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ADEPT TECHNOLOGY, INC.
FOIA CONFIDENTIAL TREATMENT REQUESTED
April 12, 2005
(925) 245-3413
By Overnight Delivery and EDGAR
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 0306
Washington, DC 20549
Attention: Gary Todd
Re: Adept Technology, Inc.
Form 10-K for the fiscal year ended June 30, 2004
Form 10-Q for the quarter ended October 2, 2004
Form l0-Q for the quarter ended January 1, 2005
File No. 000-27122
Ladies and Gentlemen:
On behalf of Adept Technology, Inc. ("Adept" or "the Company"), we
hereby respond to your comment letter dated March 29, 2005 (the "Comment
Letter") relating to the above-referenced filings by Adept with the Securities
and Exchange Commission (the "Commission"). For ease of reference, the bold
headings and numbered paragraphs below correspond to the headings and numbered
comments in the Comment Letter.
Adept requests, pursuant to the provisions of Commission Rule 83 (17
C.F.R. ss. 200.83), confidential treatment of the Annex A accompanying this
letter as noted and bearing the Bates Number ADEO CTR 001- ADEO CTR 002 that
includes information being provided supplementally to the Staff (the
"Confidential Information"), under the Freedom of Information Act (5 U.S.C. ss.
552) (the "FOIA"). The Confidential Information contains confidential business
information, which we believe is covered by one or more exemptions in the FOIA.
Such information, if made public, could adversely affect Adept. A letter
detailing Adept's confidential treatment request accompanies this letter and is
also being filed with the Office of Freedom of Information and Privacy Act
Operations.
3011 Triad Drive * Livermore, CA 94550 * (925) 245-3400 * (925) 960-0452 Fax
www.adept.com
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 2
Form 10-K for the fiscal year ended June 30, 2004
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Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations - Page 16
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Critical Accounting Policies and Estimates - Page 17
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1. Critical accounting policy disclosure should provide insight about
complex judgments and estimates that underlie your key accounting
policies. That information should generally expand upon and not merely
repeat basic accounting policies. We see that the revenue discussion is
mostly factual. Please expand that item to more specifically identify
and describe the nature and extent of complex estimates and subjective
judgments associated with your revenue practices, including discussion
about the susceptibility of those estimates and judgments to change.
That disclosure should also describe the factors you consider in
evaluating the significance of subjective matters in determining the
amounts and timing of revenue. Apply in future filings. Refer to FR-60
and Exchange Act release 34-48960 for further guidance.
In response to the Staff's comment, Adept intends to disclose in future
filings any complex judgments and estimates underlying key accounting
policies. Adept supplementally advises the Staff that the
discontinuation of our Solutions business late in fiscal 2004 has
simplified revenue recognition matters for fiscal 2005 and future
years.
Results of Operations
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Net Revenues - Page 21
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2. Where significant, please quantify the impact of changes in exchange
rates on reported revenues and expenses. Apply in future filings.
Management concluded that the impact of changes in exchange rates on
reported revenues and expenses was not significant in fiscal 2004.
Adept will include this disclosure in future filings if the impact
becomes significant.
Item 9A. Controls and Procedures - Page 47
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3. We note your statement 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,
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 3
regardless of how remote." You should delete the referenced sentence.
Alternatively, you should expand to state clearly, if true, that your
disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives and that your principal
executive officer and principal financial officers concluded that
disclosure controls and procedures are effective at that reasonable
assurance level. Refer to Section II.F.4 of Management's Reports on
Internal Control Over Financial Reporting and Certification of
Disclosure in Exchange Act Periodic Reports, Release No. 33-8238,
available on our website at www.sec.gov/rules/final/33-8283.htm Apply
in future filings, including quarterly filings.
Adept will revise its disclosures in future filings in response to this
comment. Adept intends to include in its Item 9A discussion, disclosure
substantially similar to the following:
Adept's disclosure controls and procedures are designed to ensure that
the information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and to reasonably
assure that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure. A control system, no matter
how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met
under all potential conditions, regardless of how remote, and may not
prevent or detect all error and all fraud. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within Adept have been detected.
Financial Statements
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Consolidated Statements of Operations - Page 57
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4. We see from your business and MD&A discussions that you have revenues
from services provided to your customers and royalties from licenses.
Tell us how your income statement considers the formatting guidance
from Rules 5-03(b)(1) and 5-03(b)(2) to Regulation S-X.
Adept's MD&A (page 21) discloses revenues as emanating from its two
business segments, consisting of Components revenue of $30.8 million
and Services and Support revenues of $18.3 million. A more detailed
discussion of these revenues is included in Annex A. Approximately 90%
of the Parts & Services revenue item (which comprises most of the
Services and Support revenues) consists of revenue from the sale of
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 4
spare parts and refurbished robots. Revenue from service-related
activities (such as maintenance, repair, and training) was
approximately 5% of total revenue in fiscal 2004. Revenue from
licensing and royalties was less than 1% of total revenue in fiscal
2004. Thus neither category required separate disclosure on the face of
the income statement in accordance with Regulation S-X Rules 5-03(b)(1)
and 5-03(b)(2). In future filings we intend to expand our description
of our Services and Support business segment to clarify that segment
revenues include sales of spare parts and refurbished robots.
Furthermore, to the extent our service revenues meet the thresholds for
separate disclosure in our income statement, we will do so.
Note I: Summary of Significant Accounting Policies
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Revenue Recognition - Page 63
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5. We see the general criteria you apply for product revenue recognition
purposes. Tell us more about the terms and conditions of transactions
with systems integrators. Show us how you apply the disclosed criteria
for transactions with those entities and demonstrate to us that your
revenue practices are appropriate for transactions with those parties.
We are particularly interested in considerations that drive the timing
of revenue. Your supplemental response should be detailed and specific.
To facilitate the Staff's understanding of Adept's revenues practices,
we have provided a detailed breakdown of fiscal 2004 revenues in Annex
A. Adept products are primarily sold by its internal sales force to
system integrators, OEM's, and end users. We generally supply
off-the-shelf components to our direct customers (systems integrators,
OEM's, and end users) who use our components in specific application
solutions. The specific solutions generally use custom designed
fixtures (which we do not supply) with our robots and controllers. The
overall solution is controlled by customer tailored software (such
tailoring may make use of our software templates and vision enabling
tools). It is our customers who assemble these elements into complex
systems, and it is these systems which may have acceptance criteria
attached to them. The approximately 250 system integrator customers
accounted for about 60% of Adept component sales in fiscal 2004. Sales
to system integrators are recognized at point of shipment from Adept
facilities because title and risk of loss passes to the buyers at this
point and system integrators have no right of return other than for
defects covered by warranty. No acceptance criteria or multiple element
arrangements exist with respect to Adept's sales to system integrators.
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 5
6. We see the complexity of the products you provide. Tell us about post
shipment obligations (training, installation, etc.) and acceptance
protocols associated with product sales. Tell us how you consider these
matters in determining the timing of revenue. Unless insignificant, you
should present disclosure about these matters in future filings.
Adept supplementally informs the Staff that standard Adept products
with standard specifications are sold to system integrators, OEM's, and
end users. Training, installation and application programming are
provided at the customer's option under separate arrangements. Post
shipment obligations are not included in product sale prices. There are
no acceptance criteria related to robots, controllers, spare parts,
maintenance, repair, and training, and our customers have no right of
return other than for product defects covered by warranty. We have no
history of significant product returns. Since we have no post shipment
obligations for product sales no disclosure is necessary.
7. As a related matter, you indicate that you generally do not have
multiple element arrangements. In light of the apparent complexity of
your products tell us more about the terms of product sales and explain
the bases for that assertion. The supplemental response should explain
how you have considered the requirements of EITF 00-21. Please be
detailed and specific.
As can be seen in Annex A, over 95% of Adept's sales consist primarily
of direct shipments of Adept produced robots, controllers, component
parts, and software to system integrators, OEM's, and end user
customers. There are no significant multiple element arrangements as
described in EITF 00-21 and SOP 97-2, as amended.
8. Tell us about return policies and practices, including how your
policies are considered in determining the timing of revenue. As
relevant, tell us how your revenue practices consider the requirements
of FAS 48.
Adept supplementally advises the staff that our product's Terms of Sale
do not include rights of return; therefore, we do not maintain return
reserves. We do not have any historical experience of significant
returns of product or software. Our warranty policy is also
encapsulated in our Terms of Sale and states that we will give a refund
at our discretion, and only if there is an identified fault in the
product, and only if the customer has complied with Adept's approved
maintenance schedules and procedures, and the product has not been
subject to abuse.
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 6
Adept also supplementally informs the Staff that Adept Services and
Support spare parts shipments can be returned by customers for credit
within 10 days. Returns occur on less than one-half of 1% of parts
sales, and usually for emergency shipments where our customers order
extra parts to ensure their technical problems are fixed. We have not
reserved for these sales returns because the amounts have not been
material.
9. For software revenue purposes, tell us more about how you evaluate the
criteria from SOP 97-2, as amended. For instance, describe the nature
and extent of post contract support generally associated with your
license arrangements and describe the criteria you evaluate in
assessing whether that post shipment support is significant. Describe
your practices when that support is deemed significant. How are upgrade
or enhancement rights considered in your practices? Do you apply
multiple-element accounting for software transactions? If not, why not;
and, if so, how do you apply the multiple-element method? The
supplemental narrative should show us that your application of the SOP
in accounting for software sales is appropriate in your circumstances.
Adept supplementally advises the Staff that Adept sells two separate
and distinct categories of software: (1) software elements within
Adept's robot and controller products, and (2) standalone software
consisting primarily of HexSight, a library of machine vision software
tools.
The software elements within Adept's products are not products that are
sold separately nor are they marketed as a separate product offering to
our customers. The Company's robots and controllers have features which
are enabled or enhanced through the use of the software enabling tools
and other software elements. However, our software enabling tools or
other software elements do not operate independently of the robots or
controllers, and they are not sold separately and cannot be used
without the robots or controllers. Furthermore, although it is
undeniable that the software element is critical to the operating
capabilities of the robots and controllers, the software elements are
not the main focus of our marketing efforts, nor are they what our
customers perceive they are buying from Adept. Adept's customers
clearly perceive that they are purchasing production automation
equipment. Accordingly, Adept believes that the software component of
its products is incidental to its products and services taken as a
whole. As a result, as described in Response #1, we recognize revenue
related to product sales in accordance with SAB 104.
Sales of standalone software were only 1.4% of net revenues in fiscal
2004 and were not disclosed as a separate line item in the income
statement in accordance with Regulation S-X, Rules 5-03 (b)(1) and
5-03(b)(2). These revenues were primarily from sales of HexSight(TM), a
library of machine vision software tools. This is a standard product
that Adept delivers to customers via a pre-packaged CD-ROM for
customers to use in programming their applications. There are no
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 7
ongoing maintenance obligations of Adept or any customer rights to
future upgrades. In addition, from time to time we may do some customer
customizations of HexSight tools, and we charge our customers based
upon the time required to complete the work. Revenue for such
customization work is recognized upon customer acceptance of our work.
Adept does not generally provide any post-contract support of either
software elements within its robot or controller products or standalone
software sales. In the event that Adept were to enter into a software
arrangement with a license for multiple software deliverables, our
revenue recognition practice would follow the multi-element procedures
provided by SOP 97-2, as amended. The revenue would be allocated to the
various elements of the arrangement based on vendor-specific objective
evidence (VSOE) of the relative fair value of each element. If
sufficient VSOE did not exist for the allocation of revenue to the
various elements of the arrangement, all revenue from the arrangement
would be deferred until the earlier of the point at which (1)
sufficient VSOE does exist or (2) all elements of the arrangement have
been delivered.
10. For software to be installed by the customer you disclose that revenue
is recognized at shipment if functionality has been previously
established and if there are no customizations that cause substantial
acceptance risk. Tell us more about how you apply that policy. How do
you determine whether acceptance risk is "substantial?" What accounting
is applied when these criteria are not achieved?
Adept supplementally advises the Staff that the acceptance risk
associated with customizations was principally relevant to our
Solutions segment, now discontinued, for which the accounting treatment
was to defer revenue until customer acceptance. Adept's currently
marketed software installed by customers provides them with either a
development environment used to program their application, such as
Adept DeskTop, or tools used to complete such programming, such as
HexSight. These are standard products that are not commonly customized.
Adept's risk related to customer acceptance is primarily limited to a
newly released product for which a defect was discovered. In this
uncommon instance, Adept would have to remediate the defect and send
the customer a corrective revision. As a result, we do not believe that
our acceptance risk related to software sales through the end of fiscal
2004 is substantial.
11. Unless insignificant, please make disclosure about the nature and
extent of vendor sales consideration as described in EITF 01-09. Make
disclosure about how you estimate discounts and incentives, including
how amounts are reported in the financial statements. Apply in future
filings.
Adept advises the Staff that Adept does not provide any vendor sales
consideration as described in EITF 01-09.
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 8
Note 5 - Goodwill and Other Intangible Assets - Page 70
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12. In light of your recent losses and accumulated deficit, please make
more specific disclosure about how you perform the annual goodwill
impairment testing. Make disclosure about the method and to the extent
important to an understanding of the method, significant assumptions,
and clarify why you believe goodwill is recoverable. Also make
disclosure about the nature and extent of subjective estimates
associated with that process. For instance, evaluations are often based
on projected cash flows that are inherently uncertain. Apply in future
filings.
Adept will include the disclosures requested by the Staff in future
filings. Such disclosures will be substantially similar to the
following:
The carrying value of goodwill and other intangible assets are reviewed
for possible impairment in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets." The Company's impairment review is based on a
discounted cash flow approach that requires significant management
judgment with respect to future sales and production volumes, revenue
and expense growth rates, changes in working capital use, foreign
exchange rates and selection of an appropriate discount rate.
Impairment occurs when the carrying value of a reporting unit exceeds
the fair value of that reporting unit. An impairment charge is recorded
for the difference between the carrying value and the net present value
of estimated future cash flows, which represents the estimated fair
value of the reporting unit. The Company tests its intangible assets
annually on April 1 unless there are indications during an interim
period that such assets may have become impaired. The Company uses its
judgment in assessing whether intangible assets may have become
impaired between annual valuations. Indicators such as unexpected
adverse economic factors, unanticipated technological change or
competitive activities may signal that an intangible asset has become
impaired.
Note 13 - Segment information - Page 79
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13. Disclosure of long-lived assets by geographic area under SFAS 131
should present tangible assets only and should not include intangibles
or investments. See question 22 to the FASB publication "Segment
Information: Guidance on Applying Statement 131." Apply in future
filings.
We concur and will only include tangible assets in our future filings.
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 9
Form 10-Q for the quarter ended January 1, 2005
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Item 4. Controls and Procedures - Page 35
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14. In a supplemental response, provide us a more specific description of
the material weakness and the related error. Tell us how FAS 52 was not
properly applied and quantify the related adjustment. Tell us what you
did to ensure that there are not similar errors in prior periods. Also
more specifically describe what you did to mitigate the material
weakness. That is, describe more specifically how you altered internal
controls for this matter. Future filings should present a more detailed
description of the weakness, including identification and description
of the aspects of FAS 52 that were not properly applied.
Future filings will include a more detailed explanation, substantially
as follows:
In preparing our financial statements for the interim period ended
January 1, 2005, Adept overstated the foreign currency translation gain
by approximately $400,000. This error was identified by our independent
auditors during their interim review and was corrected prior to the
issuance of our Form 10-Q for the period ended January 1, 2005. The
error was made by a new Adept employee who inadvertently translated
certain monetary and non-monetary accounts at the wrong exchange rates.
In addition to training the responsible employee on the requirements of
SFAS 52, we have also established an additional control whereby the
Corporate Controller reviews the foreign exchange computation each
quarter to ensure that the accounts of our international subsidiaries
are being correctly designated as monetary and non-monetary and that
the correct exchange rates are being used for compliance with FAS 52.
We have also reviewed prior quarterly and annual financial statements,
and have determined that we did not make a similar error in prior
periods.
*******
As requested by the Staff, Adept acknowledges that:
o The Company is responsible for the adequacy and accuracy of
the disclosure in its Commission filings;
o Staff comments or changes to disclosure in response to Staff
comments in the Commission filings reviewed by the Staff do
not foreclose the Commission from taking any action with
respect to the filing; and
o The Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 10
We appreciate your prompt review of this response. If you have any
questions or comments regarding the foregoing, please do not hesitate to contact
me at the above-listed telephone number. We are available to discuss any
questions or remaining issues with the Staff in order resolve these comments.
Sincerely,
/s/ Robert R. Strickland
Robert R. Strickland
Chief Financial Officer
cc: Patrick Enunwaonye - Securities and Exchange Commission
Brian Cascio - Securities and Exchange Commission
Robert Bucher - Adept Technology, Inc.
Securities and Exchange Commission
Attention: Gary Todd April 12, 2005
Page 11
FOIA CONFIDENTIAL TREATMENT REQUESTED
ADEO CTR 0001
ANNEX A