be converted into shares of our common stock at a
rate of the initial purchase price divided by a denominator equal to the lesser
of $8.18, or 75% of the 30 day average closing price of our Common Stock
immediately preceding the conversion date. However, as a result of a waiver of
events of default by the preferred stockholder, other than in connection with
certain liquidity events that are not approved by the Board of Directors of
Adept, such as a bankruptcy or an unapproved takeover, the denominator for the
determination of the conversion rate with respect to the Series B Preferred
shall not be less than $4.09 and with respect to the Series A Preferred shall
not be less than $2.05, even if the Conversion Date Price is less than $4.09 and
$2.05, respectively. With respect to the 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. As a result, as the number of
outstanding shares of common stock of Adept increases, including as the result
of the exercise or conversion of options, warrants or convertible notes and as
the number of shares held by the
20
preferred stockholder decreases, the number of shares into which the Preferred
Stock may be convertible proportionately increases. 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, such as a shareholder-approved plan of liquidation
or an unapproved takeover, 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 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 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 is classified
outside of shareholders' equity as redeemable convertible preferred stock in the
accompanying consolidated balance sheet.
In December 2002, Adept and JDS Uniphase agreed to terminate the supply,
development and license agreement entered into by them in October 2001. Under
this agreement, we were obligated to work with JDS Uniphase's internal
automation organization, referred to as Optical Process Automation, or OPA, to
develop solutions for component and module manufacturing processes for
sub-micron tolerance assemblies. JDS Uniphase retained sole rights for
fiberoptic applications developed under this contract. For non-fiberoptic
applications of component and module manufacturing processes developed by OPA,
we were obligated to pay up to $1.0 million each fiscal quarter for the planned
five-quarter effort. Due to changing economic and business circumstances and the
curtailment of development by JDS Uniphase and termination of their OPA
operations, both parties determined that these development services were no
longer in their mutual best interests. As part of the termination, Adept
executed a $1.0 million promissory note in favor of JDS Uniphase earning
interest at a rate of 7% per year payable on or before September 30, 2004. JDS
Uniphase has the right to require Adept to apply any additional financing
received prior to maturity first to repayment of the outstanding balance under
the promissory note. JDS Uniphase waived this right in connection with our
receivables purchase facility with Silicon Valley Bank and the convertible note
issued to the landlord of our Livermore, California facilities. In addition, in
the event of Adept's insolvency or inability to pay its debts when they become
due, an event of default occurs under the promissory note. An event of default
will result in the immediate acceleration of the promissory note and the unpaid
balance and all accrued interest will become immediately due and payable. The
payments made prior to termination plus the promissory note represent payment in
full by Adept for the development services performed by JDS Uniphase, and there
are no remaining payment obligations arising from the agreement. All licenses,
licensing rights and other rights and obligations arising from the development
work performed under the contract before termination survive its termination.
Adept also agreed to seek shareholder approval to amend the date that the
preferred stock held by JDS Uniphase automatically converts into Adept common
stock from October 29, 2004 to October 29, 2005 to allow JDS Uniphase an
additional year to maintain its position as a preferred stockholder or convert
the Preferred Stock into shares of Adept's common stock. JDS Uniphase waived
this obligation to seek shareholder approval in connection with Adept's Annual
Meeting.
Pursuant to the terms of the CHAD acquisition agreement, we paid $28,500 in cash
and released from escrow 94,000 shares totaling $12,000 to the shareholders of
CHAD on October 9, 2003. At September 27, 2003, $26,000 remains to be paid to
the employees of CHAD on October 9, 2004 contingent on the continued employment
of such employees.
On August 6, 2003, we completed a lease restructuring with Tri-Valley Campus
LLC, the landlord for our Livermore, California corporate headquarters and
facilities, which has significantly reduced our quarterly lease expenses. Under
the lease amendment, we were released of our lease obligations for two
unoccupied buildings in Livermore and received a rent reduction on the occupied
building from $1.55 to $1.10 per square foot for a lease term extending until
May 31, 2011. In addition, the lease amendment carries liquidated damages in the
event of default on the lease payments equivalent to one year of rent
obligations on the original lease. In the event of Adept's bankruptcy or a
failure to make payments to the landlord of our Livermore, California facilities
within three days
21
after a written notice from the landlord, a default would be triggered on the
lease. Finally, under the lease amendment, we agreed to relocate once to another
facility anywhere in the South or East Bay Area between San Jose, California and
Livermore, California at the landlord's option, provided that the new facility
is comparable and that the landlord gives Adept reasonable notice and pays our
moving expenses.
In connection with the lease restructuring, we issued a three year, $3.0 million
convertible subordinated note due June 30, 2006 in favor of the landlord bearing
an annual interest rate of 6.0%. Principal and interest are payable in cash,
unless the landlord elects to convert the note into our common stock, in which
case interest on the principal amount converted will be paid, at the election of
Adept, in cash, by converting such interest into principal amount or by issuance
of our common stock. The note is convertible at any time at the option of the
holder into the our common stock at a conversion price of $1.00 per share and
the resulting shares carry certain other rights, including piggyback
registration rights, participation rights and co-sale rights in equity sales by
Adept or its management. This liability was recorded as long term Subordinated
Convertible Note. Payment under the note will be accelerated in the event of a
default, including the insolvency or bankruptcy of Adept, Adept's failure to pay
its obligations under the note when due, Adept's default on certain material
agreements, including the Livermore lease, the occurrence of a material adverse
change with respect to Adept's business or ability to pay its obligations under
the note, or a change of control of Adept without the landlord's consent.
A summary of our long-term debt and operating lease obligations as of September
27, 2003 follows:
Total Less than 1 year 1-3 years 3-5 years More than 5 years
----- ---------------- --------- --------- -----------------
Operating lease obligations ........................ $11,266 $ 1,427 $ 4,799 $ 2,597 $ 2,443
Long-term debt* .................................... 4,000 -- 4,000 -- --
------- ------- ------- ------- -------
Total long-term debt and operating
lease obligations ............................ $15,266 $ 1,427 8,799 $ 2,597 $ 2,443
======= ======= ======= ======= =======
*excludes interest
New Accounting Pronouncements.
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133,"Accounting for Derivative Instruments and Hedging
Activities." In particular, SFAS 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
(2) clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45),
and (4) amends certain other existing pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material impact on our financial
position or results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Risks Related to Our Business
We have limited cash resources, and our recurring operating losses, negative
cash flow and debt obligations could exhaust these cash resources. We are
attempting to raise additional capital, but we may not be able to obtain
adequate funds to continue our operations in the future.
Although revenue increased in the first quarter of fiscal 2004, we have
experienced declining revenues in each of the last two fiscal years and incurred
operating losses in the first quarter of fiscal 2004 and each of the last four
fiscal years. At September 27, 2003, we had a net capital deficiency of $12.8
million. During this period, we have also consumed significant cash and other
financial resources, and presently have minimal liquidity. In response to these
conditions, we reduced operating costs and employee headcount, and restructured
certain operating lease commitments in fiscal 2002 and fiscal 2003. These
adjustments to our operations have significantly reduced our cash consumption
and the aggregate revenue levels necessary to achieve break-even operating
results, but we cannot guarantee that they will be effective in permitting our
ability to continue as a going concern. In addition, we intend to seek an
22
expansion of our existing working capital receivables financing facility, or
secure an alternative credit facility to improve our near term liquidity.
Furthermore, we continue to pursue outside debt and equity sources of financing
that can provide Adept with a longer term source of capital and generally
improve our balance sheet and financial stability.
As of September 27, 2003, we had working capital of approximately $6.6 million,
including $2.6 million in cash and cash equivalents. We are in a very precarious
cash position, and because of certain regulatory restrictions on our ability to
move certain cash reserves from our foreign operations to our U.S. operations,
we may have limited access to a portion of our existing cash balances. As of
September 27, 2003, we had an aggregate cash balance of $2.6 million, and a
short-term receivables financing credit facility of $1.75 million net, of which
$0.9 million was outstanding and $0.8 million remained available under this
facility. We currently depend on funds generated from operating revenue and the
funds available through our accounts receivable financing arrangement to meet
our operating requirements. We expect our cash ending balance to be
approximately $1.8 million at December 27, 2003, if no additional financing is
obtained. Recently, we have managed to finance our operating losses by
converting non-cash working capital items such as accounts receivable and
inventory, to cash, and consequently, these working capital components have been
significantly reduced over the last several quarters. If we continue to generate
a loss on operations, it will become increasingly difficult to rely on funding
these losses by liquidating working capital. Our ability to sustain operations
through the remainder of fiscal 2004 is predicated upon certain critical
assumptions, including (i) that our restructuring efforts do effectively reduce
operating costs as estimated by management and do not impair our ability to
generate revenue, (ii) that we are able to favorably settle pending litigation
related to our San Jose lease, including both the aggregate amount and the
timing of any settlement payments, (iii) that we will not incur additional
unplanned capital expenditures in fiscal 2004, (iv) that we will continue to
receive funds under our existing accounts receivable financing arrangement or a
new credit facility, (v) that we will receive continued timely receipt of
payment of outstanding receivables, and not otherwise experience severe cyclical
swings in our receipts resulting in a shortfall of cash available for our
disbursements during any given quarter, and (vi) that we will not incur
unexpected significant cash outlays during any quarter. In addition, a
significant portion of our shipments and therefore invoicing occurs during the
final month of each quarter, which causes our collections to be uneven and
places constraints on our ability to manage cash flows during the subsequent
quarter. As a result, if our assumptions are incorrect, we may have insufficient
cash resources to satisfy our obligations in a timely manner during the next 12
months.
We are currently litigating with the landlord of our San Jose facility regarding
our lease obligations for that facility. We have vacated and no longer pay rent
on this facility. In fiscal 2003, we recorded expenses in the amount of $2.3
million for the remaining unpaid rent associated with this lease; however, we
have not reserved the cash associated with such unpaid rent expenses. Our cash
usage for the first quarter of fiscal 2004 and our expectations for cash usage
for the remainder of fiscal 2004 are significantly impacted by our nonpayment of
rent for this facility. The landlord has claimed that damages exceed $2.9
million. If we receive a material adverse judgment or interim ruling in the San
Jose lease litigation and do not have control of the timing of the payments of
any such judgment, we may not have sufficient cash to meet our obligations and
therefore, we may be required to cease operations. For a description of this
litigation, see "Legal Proceedings."
Even if we do not receive an adverse judgment or interim ruling in the San Jose
lease litigation, if the results of our search for additional outside sources of
financing are unsuccessful, or if adequate funds are not available on acceptable
terms or at all and we are unable to achieve our projected revenues or if
operating expenses exceed current estimates, we will be forced to curtail our
operations and we would not be able to take advantage of market opportunities,
develop or enhance new products to an extent desirable to execute our strategic
growth plan, pursue acquisitions that would complement our existing product
offerings or enhance our technical capabilities to fully execute our business
plan or otherwise adequately respond to competitive pressures or unanticipated
requirements. Even if we complete a financing, the transaction is likely to
involve the incurrence of debt or issuance of debt or equity securities of
Adept, which would dilute the outstanding equity.
You should not rely on our past results to predict our future performance
because our operating results fluctuate due to factors, which are difficult to
forecast, are often out of our control and which can be extremely volatile.
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 our ability to obtain additional liquidity, including sources
of financing;
o the results of our current litigation concerning one of our
facilities leases or any future litigation;
o the likelihood that our primary suppliers would begin
requesting cash in advance or at minimum be reluctant to
continue with existing terms where those terms extend beyond
customary industry averages if our financial condition further
deteriorates;
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 reductions in demand due to customer concerns over our
financial situation and perceived future viability as a
supplier;
o changes or reductions in demand in the communications,
semiconductor, and electronics industries and other markets we
serve;
o timing of our revenue receipts and our required disbursements;
23
o a change in market acceptance of our products or a shift in
demand for our products;
o new product introductions by us or by our competitors;
o changes in product mix and pricing by us, our suppliers or our
competitors;
o pricing and related availability of components and raw
materials for our products;
o our failure to manufacture a sufficient volume of products in
a timely and cost-effective manner;
o our failure to anticipate the changing product requirements of
our customers;
o changes in the mix of sales by distribution channels;
o exchange rate fluctuations;
o extraordinary events such as litigation or acquisitions;
o decline or slower than expected growth in those industries
requiring precision assembly automation; and
o slower than expected adoption of distributed controls
architecture or the adoption of alternative automated
technologies.
Our gross margins may vary greatly depending on the mix of sales of lower margin
hardware products, particularly mechanical subsystems purchased from third party
vendors, volume variances driven by substantially lower production volumes, and
higher margin software products.
Our operating results are also affected by general economic and other conditions
affecting the timing of customer orders and capital spending. For example, our
operations during the first quarter of fiscal 2000, each of the last three
fiscal years and the first quarter of fiscal 2004 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 experienced significantly reduced
demand during fiscal 2002 and 2003 in our base industries, especially the
electronics and semiconductor industries, as our customers reduced inventories
as they adjusted their businesses from a period of high growth to lower rates of
growth or downsizing. We expect this downturn to adversely affect our business
for an indefinite time and cannot estimate when or if a sustained revival in
these key hardware markets and the semiconductor and electronics industries 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.
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.
The long sales cycles and implementation periods of our products may increase
costs of obtaining orders and reduce predictability of our earnings.
Our products are technologically complex. Prospective customers generally must
commit significant resources to test and evaluate our products and to install
and integrate them into larger systems. Orders expected in one quarter may shift
to another quarter or be cancelled with little advance notice as a result of the
customers' budgetary constraints, internal acceptance reviews, and other factors
affecting the timing of customers' purchase decisions. In addition, customers
often require a significant number of product presentations and demonstrations,
in some instances evaluating equipment on site, before reaching a sufficient
level of confidence in the product's performance and compatibility with the
customer's requirements to place an order. As a result, our sales process is
often subject to delays associated with lengthy approval processes that
typically accompany the design and testing of new products. The sales cycles of
our products often last for many months or even years. In addition, the time
required for our customers to incorporate our products into their systems can
vary significantly with the needs of our customers and generally exceeds several
months, which further complicates our planning processes and reduces the
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. In addition, should our financial condition deteriorate further,
prospective customers may be reluctant to purchase our products which would have
an adverse effect on our revenues.
We may not be able to effectively implement our restructuring activities, may
need to implement further restructuring activities and our restructuring may
negatively impact our business.
The intelligent automation industry is highly competitive and currently
experiencing reduced demand. We have responded to increased competition and
changes in the industry in which we compete by restructuring our operations and
reducing the size of our workforce while attempting to maintain our market
presence in the face of increased competition. Despite our efforts to structure
Adept and its
24
businesses to meet competitive pressures and customer needs, we cannot assure
you that we will be successful in implementing these restructuring activities or
that the reductions in workforce and other cost cutting measures will not harm
our business operations and prospects. We recently hired a new Chief Executive
Officer to lead our further evolution to a more profitable business model, but
we cannot guarantee that his efforts will be successful. Our inability to
structure our operations based on current market conditions could negatively
impact our business. We also cannot assure you that we will not be required to
implement further restructuring activities, make additions or other changes to
our management or reductions in workforce based on other cost reduction measures
or changes in the markets and industry in which we compete. We cannot assure you
that any future restructuring efforts will be successful.
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
industries in which we operate, which may continue to adversely affect our
revenues.
Intelligent automation systems using our products can range in price from $8,500
to $500,000. 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, and life
sciences industries, and resulting cutbacks in capital spending would have a
direct, negative impact on our business. Evidencing the weakness in the
industry, our supply and development agreement with JDS Uniphase was terminated
largely as a result of the termination of JDS Uniphase's Optical Process
Automation operations. We are currently experiencing reduced demand in most of
the industries we serve including the electronics and semiconductor industries
and expect this reduced demand to adversely affect our revenues for an
indefinite period. During fiscal 2001, 2002 and 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 fiscal 2003 to further realign our
business. Despite this restructuring activity, 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.
Changes in delivery schedules and customer cancellations of orders constituting
our backlog may result in lower than expected revenues.
Backlog should not be relied on as a measure of anticipated demand for our
products or future revenues, because the orders constituting our backlog are
subject to changes in delivery schedules and in certain instances are subject to
cancellation without significant penalty to the customer. Increasingly, our
business is characterized by short-term order and shipment schedules. We have in
the past experienced changes in delivery schedules and customer cancellations
that resulted in our revenues in a given quarter being materially less than
would have been anticipated based on backlog at the beginning of the quarter. We
experienced greater customer delays and cancellations in fiscal 2002 and 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.
25
Because we do not have long-term contracts with our customers, our future sales
are not guaranteed.
We generally do not have long-term contracts with our customers and existing
contracts may be cancelled. As a result, our agreements with our customers do
not provide any assurance of future sales. Accordingly our customers are not
required to make minimum purchases and may cease purchasing our products at any
time without penalty. Because our customers are free to purchase products from
our competitors, we are exposed to competitive price pressure on each order. Any
reductions, cancellations or deferrals in customer orders could have a negative
impact on our financial condition and results of operations.
Our new distributed controls architecture may not achieve customer acceptance.
We began to sell to customers our new distributed controls architecture based on
IEEE 1394 FireWire technology in fiscal 2002. IEEE 1394 is a standard defining a
high speed multimedia connection protocol that enables simple, low cost,
high-bandwidth, real-time data interfacing between computers and intelligent
devices. We are 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,
including integrating this architecture with a variety of
robots manufactured by other companies;
o enter into agreements with system integrators, manufacturers
and distributors; and
o achieve market acceptance for our design and approach.
Our distributed controls strategy may not achieve broad market acceptance for a
variety of reasons including:
o companies who use machine controls may continue to use their
current design and may not adopt our distributed architecture;
o companies may decide to adopt a different technology than IEEE
1394 FireWire for their distributed controls;
o companies may determine that the costs and resources required
to switch to our distributed architecture are unacceptable to
them;
o system integrators, manufacturers, and OEMs may not enter into
agreements with us; and
o competition from traditional, well-established controls
solutions.
If we do not achieve market acceptance of these products, our business and
operating results will suffer.
Some of our solution products require us to commit contractually to a firm price
which makes us vulnerable to cost overruns.
We contractually commit to a firm price over a number of units for certain of
our solutions products, including the products that we have added as a result of
our acquisitions. Our ability to achieve a reasonably accurate estimate of the
costs of these products will have a direct impact on the profit we obtain from
these products. If the costs we incur in completing a customer order for these
products exceed our expectations, we generally cannot pass those costs on to our
customer.
Our gross margins can vary significantly from quarter to quarter based on
factors which are not always in our control.
Our operating results fluctuate when our gross margins vary. Our gross margins
vary for a number of reasons, including:
o the mix of products we sell;
o the average selling prices of products we sell including
changes in the average discounts offered;
o the costs to manufacture, service and support our new products
and enhancements;
o the costs to customize our systems;
o the volume of products produced;
o our efforts to enter new markets; and
o certain inventory related costs including obsolescence of
products and components resulting in excess inventory.
Because we have significant fixed costs that are not easily reduced, we may be
unable to adequately reduce expenditures to offset decreases in revenue and
therefore avoid operating losses.
While we have reduced our absolute amount of expenses in all areas of our
operations in connection with our restructuring, we continue to invest in
research and development, capital equipment and extensive ongoing customer
service and support capability worldwide. These investments create significant
fixed costs that we may be unable to reduce rapidly if we do not meet our sales
goals. Moreover, if we fail to obtain a significant volume of customer orders
for an extended period of time, we may have difficulty
26
planning our future production and inventory levels, utilizing our relatively
fixed capacity, which could also cause fluctuations in our operating results.
We cannot control the procurement, sales or marketing efforts of the systems
integrators and OEMs who sell our products which may result in lower revenues if
they do not successfully market and sell our products or choose instead to
promote competing products.
We believe that our ability to sell products to system integrators and OEMs will
continue to be important to our success. Our relationships with system
integrators and OEMs are generally not exclusive, and some of our system
integrators and OEMs may expend a significant amount of effort or give higher
priority to selling products of our competitors. In the future, any of our
system integrators or our OEMs may discontinue their relationships with us or
form additional competing arrangements with our competitors. The loss of, or a
significant reduction in revenues from, system integrators or OEMs to which we
sell a significant amount of our product could negatively impact our business,
financial condition or results of operations.
As we enter new geographic and applications markets, we must locate and
establish relationships with system integrators and OEMs to assist us in
building sales in those markets. It can take an extended period of time and
significant resources to establish a profitable relationship with a system
integrator or OEM because of product integration expenses, training in product
and technologies and sales training. We may not be successful in obtaining
effective new system integrators or OEMs or in maintaining sales relationships
with them. In the event a number of our system integrators and/or OEMs
experience financial problems, terminate their relationships with us or
substantially reduce the amount of our products they sell, or in the event we
fail to build or maintain an effective systems integrator or OEM channel in any
existing or new markets, our business, financial condition and results of
operations could be adversely affected.
In addition, a substantial portion of our sales is to system integrators that
specialize in designing and building production lines for manufacturers. Many of
these companies are small operations with limited financial resources, and we
have from time to time experienced difficulty in collecting payments from
certain of these companies. As a result, we perform ongoing credit evaluations
of our customers. To the extent we are unable to mitigate this risk of
collections from system integrators, our results of operations may be harmed. In
addition, due to their limited financial resources, during extended market
downturns, the viability of some system integrators may be in question, which
would also result in a reduction in our revenues.
Our reliance on single source suppliers with lengthy lead procurement times or
limited supplies for our key components and materials may render us unable to
meet product demand and we may lose customers and suffer decreased revenue.
We obtain many key components and materials and some significant mechanical
subsystems from sole or single source suppliers with whom we have no guaranteed
supply arrangements. In addition, some of our sole or single sourced components
and mechanical subsystems incorporated into our products have long procurement
lead times. Our reliance on sole or single source suppliers involves certain
significant risks including:
o loss of control over the manufacturing process;
o potential absence of adequate supplier capacity;
o potential inability to obtain an adequate supply of required
components, materials or mechanical subsystems; and
o reduced control over manufacturing yields, costs, timely
delivery, reliability and quality of components, materials and
mechanical subsystems.
We depend on Flash Corporation for the supply of our circuit boards, Wilco
Corporation for the supply of our cables, 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. We do not have contracts with
certain of these suppliers. 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. In addition, some of our
27
suppliers currently require accelerated payment terms or require cash in advance
for our purchase of supplies. Should our financial condition deteriorate
further, additional suppliers may be reluctant to continue with existing terms
where those terms extend beyond customary industry averages or permit sales
without prior payment in full.
Disruption or termination of our supply sources could require us to seek
alternative sources of supply, could delay our product shipments and damage
relationships with current and prospective customers, or prevent us from taking
other business opportunities, 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.
Any acquisition we have made or may make in the future 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 acquisitions of, or
investments in, other businesses that offer products, services, and technologies
that management believes will further our strategic objectives. We cannot be
certain that we would successfully integrate any businesses, technologies or
personnel that we might acquire, and any acquisitions might divert our
management's attention away from our core business. Any future acquisitions or
investments we might make would present risks commonly associated with these
types of transactions, including:
o difficulty in combining the product offerings, operations, or
work force of an acquired business;
o potential loss of key personnel of an acquired business;
o adverse effects on existing relationships with suppliers and
customers;
o disruptions of our on-going businesses;
o difficulties in realizing our potential financial and
strategic objectives through the successful integration of the
acquired business;
o difficulty in maintaining uniform standards, controls,
procedures and policies;
o potential negative impact on results of operations due to
amortization of goodwill, other intangible assets acquired or
assumption of anticipated liabilities;
o risks associated with entering markets in which we have
limited previous experience;
o potential negative impact of unanticipated liabilities or
litigation; and
o the diversion of management attention.
The risks described above, either individually or in the aggregate, could
significantly harm our business, financial condition and results of operations.
We expect that future acquisitions, if any, could provide for consideration to
be paid in cash, shares of our common stock, or a combination of cash and common
stock. In addition, we may issue additional equity in connection with future
acquisitions, which could result in dilution of our shareholders' equity
interest. Fluctuations in our stock price may make acquisitions more expensive
or prevent us from being able to complete acquisitions on terms that are
acceptable to us.
Our international operations and sales subject us to divergent regulatory
requirements and other financial and operating risks outside of our control that
may harm our operating results.
28
International sales were $5.1 million for the quarter ended September 27, 2003,
$17.1 million for the fiscal year ended June 30, 2003, $31.8 million for the
fiscal year ended June 30, 2002, and $36.4 million for the fiscal year ended
June 30, 2001. This represented 43.0%, 38.2%, 55.7%, and 36.3% 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. To maintain a competitive price for our products in Europe, we may have
to provide discounts or otherwise effectively reduce our prices, resulting in a
lower margin on products sold in Europe. Continued change in the values of
European currencies or changes in the values of other foreign currencies could
have a negative impact on our business, financial condition and results of
operations.
We sell standard components for products to OEMs, who deliver products to Asian
markets, such as Japan, Malaysia, Korea and China.
Past turmoil in Asian financial markets and the deterioration of underlying
economic conditions in certain Asian countries may continue to impact our sales
to our OEM customers who deliver to, are located in, or whose projects are based
in, Asian countries due to the impact of restrictions on government spending
imposed by the International Monetary Fund on those countries receiving the
IMF's assistance. In addition, customers in those countries may face reduced
access to working capital to fund component purchases, such as our products, due
to higher interest rates, reduced bank lending due to contractions in the money
supply or the deterioration in the customer's or our bank's financial condition
or the inability to access local equity financing. In the past, as a result of
this lack of working capital and higher interest rates, we have experienced a
significant decline in sales to OEMs serving the Asian market.
Maintaining operations in different countries requires us to expend significant
resources to keep our operations coordinated and subjects us to differing laws
and regulatory regimes that may affect our offerings and revenue.
We may incur currency exchange-related losses in connection with our reliance on
our single or sole source foreign suppliers.
We make yen-denominated purchases of certain components and mechanical
subsystems from certain of our sole or single source Japanese suppliers. We
remain subject to the transaction exposures that arise from foreign exchange
movements between the dates foreign currency export sales or purchase
transactions are recorded and the dates cash is received or payments are made in
foreign currencies. We experienced losses on instruments that hedge our foreign
currency exposure in fiscal 2002 and the first three quarters of fiscal 2003. In
March 2003, we suspended our foreign currency hedging program because we
determined that our international activities held or conducted in foreign
currency did not warrant the cost associated with a hedging program due to
decreased exposure of foreign currency exchange risk on international
operational assets and liabilities. 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.
29
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, our channel partners 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.
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.
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.
If we cannot identify and make acquisitions, our ability to expand our
operations and increase our revenue may be impaired.
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, businesses, products and technologies
in the future may play an important role in our ability to expand our operations
and increase our revenue. We continue to review acquisition candidates as part
of our strategy to market intelligent automation solutions targeted at the
precision assembly industry. Our ability to make acquisitions is rendered more
difficult due to our cash constraints and the decline of our common stock price,
making equity consideration more expensive. If we are unable to identify
suitable targets for acquisition or complete acquisitions on acceptable terms,
our ability to expand our product and/or 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.
We may face costly intellectual property infringement claims.
30
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,
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, integrate,
retain and motivate highly-qualified managerial and technical personnel.
Competition for qualified personnel in the intelligent automation industry is
intense. Our inability to recruit, train and motivate qualified management and
technical personnel on a timely basis would adversely affect our ability to
manage our operations, and design, manufacture, market and support our products.
We recently hired a new Chief Executive Officer to lead our further evolution to
a more profitable business model. We cannot guarantee that we will be able to
timely or affectively integrate him into our operations or will be successful in
retaining him. Other than Mr. Bucher's offer letter, we have no employment
agreements with our senior management.
Risks Related to Our Industry
Intense competition in the market for intelligent automation products will cause
our revenues and business to suffer if our products are not seen as more
attractive by customers than other products in the marketplace.
The market for intelligent automation products is highly competitive. We believe
that the principal competitive factors affecting the market for our products
are:
o product functionality and reliability;
o price;
o customer service;
o delivery; including timeliness, predictability and reliability
of delivery commitment dates; and
o product features such as flexibility, programmability and ease
of use.
We compete with a number of robot companies, motion control companies, machine
vision companies and simulation software companies. Many of our competitors have
substantially greater financial, technical and marketing resources than us. In
addition, we may in the future face competition from new entrants in one or more
of our markets.
Many of our competitors in the robot market are integrated manufacturers of
products that produce robotics equipment internally for their own use and may
also compete with our products for sales to other customers. Some of these large
manufacturing companies have greater flexibility in pricing because they
generate substantial unit volumes of robots for internal demand and may have
access through their parent companies to large amounts of capital. Any of our
competitors may seek to expand their presence in other markets in which we
compete.
Our current or potential competitors may develop products comparable or superior
in terms of price and performance features to those developed by us or adapt
more quickly than we can to new or emerging technologies and changes in customer
requirements. We may be required to make substantial additional investments in
connection with our research, development, engineering, marketing and customer
service efforts in order to meet any competitive threat, so that we will be able
to compete successfully in the future. We expect that in the event the
intelligent automation market expands, competition in the industry will
intensify, as additional competitors enter our markets and current competitors
expand their product lines. Increased competitive pressure could result in a
loss of sales or market share, or cause us to lower prices for our products, any
of which could harm our business.
If we are unable to effectively support the distinct needs of the multiple
industries of our customers, the demand for our products may decrease and our
revenues will decline.
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We market products for the food, communications, electronics, automotive,
appliance, semiconductor, and life sciences industries. Because we operate in
multiple industries, we must work constantly to understand the needs, standards
and technical requirements of numerous 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.
Our business will decline if we cannot keep up with the rapid pace of
technological change and new product development that characterize the
intelligent automation industry.
The intelligent automation industry is characterized by rapid technological
change and new product introductions and enhancements. Our ability to remain
competitive depends greatly upon the technological quality of our products and
processes compared to those of our competitors and our ability both to continue
to develop new and enhanced products and to introduce those products at
competitive prices and on a timely and cost-effective basis. We may not be
successful in selecting, developing and manufacturing new products or in
enhancing our existing products on a timely basis or at all. Our new or enhanced
products may not achieve market acceptance. Our failure to successfully select,
develop and manufacture new products, or to timely enhance existing technologies
and meet customers' technical specifications for any new products or
enhancements on a timely basis, or to successfully market new products, could
harm our business. If we cannot successfully develop and manufacture new
products or meet specifications, our products could lose market share, our
revenues and profits could decline, or we could experience operating losses. New
technology or product introductions by our competitors could also cause a
decline in sales or loss of market acceptance for our existing products or force
us to significantly reduce the prices of our existing products.
From time to time we have experienced delays in the introduction of, and certain
technical and manufacturing difficulties with, some of our products, and we may
experience technical and manufacturing difficulties and delays in future
introductions of new products and enhancements. Our failure to develop,
manufacture and sell new products in quantities sufficient to offset a decline
in revenues from existing products or to successfully manage product and related
inventory transitions could harm our business.
Our success in developing, introducing, selling and supporting new and enhanced
products depends upon a variety of factors, including timely and efficient
completion of hardware and software design and development, implementation of
manufacturing processes and effective sales, marketing and customer service.
Because of the complexity of our products, significant delays may occur between
a product's initial introduction and commencement of volume production.
The development and commercialization of new products involve many difficulties,
including:
o the identification of new product opportunities;
o the retention and hiring of appropriate research and
development personnel;
o the determination of the product's technical specifications;
o the successful completion of the development process;
o the successful marketing of the product and the risk of having
customers embrace new technological advances; and
o additional customer service costs associated with supporting
new product introductions and/or effecting subsequent
potential field upgrades.
The development of new products may not be completed in a timely manner, and
these products may not achieve acceptance in the market. The development of new
products has required, and will require, that we expend significant financial
and management resources. If we are unable to continue to successfully develop
new products in response to customer requirements or technological changes, our
business may be harmed.
If we fail to adequately invest in research and development, we may be unable to
compete effectively and sales of our products will decline.
Over the past year, our total expenditures for research and development have
declined significantly. 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.
We may not receive significant revenues from our current research and
development efforts for several years, if at all.
32
Internally developing intelligent automation products is expensive, and these
investments often require a long time to generate returns. Our strategy involves
significant investments in research and development and related product
opportunities. Although our total expenditures for research and development have
declined, we continue to believe that we must continue to dedicate a significant
amount of resources to our research and development efforts to maintain our
competitive position. However, we cannot predict that we will receive
significant revenues from these investments, if at all.
If we do not comply with environmental regulations, we may incur significant
costs causing our overall business to suffer.
We are subject to a variety of environmental regulations relating to the use,
storage, handling, and disposal of certain hazardous substances used in the
manufacturing and assembly of our products. We believe that we are currently in
compliance with all material environmental regulations in connection with our
manufacturing operations, and that we have obtained all necessary environmental
permits to conduct our business. However, our failure to comply with present or
future regulations could subject us to a variety of consequences that could harm
our business, including:
o the imposition of substantial fines;
o suspension of production; and
o alteration of manufacturing processes or cessation of
operations.
Compliance with environmental regulations could require us to acquire expensive
remediation equipment or to incur substantial expenses. Our failure to control
the use, disposal, removal, storage, or to adequately restrict the discharge of,
or assist in the cleanup of, hazardous or toxic substances, could subject us to
significant liabilities, including joint and several liability under certain
statutes. The imposition of liabilities of this kind could harm our financial
condition.
If we fail to obtain export licenses, we would be unable to sell any of our
software products overseas and our revenues would decline.
We must comply with U.S. Department of Commerce regulations in shipping our
software products and other technologies outside the United States. Any
significant future difficulty in complying could harm our business, financial
condition and results of operations.
Proposed regulations related to equity compensation could adversely affect our
results of operation
The Financial Accounting Standards Board (FASB), among other agencies and
entities, is currently considering changes to generally accepted accounting
principles in the United States that, if implemented, would require us to record
a charge to compensation expense for option grants. As currently permitted by
SFAS No. 123, we apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", (APB 25) and related interpretations in
accounting for its stock option plans and stock purchase plan. Accordingly, we
do not recognize compensation cost for stock options granted at fair market
value. We cannot predict whether the proposed regulations will be adopted, but
if adopted these regulations would have an adverse affect on our results of
operations.
Our business is subject to the risk of earthquakes and other natural
catastrophic events.
Our corporate headquarters and principal offices, including certain of our
research and development operations and distribution facilities, are located in
the San Francisco Bay area of Northern California, which is a region known to
experience seismic activity, flood plains and other natural phenomenon not
within our control. If significant seismic activity or other natural
catastrophes affecting this region were to occur, our operations may be
interrupted, which would adversely impact our business and results of
operations.
Acts of war or terrorism could adversely and materially affect our business.
Terrorist acts or military engagement anywhere in the world could cause damage
or disruption to us, our customers, OEMs, distributors or suppliers, or could
create political or economic instability, any of which could adversely effect
our business, financial condition or results of operations. Furthermore, we are
uninsured for losses or interruptions caused by acts of war or terrorism.
Risks Related to our Stock
Our common stock has been delisted from the Nasdaq Stock Market and trades on
the OTC Bulletin Board. The delisting of our common stock may negatively impact
the trading activity and price of our common stock and could make it more
difficult for us to generate additional financing.
In April 2003, we were delisted from the Nasdaq National Market as a result of
our failure to comply with certain quantitative requirements for continued
listing on the Nasdaq National Market. Our common stock commenced trading on the
OTC Bulletin Board on April 15, 2003. The OTC Bulletin Board is generally
considered less liquid and efficient than Nasdaq, and although trading in our
stock was relatively thin and sporadic before the delisting, the liquidity of
our common stock has declined and price volatility
33
increased because smaller quantities of shares are bought and sold, transactions
could be delayed and securities analysts' and news media coverage of Adept will
likely 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 or
otherwise use our equity as consideration for an acquisition or other corporate
opportunity. The delisting could result in a number of other negative
implications, including the potential loss of confidence by suppliers, customers
and employees, the loss of institutional investor interest and the availability
of fewer business development, other strategic opportunities and additional cost
of compensating our employees using cash and equity compensation.
Our existing outstanding preferred stock, as well as the ability of our Board of
Directors to issue additional preferred stock could delay or impede a change of
control of our company and may adversely affect the price an acquirer is willing
to pay for our common stock.
We have issued 100,000 shares of our convertible preferred stock for
consideration of $25.0 million with a liquidation preference of $25.0 million
that may be triggered by events such as a change of control of our common stock
or liquidation. The preferred stock may be converted into shares of Adept's
common stock at the per share rate equal to the initial preferred price, $250,
divided by the lower of $8.18 or 75% of the price of Adept's stock on the
conversion date, provided that the denominator in such conversion rate will not
be lower than $4.09 for the Series B preferred stock and $2.05 for the Series A
preferred stock, other than for certain liquidity events not approved by the
Board of Directors. The preferred stock shall not be convertible into 20% or
more of the outstanding voting securities of Adept and no holder of preferred
stock may convert shares of preferred stock if, after the conversion, the holder
will hold 20% or more of our outstanding voting securities. As a result, as the
number of outstanding shares of Adept increases (including upon exercise of
options, warrants or conversion of convertible notes), the number of shares into
which the preferred stock may be convertible proportionately increases or the
preferred stockholder reduces the shares of voting stock it owns. Shares not
permitted to be converted remain outstanding and become convertible when such
holder holds less than 20% of Adept's outstanding voting securities. The
liquidation preference of the preferred stock or the ability of a preferred
shareholder to convert shares of preferred stock into common stock may affect
the price an acquirer or investor is willing to pay for our common stock and the
trading price of our common stock.
The Board of Directors has the authority to issue, without further action by the
shareholders, up to 5,000,000 shares of preferred stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by Adept's shareholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions,
financings and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of Adept without further action by
the shareholders and may adversely affect the market price of, and the voting
and other rights of, the holders of common stock. Additionally, the conversion
of preferred stock into common stock may have a dilutive effect on the holders
of common stock.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price of our common stock has fluctuated substantially in the past.
The market price of our common stock will continue to be subject to significant
fluctuations in the future in response to a variety of factors, including:
o the business environment, including the operating results and
stock prices of companies in the industries we serve;
o our liquidity needs and constraints;
o the delisting of our common stock from the Nasdaq Stock Market
and trading on the OTC Bulletin Board;
o fluctuations in operating results;
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 general conditions in the intelligent automation industry; and
o perceived dilution from stock issuances for acquisitions, our
convertible preferred stock and convertible note 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 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.
We may be subject to securities class action litigation if our stock price
remains volatile or operating results suffer, which could result in substantial
costs, distract management and damage our reputation.
34
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities or where operating results suffer. Companies, like us, that are
involved in rapidly changing technology markets are particularly subject to this
risk. In addition, we have incurred net operating losses for the last few fiscal
years. We may be the target of litigation of this kind in the future. Any
securities litigation could result in substantial costs, divert management's
attention and resources from our operations and negatively affect our public
image and reputation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. We maintain an investment policy, which seeks to
ensure the safety and preservation of our invested funds by limiting default
risk, market risk and reinvestment risk. The table below presents principal cash
flow amounts and related weighted-average interest rates by year of maturity for
our investment portfolio.
Fiscal Fair
(in thousands except average rate) 2003 Value
------------- ---------
Cash equivalents
Fixed rate $ 2,643 $ 2,643
Average rate 0.03%
Total Investment Securities $ 2,643 $ 2,643
------------- ---------
Average rate 0.03%
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 contains 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. There have been no
material changes in our exposure to market risk since June 30, 2003.
In the past, we have previously used a foreign currency-hedging program to hedge
our exposure to foreign currency exchange risk on local international
operational assets and liabilities. We entered into foreign currency forward
contracts to minimize the impact of exchange rate fluctuations on certain
foreign currency commitments and balance sheet positions. In March 2003, we
determined that our international activities held or conducted in foreign
currency did not warrant the cost associated with a hedging program due to
decreased exposure of foreign currency exchange risk on international
operational assets and liabilities. As a result, we suspended our foreign
currency hedging program in March 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the fiscal quarter ended September 27, 2003, Adept carried out
an evaluation, under the supervision and with the participation of members of
our management, including our former Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities
Exchange Act of 1934. Based upon that evaluation, our former Chief Executive
Officer and our 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. Our new Chief Executive
Officer has reviewed with our former Chief Executive Officer and our Chief
Financial Officer the procedures that were used to conduct our evaluation for
the fiscal quarter ended September 27, 2003 and the results thereof. Based upon
that review, our new Chief Executive Officer concluded that Adept's disclosure
controls and procedures were effective as of the end of first quarter of fiscal
2004 in alerting our Chief Executive Officer and Chief Financial Officer in a
timely manner to material information relating to Adept (including its
consolidated subsidiaries) required to be included in Adept's periodic SEC
filings. It should be noted that our new Chief Executive Officer's certification
as to our disclosure controls and procedures as of the end of the first quarter
of fiscal 2004 is necessarily based on an evaluation of facts that existed
before he joined Adept. It should be further 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.
During the most recent fiscal quarter, there has not occurred any change in
Adept's internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, Adept's internal control over
financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2003, DL Rose Orchard, L.P., owner of the property leased by Adept at 150
Rose Orchard Way and 180 Rose Orchard Way in San Jose, California, filed an
action against Adept in Santa Clara Superior Court (NO. CV817195) alleging that
Adept breached the leases for the Rose Orchard Way properties by ceasing rent
payments and vacating the property. The complaint makes a claim for unspecified
damages for unpaid rent through April 2003, the worth at the time of the award
of rent through the balance of the leases, an award of all costs necessary to
ready the premises to be re-leased and payment of its costs and attorney's fees.
Adept answered the complaint on July 15, 2003. Since filing the complaint,
plaintiff has disclosed in court filings that it claims estimated damages
exceeding $2.9 million. In fiscal 2003, we recorded expenses in the amount of
$2.3 million for the remaining unpaid rent associated with this lease; however,
we have not reserved the cash associated with such unpaid rent expenses. Our
cash usage for the first quarter of fiscal 2004 and our expectations for cash
usage for the second quarter of fiscal 2004 are significantly impacted by our
nonpayment of rent for this facility. Adept is vigorously defending the lawsuit,
however, if we receive a material adverse judgment or interim ruling in the San
Jose lease litigation and do not have control of the timing of the payments of
any such judgment, we may not have sufficient cash to meet our obligations and
therefore, may be required to cease operations.
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, other than the above noted legal action, 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.
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.
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
relating to alleged infringement will not have a material adverse effect on our
financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On August 6, 2003, in connection with the lease restructuring for our Livermore,
California corporate headquarters and facilities, we issued a three year, $3.0
million convertible subordinated note due June 30, 2006 in favor of the
landlord, Tri-Valley Campus LLC, bearing an annual interest rate of 6.0%.
Principal and interest are payable in cash, unless the landlord elects to
convert the note into our common stock, in which case interest on the principal
amount converted will be paid, at the election of the Adept, in cash, by
converting such interest into principal amount or by issuance of our common
stock. The note is convertible at any time at the option of the holder into
common stock at a conversion price of $1.00 per share and the resulting shares
carry certain other rights, including piggyback registration rights,
participation rights and co-sale rights in equity sales by Adept or its
management. The issuance of the note was exempt from registration in reliance on
Section 4(2) of the Securities Act of 1933.
ITEM 5. OTHER INFORMATION
Annual Meeting
Adept has scheduled its next annual meeting of shareholders to be held on
January 23, 2004. The record date for determining shareholders of the Registrant
entitled to notice of, and to vote at, the annual meeting is December 12, 2003.
In order for business to be conducted or nominations to be considered at the
annual meeting, the business or nominations must be properly brought before the
meeting. In accordance with Rule 14a-8 of the Securities Exchange Act of 1934,
certain shareholder proposals complying with Rule 14a-8 may be eligible for
inclusion in Adept's proxy statement and proxy in connection with our annual
meeting. Alternatively, under Adept's bylaws, a proposal or nomination that the
shareholder does not seek to include in Adept's proxy statement pursuant to Rule
14a-8 may also be brought before the annual meeting if timely notice is
submitted in writing to the secretary of the corporation and such other business
is a proper matter for shareholder action under the California General
Corporations Law. A shareholder intending to submit to Adept a proposal that
qualifies for inclusion in Adept's proxy statement and proxy relating to the
annual meeting must deliver such proposal in writing to the secretary of Adept
at its principal executive offices no later than November 24, 2003. If the
shareholder does not also comply with the requirements of Rule 14a-4 of the
Securities and Exchange Act of 1934, Adept may exercise discretionary voting
authority under proxies it solicits to vote in accordance with its best judgment
on any such shareholder proposal or nomination submitted by a shareholder. The
submission of a shareholder proposal does not guarantee that it will be included
in Adept's proxy statement or proxy.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report.
10.1 Convertible Subordinated Note issued by Registrant to Tri-Valley
Campus, LLC dated August 6, 2003 (incorporated by reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 8, 2003).
10.2 Lease Amendment dated as of August 6, 2003 between the Registrant and
Tri-Valley Campus LLC (incorporated by reference to Exhibit 10.26 to
the Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on September 29, 2003).
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31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K.
On August 6, 2003, a Form 8-K was filed by Adept announcing that it had
restructured its lease obligations with the landlord of its Livermore,
California facilities and announcing its financial results for its fourth
quarter ended June 30, 2003.
37
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/ Robert H. Bucher
--------------------------------
Robert H. Bucher
Chairman of the Board of Directors and
Chief Executive Officer
Date: November 11, 2003
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INDEX TO EXHIBITS
10.1 Convertible Subordinated Note issued by Registrant to Tri-Valley
Campus, LLC dated August 6, 2003 (incorporated by reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 8, 2003).
10.2 Lease Amendment dated as of August 6, 2003 between the Registrant and
Tri-Valley Campus LLC (incorporated by reference to Exhibit 10.26 to
the Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on September 29, 2003).
31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
39