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 April 2, 2005
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 May 13,
2005 was 6,134,418.
ADEPT TECHNOLOGY, INC.
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
April 2, 2005 and June 30, 2004 .......................................... 3
Consolidated Statements of Operations
Three and nine months ended April 2, 2005 and March 27, 2004 ............. 4
Consolidated Statements of Cash Flows
Three and nine months ended April 2, 2005 and March 27, 2004 ............. 5
Notes to Consolidated Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 38
Item 4. Controls and Procedures .......................................... 38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ..... 39
Item 3. Defaults upon Senior Securities ................................. 39
Item 4. Submission of Matters to a Vote of Security Holders ............. 39
Item 5. Other Information ............................................... 39
Item 6. Exhibits ......................................................... 40
Signatures ............................................................... 41
Index to Exhibits ........................................................ 42
2
ADEPT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 2, June 30,
2005 2004
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 3,364 $ 4,957
Accounts receivable, less allowance for doubtful accounts of $1,349 at
April 2, 2005 and $1,269 at June 30, 2004 .......................................... 12,219 13,385
Inventories ............................................................................. 8,702 6,233
Other current assets .................................................................... 909 656
--------- ---------
Total current assets ................................................................ 25,194 25,231
Property and equipment at cost ............................................................... 10,033 9,372
Less accumulated depreciation and amortization ............................................... 8,603 7,924
--------- ---------
Property and equipment, net .................................................................. 1,430 1,448
Goodwill ..................................................................................... 3,176 3,176
Other intangible assets, net ................................................................. 276 423
Other assets ................................................................................. 1,291 1,293
--------- ---------
Total assets ........................................................................ $ 31,367 $ 31,571
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 5,727 $ 5,689
Accrued payroll and related expenses .................................................... 1,356 1,486
Accrued warranty expenses ............................................................... 1,994 2,111
Deferred revenue ........................................................................ 158 1,589
Accrued restructuring expenses .......................................................... 25 191
Other accrued liabilities ............................................................... 778 455
--------- ---------
Total current liabilities ........................................................... 10,038 11,521
Long-term liabilities:
Subordinated convertible note ........................................................... 3,000 3,000
Other long-term liabilities ............................................................. 1,537 1,422
Commitments and contingencies:
Redeemable convertible preferred stock, no par value:
1,000 shares authorized, no shares issued and outstanding at
January 1, 2005 and June 30, 2004 ....................................................... -- --
Shareholders' equity:
Preferred stock, no par value: 1,000 shares authorized, none issued and
outstanding ............................................................................ -- --
Common stock, no par value: 14,000 shares authorized, 6,132 and 5,982
shares issued and outstanding at April 2, 2005 and June 30, 2004,
respectively ........................................................................... 144,175 143,405
Accumulated deficit: ..................................................................... (127,383) (127,777)
--------- ---------
Total shareholders' equity .......................................................... 16,792 15,628
--------- ---------
Total liabilities, redeemable convertible preferred stock and
shareholders' equity ............................................................ $ 31,367 $ 31,571
========= =========
<FN>
Reflects the one-for-five reverse stock split by Adept effective February 25, 2005
See accompanying notes
</FN>
3
ADEPT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Nine months ended
----------------------- -----------------------
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
-------- -------- -------- --------
Revenues ................................................................... $ 13,025 $ 13,334 $ 36,103 $ 34,619
Cost of revenues ........................................................... 7,061 7,822 19,349 21,122
-------- -------- -------- --------
Gross margin ............................................................... 5,964 5,512 16,754 13,497
Operating expenses:
Research, development and engineering ................................ 1,787 1,696 5,008 5,215
Selling, general and administrative .................................. 3,817 3,824 11,453 10,838
Restructuring charge (reversal), net ................................. -- (697) (33) (697)
Amortization of intangible assets .................................... 49 142 146 427
-------- -------- -------- --------
Total operating expenses ................................................... 5,653 4,965 16,574 15,783
-------- -------- -------- --------
Operating income (loss) .................................................... 311 547 180 (2,286)
Interest expense, net ...................................................... (58) (71) (133) (334)
Foreign currency exchange gain ............................................. 50 34 374 399
-------- -------- -------- --------
Income (loss) from continuing operations before income tax ................. 303 510 421 (2,221)
Provision for (benefit from) income tax .................................... 11 (1,433) 29 (1,414)
-------- -------- -------- --------
Income (loss) from continuing operations ................................... 292 1,943 392 (806)
Loss from discontinued operations, net of tax .............................. -- (7,000) -- (7,087)
-------- -------- -------- --------
Net income (loss) .......................................................... $ 292 $ (5,057) $ 392 $ (7,893)
======== ======== ======== ========
Basic income (loss) per share from:
Continuing operations ................................................ $ 0.05 $ 0.33 $ 0.06 $ (0.18)
Discontinued operations .............................................. $ 0.00 $ (1.18) $ 0.00 $ (1.59)
-------- -------- -------- --------
Basic income (loss) per share ........................................ $ 0.05 $ (0.85) $ 0.06 $ (1.77)
======== ======== ======== ========
Diluted income (loss) per share from:
Continuing operations ................................................ $ 0.05 $ 0.33 $ 0.06 $ (0.18)
Discontinued operations .............................................. $ 0.00 $ (1.18) $ 0.00 $ (1.59)
-------- -------- -------- --------
Diluted income (loss) per share ...................................... $ 0.05 $ (0.85) $ 0.06 $ (1.77)
======== ======== ======== ========
Number of shares used in computing basic per share amounts from:
Continuing operations ................................................ 6,124 5,944 6,046 4,461
======== ======== ======== ========
Discontinued operations .............................................. 6,124 5,944 6,046 4,461
======== ======== ======== ========
Number of shares used in computing diluted per share amounts from:
Continuing operations ................................................ 6,218 5,944 6,154 4,461
======== ======== ======== ========
Discontinued operations .............................................. 6,218 5,944 6,154 4,461
======== ======== ======== ========
<FN>
Reflects the one-for-five reverse stock split by Adept effective February 25, 2005
See accompanying notes
</FN>
4
ADEPT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended
-----------------------
April 2, March 27,
2005 2004
-------- --------
(unaudited) (unaudited)
Operating activities
Net income (loss) from continuing operations ......................................................... $ 392 $ (806)
Non-cash adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation ..................................................................................... 679 1,419
Amortization of intangibles ...................................................................... 146 534
Reversal of accrued lease obligations in excess of settlement .................................... -- (1,146)
Reversal of previously accrued income taxes ...................................................... -- (1,285)
Loss on disposal of property and equipment ....................................................... -- 66
Net changes in operating assets and liabilities:
Accounts receivable, net ....................................................................... 1,166 (1,798)
Inventories, net ............................................................................... (2,469) (1,081)
Other current assets ........................................................................... (253) (41)
Other assets ................................................................................... 2 387
Accounts payable ............................................................................... 38 286
Other accrued liabilities and deferred revenues ................................................ (1,355) 312
Accrued restructuring expenses ................................................................. (165) (1,876)
Other long-term liabilities .................................................................... 115 (1,019)
-------- --------
Net cash used in operating activities from continuing operations ................................. (1,704) (6,048)
-------- --------
Net cash provided by (used in) discontinued operations ........................................... -- --
-------- --------
Net cash used in operating activities ............................................................ (1,704) (6,048)
-------- --------
Investing activities
Purchase of property and equipment ............................................................... (661) (245)
Purchase of short-term available-for-sale investments ............................................ -- (8,550)
Sale of short-term available-for-sale investments ................................................ -- 6,700
-------- --------
Net cash used in investing activities ............................................................ (661) (2,095)
-------- --------
Financing activities
Net proceeds from issuance of common stock ....................................................... -- 9,355
Net increase in short-term borrowings ............................................................ -- 387
Proceeds from employee stock incentive program and employee stock purchase plan
772 121
-------- --------
Net cash provided by financing activities ........................................................ 772 9,863
-------- --------
Increase (decrease) in cash and cash equivalents ...................................................... (1,593) 624
Cash and cash equivalents, beginning of period ........................................................ 4,957 3,234
-------- --------
Cash and cash equivalents, end of period .............................................................. $ 3,364 $ 3,858
======== ========
Cash paid during the period for:
Interest ......................................................................................... $ 145 $ 213
Taxes ............................................................................................ $ 74 $ 37
Supplemental disclosure of non-cash financing activities
Conversion of redeemable convertible preferred stock into common stock ........................... $ -- $ 25,000
<FN>
See accompanying notes.
</FN>
5
ADEPT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying condensed consolidated financial statements have been prepared
in conformity with U.S. generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with U.S. 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 presentation of the consolidated financial position,
results of operations and cash flows as of April 2, 2005 and March 27, 2004, and
for the interim periods then ended, and such adjustments consist of items of a
normal recurring nature. The results for such periods are not necessarily
indicative of the results to be expected for the full fiscal year or for any
other future period. The condensed consolidated financial statements included in
this Quarterly Report on Form 10-Q should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended June 30, 2004 included in Adept Technology, Inc.'s ("Adept" or the
"Company") Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on September 27, 2004.
The preparation of condensed consolidated financial statements in conformity
with U.S. 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
revenue and expenses during the reporting period. 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.
On January 25, 2005, our Board of Directors approved a one-for-five reverse
stock split, within the range previously approved by Adept's shareholders. The
reverse stock split became effective on February 25, 2005. All current and
historical share and per share information included in these condensed
consolidated financial statements has been restated to reflect the results of
the reverse stock split.
2. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (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 Statement of
Financial Accounting Standards (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 income (loss) and net income (loss) per share would be
as follows:
6
--------------------------- --------------------------
Three months ended Nine months ended
--------------------------- --------------------------
April 2, March 27, April 2, March 27,
(in thousands) 2005 2004 2005 2004
----------- ----------- ---------- -----------
Net income (loss), as reported ................................ $ 292 $ (5,057) $ 392 $ (7,893)
Add: Stock-based employee compensation
expense included in the determination of net
income (loss), as reported ................................ -- 84 -- 84
Deduct: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net
of related tax effects ..................................... (211) (130) (664) (1,276)
----------- ----------- ---------- -----------
Pro forma net income (loss) .................................. $ 81 $ (5,103) $ (272) $ (9,085)
=========== =========== ========== ===========
Basic income (loss) per common share:
As reported ............................................... $ 0.05 $ (0.85) $ 0.06 $ (1.77)
=========== =========== ========== ===========
Pro forma ................................................. $ 0.01 $ (0.85) $ (0.04) $ (2.04)
=========== =========== ========== ===========
Diluted income (loss) per common share:
As reported ............................................... $ 0.05 $ (0.85) $ 0.06 $ (1.77)
=========== =========== ========== ===========
Pro forma ................................................. $ 0.01 $ (0.85) $ (0.04) $ (2.04)
=========== =========== ========== ===========
3. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term investments
typically consist of marketable securities and money market investments with
maturities between three and 12 months. Investments are classified as
held-to-maturity, trading, or available-for-sale at the time of purchase. At
April 2, 2005, the Company held no short-term investments.
4. Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost under the first-in, first-out method, or market value. The components of
inventory are as follows:
(in thousands)
----------------------
April 2, June 30,
2005 2004
------ ------
Raw materials ................ $3,340 $1,694
Work-in-process .............. 1,534 2,005
Finished goods ............... 3,828 2,534
------ ------
$8,702 $6,233
====== ======
7
5. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
(in thousands)
April 2, June 30,
2005 2004
-------- --------
Machinery and equipment ...................... $ 2,763 $ 2,306
Computer equipment ........................... 5,247 5,020
Office furniture and equipment ............... 2,023 2,046
-------- --------
10,033 9,372
Accumulated depreciation and amortization .... (8,603) (7,924)
-------- --------
Net property and equipment ................... $ 1,430 $ 1,448
======== ========
6. Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization, aggregate amortization expense, and estimated amortization expense
for the next three successive fiscal years related to the intangible assets
subject to amortization.
(in thousands)
As of April 2, 2005
---------------------------------------
Gross
Carrying Accumulated Net Carrying
Amortizable intangible assets Amount Amortization Amount
----------------------------- ------ ------------ ------
Developed technology ................ $ 2,389 $(2,113) $ 276
Non-compete agreements .............. 380 (380) --
------- ------- -------
Total ............................ $ 2,769 $(2,493) $ 276
======= ======= =======
The aggregate amortization expense for the nine months ended April 2, 2005
totaled $146,000, and the estimated amortization expense for the next three
years is as follows:
(in thousands)
Amount
------
Remaining for fiscal year 2005 ................. $ 48
For fiscal year 2006 ........................... 195
For fiscal year 2007 ........................... 33
----
$276
7. Warranties
The Company generally offers a two year parts and one year labor limited
warranty for most 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," and 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 through charges to cost of revenues 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.
8
Changes in the Company's warranty liability are as follows:
(in thousands)
Nine months ended
---------------------
April 2, March 27,
2005 2004
------- -------
Balance at beginning of period ....................... $ 2,111 $ 1,833
Warranties issued .................................... 895 1,133
Change in estimated warranty provision including
expirations ..................................... (203) (35)
Warranty claims ...................................... (809) (780)
------- -------
Balance at end of period ............................. $ 1,994 $ 2,151
======= =======
8. Accrued Restructuring Expenses
The following table summarizes the Company's accrued restructuring expenses:
(in thousands)
Additional Amounts Additional Amounts Additional Amounts
Charges/ Paid Charges/ Paid Charges/ Paid
Balance Reversals) Q1 (Reversals) Q2 (Reversals) Q3 Balance
June 30, (Q1 Fiscal Fiscal Q2 Fiscal Fiscal Q3 Fiscal Fiscal April 2,
2004 2005 2005 2005 2005 2005 2005 2005
-------- -------- -------- -------- -------- -------- -------- -------
Employee severance costs $ 69 $ 7 $ 76 $ - $ - $ - $ - $ -
Less commitments 122 (50) 22 9 30 - 4 25
-------- -------- -------- -------- -------- -------- -------- -------
Total $ 191 $ (43) $ 98 $ 9 $ 30 $ - $ 4 $ 25
======== ======== ======== ======== ======== ======== ======== ========
During the quarter ended April 2, 2005, the Company was able to complete the
restructuring of leases of the formerly occupied facility in Dallas, Texas. This
restructuring combined with restructuring of lease obligations in the second
quarter in Detroit, Michigan; Santa Barbara, California; and Southbury,
Connecticut resulted in a $25,000 reduction in the restructuring accrual. The
balance at April 2, 2005 is comprised entirely of scheduled obligations that are
expected to be paid out or released during the fourth quarter of fiscal 2005,
against non-cancelable lease commitments.
9. Discontinued Operations
During the third quarter of fiscal 2004, Adept adopted a formal plan to dispose
of and completed the disposition of its Solutions business segment for no cash
consideration. Adept fully disposed of the Solutions business segment and has no
continuing interest and accordingly, the Solutions business segment was
accounted for as a discontinued operation. The results of operations of the
Solutions business segment have been removed from Adept's continuing operations
for all periods presented and classified as a separate line item in the
accompanying consolidated statements of operations as discontinued operations.
9
10. Legal Proceedings
From time to time, the Company is party to various legal proceedings or claims,
either asserted or unasserted, which arise in the ordinary course of its
business. The Company has reviewed pending legal matters and believes that the
resolution of these matters will not have a material adverse effect on its
business, financial condition or results of operations.
Adept has in the past received communications from third parties asserting that
it has infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement. While it is not
feasible to predict or determine the likelihood or outcome of any actual or
potential actions from such assertions against the Company, it believes the
ultimate resolution of these matters will not have a material adverse effect on
its financial position, results of operations or cash flows.
11. Income Taxes
The Company provides for income taxes during interim reporting periods based
upon an estimate of its annual effective tax rate. The Company also maintains a
liability to cover the cost of additional probable tax exposure items pertaining
to the filing of federal and state income tax returns, as well as filings in
foreign jurisdictions. Each of these filing jurisdictions may audit the tax
returns filed and propose adjustments. Adjustments arise from a variety of
factors, including different interpretations of statutes and regulations. For
the nine months ended April 2, 2005, the Company recorded a provision for income
taxes from continuing operations of $28,500 for domestic and international tax
liabilities.
12. Income (loss) per Share and Reverse Stock Split
The number of shares of common and preferred stock authorized for issuance by
the Company and the number of common shares issued and outstanding has been
reduced as a result of the reverse stock split as described in Note 1. Although
the number of shares issued and outstanding has been reduced, the rights and
preferences of the shares of the Company's common stock have remained the same.
The reverse stock split will not materially change the Company's financial
condition, results of operations, the percentage of ownership of management, the
number of the Company's shareholders or other aspects of the Company's business.
However, the reverse stock split will increase the Company's net income or loss
per share and net book value per share as a direct result of the reduction in
the number of outstanding shares of the Company's common stock.
Basic income (loss) per share is computed by dividing net income (loss), the
numerator, by the weighted average number of shares of common stock outstanding,
the denominator, during the period. Diluted income (loss) 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 and
nine months ended March 27, 2004, 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 to the net loss.
10
------------------------- -------------------------
Three months ended Nine months ended
------------------------- -------------------------
April 2, March 27, April 2, March 27,
(in thousands) 2005 2004 2005 2004
--------- --------- --------- ---------
Income (loss) from continuing operations ............................ $ 292 $ 1,943 $ 392 $ (806)
Income from discontinued operations ................................. $ -- $ (7,000) $ -- $ (7,087)
--------- --------- --------- ---------
Net Income (loss) ................................................... $ 292 $ (5,057) $ 392 $ (7,893)
========= ========= ========= =========
Basic:
Weighted average number of shares used in
computing basic per share amounts from
continuing and discontinued operations: ........................ 6,124 5,944 6,046 4,461
========= ========= ========= =========
Income (loss) per share from:
continuing operations .......................................... $ 0.05 $ 0.33 $ 0.06 $ (0.18)
discontinued operations ........................................ $ 0.00 $ (1.18) $ 0.00 $ (1.59)
--------- --------- --------- ---------
Basic net income (loss) per share .................................. $ 0.05 $ (0.85) $ 0.06 $ (1.77)
========= ========= ========= =========
Diluted:
Weighted average number of common shares used in computing
basic net income (loss) per share from
continuing and discontinued operations: ........................ 6,124 5,944 6,046 4,461
Add: Weighted average number of dilutive potential
Common stock ............................................. 94 -- 108 --
--------- --------- --------- ---------
Weighted average number of common shares used
in computing diluted net loss per share from
continuing and discontinued operations: ........................ 6,218 5,944 6,154 4,461
========= ========= ========= =========
Income (loss) per share from:
continuing operations .......................................... $ 0.05 $ 0.33 $ 0.06 $ (0.18)
discontinued operations ........................................ $ 0.00 $ (1.18) $ 0.00 $ (1.59)
--------- --------- --------- ---------
Diluted net income (loss) per share ................................ $ 0.05 $ (0.85) $ 0.06 $ (1.77)
========= ========= ========= =========
13. Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires disclosures of certain information regarding operating
segments, products and services, geographic areas of operation and major
customers. SFAS No. 131 reporting is based upon the "management approach": how
management organizes the company's operating segments for which separate
financial information is (i) available and (ii) evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Adept's chief operating decision maker is its President and Chief
Executive Officer, or CEO.
Adept's business is focused towards delivering intelligent flexible production
automation products, components and services for assembly and material handling
applications under two categories: (1) Components and (2) Services and Support.
The Components segment provides intelligent production automation software and
hardware component products externally to customers and internally to the other
business segment for support of existing customer installations.
The Services and Support segment provides support services to customers
including: supplies of spare parts and refurbished robots; providing information
regarding the use of the Company's 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 towards manufacturing engineers who design and implement
automation lines.
11
The Company evaluates performance and allocates resources based on segment
revenue and segment operating income (loss). Segment operating income (loss) is
comprised of income before unallocated research, development and engineering
expenses, unallocated selling, general and administrative expenses, interest
income, and interest and other expenses.
Management does not fully allocate research, development and engineering
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 of materials or labor 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 between segments.
Three months ended Nine months ended
---------------------------- -----------------------------
April 2, March 27, April 2, March 27,
(in thousands) 2005 2004 2005 2004
-------- -------- -------- --------
Revenues:
Components ......................................... $ 9,422 $ 9,701 $ 25,767 $ 24,428
Services and Support ............................... 3,603 3,633 10,336 10,191
-------- -------- -------- --------
Total revenues ..................................... $ 13,025 $ 13,334 $ 36,103 $ 34,619
Operating income:
Components ......................................... $ 1,482 $ 1,593 $ 4,660 $ 1,629
Services and Support ............................... 931 501 2,083 $ 1,212
-------- -------- -------- --------
Segment profit ..................................... 2,413 2,094 6,743 2,841
Unallocated research, development
and engineering and selling,
general and administrative ....................... 2,053 2,102 6,450 5,396
Restructuring charges (reversal),
net .............................................. -- (697) (33) (697)
Amortization of intangible assets .................. 49 142 146 427
Interest income .................................... (5) 27 13 71
Interest expense ................................... (53) (98) (146) (405)
Foreign currency gain .............................. 50 34 374 398
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes ................... $ 303 $ 510 $ 421 $ (2,221)
======== ======== ======== ========
Management also assesses the Company's performance, operations and assets by
geographic areas, and therefore revenue and long-lived assets are summarized in
the following table:
Three months ended Nine months ended
------------------- --------------------
April 2, March 27, April 2, March 27,
(in thousands) 2005 2004 2005 2004
------- ------- ------- -------
Revenue:
United States ................. $ 2,991 $ 8,762 $10,582 $19,777
Germany ....................... 2,982 1,282 8,602 3,695
France ........................ 1,664 865 3,950 3,720
Other European countries ...... 4,130 1,110 7,589 4,235
All other countries ........... 1,258 1,315 5,380 3,192
------- ------- ------- -------
Total .................... $13,025 $13,334 $36,103 $34,619
======= ======= ======= =======
12
April 2, June 30,
(in thousands) 2005 2004
------ ------
Long-lived tangible assets:
United States ................................. $2,536 $2,582
All other countries ........................... 185 159
------ ------
Total long-lived tangible assets ........... $2,721 $2,741
====== ======
14. Comprehensive Income
For the three and nine months ended April 2, 2005 and March 27, 2004, there were
no significant differences between the Company's comprehensive income or loss
and its net income or loss.
15. Equity
During the nine months ended April 2, 2005, 104,782 shares of common stock were
issued upon the exercise of options under the Company's stock option plans, and
46,208 shares of common stock were issued under the Company's employee stock
purchase plan (ESPP). Shares are issued semi-annually under the ESPP, in
February and August. Total shares outstanding at April 2, 2005 were 6,131,837.
16. Foreign Currency Translation
The Company applies Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," with respect to its international operations, which are
primarily sales and service entities. The accounts denominated in non-U.S.
currencies have been re-measured using the U.S. dollar as the functional
currency. All monetary assets and liabilities are remeasured at the current
exchange rate at the end of the period, nonmonetary assets and liabilities are
remeasured at historical exchange rates, and revenues and expenses are
remeasured at average exchange rates in effect during the period. Translation
gains (losses) resulting from the process of remeasuring foreign currency
financial statements into U.S. dollars were $(39,100) and $13,100 for the three
and nine months ended April 2, 2005 respectively, and $(83,700) and $(25,100)
for the three and nine months ended March 27, 2004 respectively. Foreign
currency transaction gains (losses) were $89,400 and $360,600 for the three and
nine months ended April 2, 2005 respectively, and $118,100 and $424,000 for the
three and nine months ended March 27, 2004 respectively. In the past the Company
has included foreign currency exchange gains or losses in selling, general and
administrative expenses, but beginning in the second quarter of fiscal 2005,
foreign currency gains or losses are reported as a separate line item in the
income statement.
17. Impact of Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board issued Statement
123R, Share-Based Payment, which is a revision of Statement 123, Accounting for
Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends Statement No. 95, Statement
of Cash Flows.
As amended effective April 14, 2005, Statement 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values (i.e.,
proforma disclosure is no longer an alternative to financial statement
recognition). Statement 123R is effective for public companies (excluding small
business issuers) at the beginning of the first interim or annual period
beginning after June 15, 2005. Statement 123R will be effective for Adept for
the quarter ending October 1, 2005. See "Stock-Based Compensation" in Note 2 to
the Company's Condensed Consolidated Financial Statements for the pro forma net
income (loss) and net income (loss) per share amounts, for the three and nine
months ended April 2, 2005 and March 27, 2004. Although Adept has not yet
determined whether the adoption of SFAS No. 123R will result in future amounts
that are similar to the current pro forma disclosures under SFAS No. 123, the
Company is evaluating the requirements under SFAS No. 123R. Current estimates of
option values using the Black-Scholes method may not be indicative of results
from the final methodology adopted by the Company for reporting under Statement
123R guidelines. Adept expects the adoption will have a significant impact on
its results of operations.
Statement 151, Inventory Cost, an amendment to ARB No 43, Chapter 4, was issued
by the FASB in November 2004. The pronouncement clarifies that abnormal amounts
of idle facility exposure, freight, handling costs and wasted materials
(spoilage) be recognized as current period charges and requires the allocation
of fixed production overheads to inventory based on the normal capacity and cost
of the production facilities. Statement 151 is the result of a broader effort by
13
the FASB to improve the comparability of cross-border financial reporting by
working with the International Accounting Standards Board (IASB) toward
development of a single set of high quality accounting standards. Statement 151
is effective for inventory costs incurred during fiscal periods beginning after
June 15, 2005. The Company believes that it is currently following the practices
mandated in Statement 151, and as a result, the Company does not anticipate that
the adoption of Statement 151 will have a significant impact on its financial
condition or results of operations.
Statement 153, Exchanges of Nonmonetary Assets, was issued subsequent to the
November 17-18, 2004 EITF Meeting and is effective for asset exchanges occurring
in fiscal periods beginning after June 15, 2005. FAS 153 amends paragraphs 20
and 21 of APB Opinion 29 as follows. A nonmonetary exchange shall be measured
based on the recorded amount (after reduction, if appropriate, for an indicated
impairment of value) of the nonmonetary asset relinquished, and not on the fair
values of the exchanged assets, if any of the following apply: (a) fair value is
not determinable, (b) the exchange transaction is to facilitate sales to
customers, (c) exchange transactions lack commercial substance. A nonmonetary
exchange has commercial substance if the entity's future cash flows are expected
to change significantly as a result of the exchange due to: (a) the
configuration (risk, timing and amount) of future cash flows of the assets
received differs significantly from cash flows of assets transferred, or (b) the
entity specific value of the asset received differs from the entity specific
value of the asset transferred, and the difference is significant in relation to
the fair values of the assets exchanged. The Company does not anticipate the
adoption of FAS 153 will have a significant impact on its financial condition or
results of operations.
14
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 the economic environment affecting us and the markets we serve;
o sources of revenues and anticipated revenues, including the
contribution from the growth of new products and markets;
o our expectations regarding our cash flows and the impact of the timing
of receipts and disbursements;
o our estimates regarding our liquidity and capital requirements;
o marketing and commercialization of our products under development;
o our ability to attract customers and the market acceptance of our
products;
o our ability to establish relationships with suppliers, systems
integrators and OEMs for the supply and distribution of our products;
o plans for future products and services and for enhancements of existing
products and services;
o plans for future acquisitions of products, technologies and businesses;
and
o our intellectual property.
In some cases, you can identify forward-looking statements 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, are based on
assumptions which may or may not prove to be correct, and are subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these statements. We discuss many of these risks in this quarterly
report on Form 10-Q in greater detail under the heading "Factors Affecting
Future Operating Results." Also, these statements represent our estimates and
assumptions only as of the date of this report.
In this report, unless the context indicates otherwise, the terms "Adept," "we,"
"us," and "our" refer to Adept Technology, Inc., a California corporation, and
its subsidiaries.
This report contains trademarks and trade names of Adept and other companies.
Adept has 140 trademarks of which 15 are registered trademarks, some of which
include the Adept Technology logo, AIM(R), FireBlox(R), HexSight(R),
MetaControls(R), Adept Cobra 600(TM), Adept Cobra 800(TM), Adept SmartAmp(TM),
Adept SmartModule(TM), Adept SmartServo(TM), AdeptOne(TM), AdeptSix(TM),
AdeptViper(TM) and Adept i-Sight(TM).
OVERVIEW
We provide intelligent flexible production automation products, components and
services to our customers in many industries including the
electronics/communications, automotive, appliance, food and pharmaceuticals,
original equipment manufacturer, or OEM, and life sciences industries. This mix
varies considerably from period to period due to a variety of market and
economic factors. We utilize our portfolio of high reliability mechanisms,
high-performance motion controllers and application development software to
deliver automation products that meet our customers' increasingly complex
manufacturing requirements. We offer our customers comprehensive and tailored
automation products that reduce the time and cost to design, engineer and launch
products into high-volume production. The benefits of Adept automation products
include increased manufacturing flexibility for future product generations, less
customized engineering and reduced dependence on production engineers. Our
product range currently includes system design software, process knowledge
software, integrated real-time vision and multi-axis motion controls, machine
vision systems and software, industrial robots, and other flexible automation
equipment. Our software has not generally been sold or licensed separately,
though we intend to market and sell software licenses on a standalone basis in
the foreseeable future. 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 2004, we introduced the
Adept i-series robots, the first self-contained SCARA (Selective Compliance
15
Assembly Robot Arm) robot with the controller built inside the robot arm. These
robots are designed for a broad range of basic applications that are currently
utilizing dedicated automation or manual labor. We believe this SCARA technology
has had and will continue to have, a significant positive impact on our gross
margins during fiscal 2005 and beyond, as discussed in "Results of
Operations-Gross Margin" below.
During the quarter we introduced the AdeptViper(TM) 6-axis robot. We estimate
that the market for 6-axis robotics in material handling and assembly processes
is several times larger than the SCARA 4-axis market, and thus gives us expanded
sales opportunities in the industries we serve. This product is complementary to
Cobra and fits our current sales and marketing efforts.
The third quarter also saw the introduction of Adept iSight(TM), a vision
guidance and inspection product on an open PC platform. iSight provides
excellent object refinement and resolution, combined with a simple start-up
configuration and an intuitive application development environment for robotic
assembly and material handling applications. An initial target for iSight is to
complement i-Cobra sales with an option for a flexible parts feeder assembly. We
intend to expand iSight to provide new value-add applications in the future,
such as color and soft body recognition, and to integrate it with additional
products in our robot component portfolio.
Pursuant to approvals by our shareholders and Board of Directors, we effected
one-for-five reverse stock split on February 25, 2005. All current and
historical share and per share information has reflected the results of the
reverse stock split. The number of shares of common stock issued and outstanding
and the number of authorized shares of common stock and preferred stock has been
reduced according to the reverse stock split, but the rights and preferences of
the shares of our common stock have remained the same. The reverse stock split
will not change our financial condition, results from operations, the percentage
of ownership of management, the number of our shareholders or other aspects of
our business. However, the reverse stock split will increase our net income or
loss per share and net book value per share as a direct result of the reduction
in the number of outstanding shares of our common stock.
International sales generally comprise between 45% and 80% of our total revenues
for any given quarter, and represented approximately 77% of our total revenues
for the quarter ended April 2, 2005. In recognition of the increasingly
international nature of our business, late in the quarter we announced a new
global vertical market business initiative. The new initiative will focus
resources initially on developing applications for customers in the telecom,
data storage, and automotive component vertical markets. We plan to focus on
working directly with leading customers in these markets, providing direct
sales, service and engineering to develop more targeted products and
applications. By being involved directly with the end users during their product
planning phase, rather than learning about the end users' project after planning
has been completed, we believe we will be more successful getting our products
designed into the final specifications for production and assembly lines
This discussion summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the
three- and nine-month periods ended April 2, 2005. 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
April 2, 2005. This discussion should be read with the unaudited condensed
consolidated financial statements and related disclosures 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, 2004 included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on September 27, 2004.
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 U.S. generally accepted accounting
principles. 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
expenses, service contracts, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be
16
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 consolidated financial statements while considering accounting policies
that involve the most complex or subjective decisions or assessments. These
critical accounting policies described below include:
o revenue recognition;
o allowance for doubtful accounts;
o inventories;
o warranties;
o deferred tax valuation allowance; and
o foreign currency exchange gain (loss).
Revenue Recognition.
- --------------------
We generate revenues primarily from sales of production automation equipment and
parts, and to a lesser extent from support and service activities associated
with this equipment. A small portion of our revenues arises from sales of
software. Non-software product revenue consists primarily of sales of robots,
refurbished robots and spare parts. We recognize non-software product revenue in
accordance with Staff Accounting Bulletin 104, ("SAB 104"), when persuasive
evidence of a non-cancelable arrangements 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. We use the signed
purchase contract or purchase order as evidence of an arrangement. Product
revenues are normally recognized at the point of shipment from Adept facilities
since title and risk of loss passes to the customers at that time. Customers
have no right of return other than for product defects covered by our warranty.
Adept maintains a warranty liability based on its historical warranty experience
and managements' best estimate of Adept's warranty liability at each balance
sheet date. There are no acceptance criteria on our standard non-software
products. We do not deem the fee to be fixed or determinable where a significant
portion of the price is due after our normal payment terms, which are 30 to 90
days from the invoice date. In these cases, if all of the other conditions
referred to above are met, we recognize the revenue as the invoice becomes due.
In recording revenue, management exercises judgment about the collectibility of
receivables based on a number of factors, including the customer's past payment
history and its current creditworthiness. If we conclude that collection is not
reasonably assured, then the revenue is deferred until the uncertainty is
removed, generally upon receipt of payment. Our experience is that we have been
able to reliably determine whether collection is reasonably assured.
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 sold separately nor
are they marketed as separate product offerings to our customers. Our robots and
controllers have features that are enabled or enhanced through the use of the
software enabling tools and other software elements. 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. Adept believes that the software component of its
products is incidental to its products and services taken as a whole. As a
result, we recognize software revenue related to product sales in accordance
with SAB 104, in consort with SOP 97-2.
We recognize stand-alone software revenue in accordance with the American
Institute of Certified Public Accountants' Statement of Position 97-2 ("SOP
97-2"), Software Revenue Recognition, as amended by SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions.
Under SOP 97-2, revenue attributable to an element in a customer arrangement is
recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is
probable and (v) the arrangement does not require services that are essential to
the functionality of the software. 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
17
obligations are accrued upon shipment of the licensed product. For software that
is installed and integrated by the customer, revenue is recognized upon shipment
assuming functionality has already been proven in prior sales and there are no
customizations that would cause a substantial acceptance risk.
Service and Support revenue consists primarily of sales of spare parts and
refurbished robots. Service revenue also includes training, consulting and
customer support, the latter of which includes all field service activities;
i.e., maintenance, repairs, system modifications or upgrades. Revenues from
training and consulting are recognized at the time the service is performed and
the customer has accepted the work. These revenues are not essential to the
product functionality and, therefore, do not bear on revenue recognition policy
for Adept's component products.
Deferred revenues represent payments received from customers in advance of the
delivery of products and/or services, or before the satisfaction of all revenue
recognition requirements enumerated above, as well as cases in which we have
invoiced the customer but cannot yet recognize the revenue for the same reasons
discussed above.
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 creditworthiness,
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.
Our policy is to record specific allowances against known doubtful accounts. An
additional allowance is also 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 allowances are netted out of the respective
receivable balances for purposes of calculating this additional allowance. 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 this additional allowance percentage.
Inventories. Inventories are stated at the lower of standard cost, which
approximates actual cost under the first-in, first-out method, or market 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 liquidation 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.
Warranties. Our warranty policy is included in our Terms of Sale and states that
there are no rights of return, and that a refund may be made at Adept's
discretion, and only if there is an identified fault in the product and the
customer has complied with Adept's approved maintenance schedules and
procedures, and the product has not been subject to abuse. We provide for the
estimated cost of product warranties at the time 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
for repair or replacement. While we engage in extensive product quality programs
and processes, including actively 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.
18
Deferred Tax Valuation Allowance. We record a valuation allowance to reduce
deferred tax assets to the amount that is more likely than not 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 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.
Foreign Currency Exchange Gain (Loss). The Company applies Financial Accounting
Standards Board Statement No. 52 ("SFAS 52"), "Foreign Currency Translation,"
with respect to its international operations, which are primarily sales and
service entities. The accounts denominated in non-U.S. currencies have been
re-measured using the U.S. dollar as the functional currency. All monetary
assets and liabilities are remeasured at the current exchange rate at the end of
the period, nonmonetary assets and liabilities are remeasured at historical
exchange rates, and revenues and expenses are remeasured at average exchange
rates in effect during the period. The Company performs a detailed review of the
underlying monetary and nonmonetary transactions each quarter to ensure these
transactions are correctly evaluated based on FAS 52 pronouncement guidelines.
Adept does not currently apply a hedging strategy against its currency positions
as defined under FAS 133, Accounting for Derivative Instruments and Hedging
Activities.
Goodwill: 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.
Results of Operations
Revenues. Revenues decreased by 2.3% to $13.0 million for three months ended
April 2, 2005 as compared to $13.3 million for three months ended March 27,
2004. The decrease resulted from reduced sales of components for semiconductor
manufacturing systems, partially offset by increased sales of our new
AdeptViper(TM) 6-axis robot. We sold and delivered and recorded revenues in the
third quarter for 60 units of AdeptViper to a global cell phone contract
manufacturer as part of a multi-year manufacturing project.
Revenues for the nine months ended April 2, 2005 were $36.1 million, an increase
of 4.3% from revenues of $34.6 million for the nine months ended March 27, 2004.
The increases were attributable to increased sales of our advanced line of Cobra
4-axis robots, increased sales of 6-axis robots, and a software license sale in
the first quarter of fiscal 2005.
In terms of our business segments, Components revenues decreased 2.9% to $9.4
million for the three months ended April 2, 2005 from $9.7 million for the three
months ended March 27, 2004. Components revenues increased 5.5% to $25.8 million
for the nine months ended April 2, 2005 compared to $24.4 million in revenues
for the nine months ended March 27, 2004. Services and Support revenues were
$3.6 million for the three months ended April 2, 2005, unchanged from $3.6
million for the three months ended March 27, 2004. Services and Support revenues
increased 1.4% to $10.3 million for the nine months ended April 2, 2005, from
$10.2 million for the nine months ended March 27, 2004.
Our domestic sales were $3.0 million for the three months ended April 2, 2005
compared to $8.8 million for the three months ended March 27, 2004, a decrease
19
of 66%. Our domestic sales totaled $10.6 million for the nine months ended April
2, 2005, compared with $19.8 million for the nine months ended March 27, 2004, a
decrease of 46%. This trend towards a predominance of international sales is
likely to continue, as domestic manufacturing markets remain soft. Our
international sales were $10.0 million for the three months ended April 2, 2005
compared to $4.6 million for the comparable period in fiscal 2004, an increase
of 120%. Our international sales totaled $25.5 million for the nine months ended
April 2, 2005, compared with $14.8 million for the nine months ended March 27,
2004, an increase of 72%. The increase in revenues from international sales is
primarily attributable to strong sales associated with automotive component and
consumer electronics applications in Europe, aided by the favorable exchange
rate between the euro and the U.S. dollar. In addition, sales in Asia increased
by $1.5 million or 88% to $3.2 million for the nine months ended April 2, 2005
as compared with the same period of the prior year. We are strengthening our
international presence with the introduction earlier in fiscal 2005 of European
sourced manufacturing and are in the process of staffing a service office in
China.
We expect that revenues from our international customers will continue to
account for a significant portion of our total revenue and approximately 40 to
50% of our product sales to European customers are priced in euros. The mix of
Euro denominated business has enhanced the competitiveness of our prices, and
has increased our revenues and gross margins as the Euro has strengthened
relative to the US dollar, however, future fluctuations in the rate of exchange
between the dollar and the euro have the potential to significantly impact,
either positively or adversely, our business and operating results.
Gross Margin. Gross margin as a percentage of revenues was 45.8% for the three
months ended April 2, 2005 compared to 41.3% for three months ended March 27,
2004. The gross margin improvement resulted principally from improved robot
component designs, increased outsourcing of robot subassemblies, and reduced
manufacturing overhead costs. Gross margin as a percentage of revenues was 46.4%
for the nine months ended April 2, 2005 compared to 39% for the nine months
ended March 27, 2004. The improvement in gross margin for the nine month period
reflects the aforementioned impacts for the quarter, as well as the positive
impact of a vision software license sale in the first quarter, which had minimal
associated cost of revenues. Over the past several quarters, we have
aggressively sought to outsource those processes where we provide little or no
additional manufacturing value. The improvements in production volumes combined
with the lower fixed overhead expense resulted in lower unit standard costs and
higher corresponding gross margins. We expect gross margins to be in the 44% to
47% range for the fourth quarter of fiscal 2005 due to continuing cost
improvement programs, and the introduction and sale of higher margin products.
We could, however, experience significant fluctuations in our gross margin
percentage due to changes in volume, changes in availability of components,
changes in product configuration, increased price based competition, and/or
changes in sales mix, particularly with respect to any software license sales.
Research, Development and Engineering Expenses. Research, development and
engineering expenses associated with continuing operations increased by 5.4% to
$1.8 million, or 13.7% of revenues for the three months ended April 2, 2005,
from $1.7 million, or 12.7% of revenues for three months ended March 27, 2004.
Research, development and engineering expenses decreased by 4.0% to $5.0
million, or 13.9% of revenues, for the nine months ended April 2, 2005 from $5.2
million, or 15.1% of revenues, for the nine months ended March 27, 2004. This
decrease is primarily the result of decreased spending on fewer, more focused,
development projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.8 million, or 29.3% of revenues, for the three
months ended April 2, 2005, unchanged from $3.8 million or 28.7% of revenues for
the three months ended March 27, 2004. Selling, general and administrative
expenses were $11.5 million, or 31.7% of revenues, for the nine months ended
April 2, 2005, as compared with $10.8 million, or 31.3% of revenues, for the
nine months ended March 27, 2004. The increase reflected increases in sales and
marketing expenditures to secure new business in the consumer electronic and
telecommunications industries, as well as increased activity in customer service
to expand our reach in Europe and China.
Restructuring Charges. Restructuring charges for the third quarter and first
nine months of fiscal 2004 reflect a reversal of $697,000 in previously accrued
restructuring charges. This resulted from favorable settlement of an outstanding
lease obligation. We reversed an additional $33,000 in restructuring charges, in
fiscal 2005 which resulted primarily from the sublease of unused sales offices.
Intangible Assets Amortization. Intangible assets amortization was $49,000 for
three months ended April 2, 2005 compared to $142,000 for three months ended
March 27, 2004. Intangible assets amortization was $146,000 for the nine months
20
ended April 2, 2005 compared to $427,000 for the nine months ended March 27,
2004. The amortization has declined because certain of the intangible assets
have now been fully amortized.
Interest Expense, Net. Interest expense, net of interest income, was $58,000 for
the three months ended April 2, 2005 compared to $71,000 for the three months
ended March 27, 2004. Net interest expense for the nine months ended April 2,
2005 was $133,000 compared to $334,000 for nine months ended March 27, 2004.
Interest expense for the three and nine month periods ended April 2, 2005 and
March 27, 2004 included interest expense accrued on a $3.0 million convertible
note, which bears a 6% fixed interest rate. In addition, interest expense for
the three and nine months ended March 27, 2004 includes charges incurred on
advances received under an accounts receivable purchase facility and a
promissory note, both of which have since been repaid.
Foreign Currency Exchange Gain. Foreign currency exchange gain was $50,000 for
the three months ended April 2, 2005 compared to $34,000 for the three months
ended March 27, 2004. Foreign currency exchange gain for the nine months ended
April 2, 2005 was $374,000 compared to $399,000 for nine months ended March 27,
2004. These foreign currency exchange gains resulted primarily from our sales
activity in Europe and the strengthening of the euro versus the U.S. dollar
during fiscal 2005 and 2004. In the past we have included foreign currency
exchange gains or losses in selling, general and administrative expenses, but
beginning in the second quarter of fiscal 2005, we now classify foreign currency
gains or losses as a separate line item in the income statement.
Provision (benefit) for Income Taxes. Adept typically provides for income taxes
during interim reporting periods based upon an estimate of our annual effective
tax rate. We also maintain a liability to cover the cost of additional tax
exposure items on the filing of federal and state income tax returns as well as
filings in foreign jurisdictions. Each of these filing jurisdictions may audit
the tax returns filed and propose adjustments. Adjustments arise from a variety
of factors, including different interpretations of statutes and regulations. Our
effective tax rate was 6.9% for the nine months ended April 2, 2005 whereas we
recorded a benefit from income taxes from continuing operations of $1.4 million
for the nine months ended March 27, 2004, which reflects a benefit for the
reversal of previously accrued taxes. In fiscal 2005 we recorded a tax provision
related to our state franchise taxes and a provision related to our Singapore
subsidiary tax.
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents decreased $1.6 million from
June 30, 2004. Net cash used in operating activities of $1.7 million was
attributable to an increase in inventory of $2.5 million and a decrease in other
current liabilities of $1.5 million, partially offset by a decrease in accounts
receivable of $1.2 million. The inventory increase was the result of a program
to improve customer order lead times by maintaining standard robot components in
stock, as well as increased parts inventory to support expansion of the
remanufacturing and service business. The reduction in other current liabilities
was primarily the result of a decrease in deferred revenues as the requirements
for revenue recognition were achieved. The decline in accounts receivable
resulted from significant collection of past due receivables. Other items
affecting the operating cash flows were net income of $392,000 augmented by
non-cash charges including depreciation and amortization of $825,000.
Cash used in investing activities of $661,000 reflects capital expenditures
primarily for test equipment, test stations, and computer hardware and software,
and includes investment in our Dortmund, Germany facility to begin carrying out
final assembly and test operations.
Cash provided by financing activities of $772,000 reflects activity in our
employee stock purchase program as well as stock option exercises.
We have limited cash resources, and because of certain regulatory restrictions
impeding 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 held outside the United States, although this portion is estimated
to be less than $500,000. As of April 2, 2005, we had an aggregate cash balance
of $3.4 million, and a short term receivables financing credit facility of up to
$4.0 million, with no outstanding balance at quarter-end. We currently depend on
funds generated from operating activities plus our cash, and the funds available
through our credit facility to meet our operating requirements. As a result, if
any of our assumptions, some of which are described below, are incorrect, we may
have difficulty satisfying our obligations in a timely manner. We expect our
cash balance to be between $3 and $5 million at June 30, 2005, the end of our
fiscal year. Our ability to effectively operate and grow our business is
21
predicated upon certain assumptions, including (i) that we will receive
continued timely payment of outstanding receivables and not otherwise experience
severe cyclical swings in our billings and associated receipts resulting in a
shortfall of cash available for our disbursements during any given quarter, (ii)
that we will not incur significant unplanned capital expenditures for the
balance of fiscal 2005, and (iii) that funds remain available under a new credit
facility. We believe our sources of funds will be sufficient to finance our
operations for at least the next twelve months, and if necessary we will take
various actions to reduce our operating expenses in an effort to achieve that
result.
Our Loan and Security Agreement with Silicon Valley Bank, under which we were
permitted to borrow amounts not to exceed the lesser of $4.0 million or the sum
of 80% of our eligible accounts receivable plus any overadvance loans granted by
SVB from time to time in its sole and absolute discretion, terminated by its
terms on April 22, 2005
We have received a commitment letter from Silicon Valley Bank ("SVB") pursuant
to which final documentation is being prepared contemplating a new loan and
security agreement with SVB (the "Loan and Security Agreement") that replaces
our prior facility with SVB. Under the terms of the proposed Loan and Security
Agreement, we may borrow amounts under the credit facility not to exceed the
lesser of $5.0 million or the sum of 80% of our eligible accounts receivable.
Eligible accounts receivable may include some receivables with extended terms,
to be determined on a case-by-case basis, plus a defined level of permitted
foreign receivables. In addition there is an overadvance facility in which
overadvances will be allowed up to $1.0 million; however, overadvances cannot
exceed 30% of eligible accounts receivable. In connection with the Loan and
Security Agreement, SVB will hold a security interest in substantially all of
our assets. Loans made under the proposed facility would bear interest at a rate
equal to the prime rate as announced from time to time by SVB ("Prime Rate"),
plus 1.50% per annum, as adjusted. Upon entering into the Loan and Security
Agreement, we would be required to pay a one-time commitment fee of $20,000, and
make quarterly payments in arrears for any unused available loan amounts at a
rate of 0.20% per annum.
The proposed Loan and Security Agreement would include certain financial and
other covenants with which we must comply. Financial covenants specify that
Adept must maintain a tangible net worth of at least $10.5 million, plus 50% of
all consideration we may receive for any equity securities and subordinated debt
we issue subsequent to the date of the Loan and Security Agreement, plus 50% of
our net income in each fiscal quarter ending after the date of the agreement.
Once an increase in our minimum tangible net worth takes effect, it remains in
effect thereafter, and does not decrease.
Completion of the credit facility is subject to completion of final
documentation and customary closing conditions.
Contractual Obligations
Total long term debt and operating lease obligations at April 2, 2005 were $12.0
million, which consists of $9.0 million in operating lease obligations and $3.0
million in long-term debt in the form of a convertible subordinated note due
June 30, 2006. This reflects a reduction change of $400,000 from the second
quarter for contract obligations under one year that were realized during the
quarter. A summary of our long-term debt and operating lease obligations as of
April 2, 2005 follows
Less Than More than 5
Total 1 Year 1-3 Years 3-5 Years Years
----------- ------------ ----------- ------------ ------------
Operating lease obligations........ $ 8,993 $ 518 $ 3,359 $ 2,673 $ 2,443
Long-term debt..................... 3,000 - 3,000 - -
----------- ------------ ----------- ------------ ------------
Total long-term debt and
Operating lease obligations..... $ 11,993 $ 518 $ 6,359 $ 2,673 $ 2,443
=========== =========== =========== =========== ===========
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued Statement
123R, Share-Based Payment, which is a revision of Statement 123, Accounting for
Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends Statement No. 95, Statement
of Cash Flows.
22
Statement 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values (i.e., proforma disclosure is no longer an alternative to
financial statement recognition). Statement 123R is effective for public
companies (excluding small business issuers) at the beginning of the first
interim or annual period beginning after June 15, 2005. Statement 123R will be
effective for Adept for the quarter ending October 1, 2005. See "Stock-Based
Compensation" in Note 2 to our Condensed Consolidated Financial Statements for
the pro forma net income (loss) and net income (loss) per share amounts, for the
three months ended April 2, 2005 and March 27, 2004. Although we have not yet
determined whether the adoption of SFAS No. 123R will result in future amounts
that are similar to the current pro forma disclosures under SFAS No. 123, we are
evaluating the requirements under SFAS No. 123R. Current estimates of option
values using the Black-Scholes method may not be indicative of results from the
final methodology the Company elects to adopt for reporting under Statement 123R
guidelines.
Statement 151, Inventory Cost, an amendment to ARB No 43, Chapter 4, was issued
by the FASB in November, 2004. The pronouncement clarifies that abnormal amounts
of idle facility exposure, freight, handling costs and wasted materials
(spoilage) be recognized as current period charges and require the allocation of
fixed production overheads to inventory based on the normal capacity of
production facilities. Statement 151 is the result of a broader effort by the
FASB to improve the comparability of cross-border financial reporting by working
with the International Accounting Standards Board (IASB) toward development of a
single set of high quality accounting standards. Statement 151 is effective for
inventory costs incurred during fiscal periods beginning after June 15, 2005. We
believe that we are currently following the practices mandated in Statement 151,
and as a result, we do not anticipate that the adoption of Statement 151 will
have a significant impact on the results of operations.
Statement 153, Exchanges of Nonmonetary Assets, was issued subsequent to the
November 17-18, 2004 EITF Meeting and is effective for asset exchanges occurring
in fiscal periods beginning after June 15, 2005. FAS 153 amends paragraphs 20
and 21 of APB Opinion 29 as follows. A nonmonetary exchange shall be measured
based on the recorded amount (after reduction, if appropriate, for an indicated
impairment of value) of the nonmonetary asset relinquished, and not on the fair
values of the exchanged assets, if any of the following apply: (a) fair value is
not determinable, (b) the exchange transaction is to facilitate sales to
customers, (c) exchange transactions lack commercial substance. A nonmonetary
exchange has commercial substance if the entity's future cash flows are expected
to change significantly as a result of the exchange due to: (a) the
configuration (risk, timing and amount) of future cash flows of the assets
received differs significantly from cash flows of assets transferred, or (b) the
entity specific value of the asset received differs from the entity specific
value of the asset transferred, and the difference is significant in relation to
the fair values of the assets exchanged. We do not anticipate the adoption of
FAS 153 will have a significant impact on our financial condition or results of
operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Risks Related to Our Business
Our operating results fluctuate from quarter to quarter due to factors which are
difficult to forecast, are often out of our control and can be extremely
volatile.
Our past revenues and other operating results may not be accurate indicators of
our future performance, and you should not rely on such results to predict our
future performance. Our operating results have been subject to significant
fluctuations in the past, and could be subject to fluctuations in the future.
The factors that may contribute to these fluctuations include:
o our limited cash resources;
o our ability to effectively manage our working capital;
o fluctuations in aggregate capital spending, cyclicality and other
economic conditions domestically and internationally in one or more
industries in which we sell our products;
o changes or reductions in demand in the electronics/communications,
automotive, food, pharmaceutical, and other markets we serve;
o a change in market acceptance of our products or a shift in demand for
our products;
o new product introductions by us or by our competitors;
23
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 channel;
o exchange rate fluctuations;
o seasonal fluctuations in demand and our associated revenue, reflected
in lower bookings in our first fiscal quarter after higher bookings in
our fourth fiscal quarter;
o our ability to expand our product offerings through acquired
technologies and products;
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.
Revenues are also impacted by our gross margins. Our gross margins can vary
greatly for a number of reasons, and our operating results tend to fluctuate as
a result of the variance in gross margins. The mix of products we sell can vary
from period to period, particularly with respect to the volume of lower margin
hardware products (such as mechanical subsystems purchased from third party
vendors), and higher margin software products. Other factors that impact gross
margins include:
o currency exchange rate fluctuations for our international sales;
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 products and
enhancements;
o the costs to customize our systems;
o the volume of products produced and associated production volume
variances, if any, generated;
o our efforts to enter new markets; and
o certain inventory-related costs including obsolescence of products and
component demand changes resulting in excess inventory.
We generally recognize product revenues upon shipment or, for certain
international sales, upon receipt 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 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 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. 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.
Similarly, our indirect costs, production capacity and operating expenses are
largely fixed in the short run. 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 cost of revenue increases and our operating results for the period could be
materially adversely affected. Further, 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 and substantially impact our liquidity. 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.
Our international operations and sales subject us to foreign currency exchange
risks, divergent regulatory requirements and other financial and operating risks
outside of our control that may harm our operating results.
We have significant operations outside the United States. International sales
from continuing operations were $25.5 million for the nine months ended April 2,
2005, $22.7 million for the fiscal year ended June 30, 2004, and $17.1 million
for the fiscal year ended June 30, 2003. This represented 70.6%, 46.1% and 44.8%
24
of net revenue for the respective periods. We expect that revenue from our
international operations will continue to account for a significant portion of
our total revenue. We also purchase some critical 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, including
terrorist activity;
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.
Ongoing global economic and political developments and the resulting changes in
currency exchange rates, most notably between the U.S. dollar, the euro, and the
Japanese yen, have had, and may in the future have, a significant effect on our
business, operating results and financial condition. The decline in value of the
U.S. dollar to the euro in fiscal 2004 and 2005 has resulted in currency
exchange gain for us, and future fluctuations may result in significant gains or
losses. If there is an increase in the rate at which a foreign currency
exchanges into U.S. dollars, the dollar has appreciated relative to the foreign
currency, and it will take more of the foreign currency to equal the same amount
of U.S. dollars than before the rate increase. Pricing our products and services
in U.S. dollars in this circumstance results in an increase in the price for our
products and services compared to those products of our competitors that are
priced in local currency. This could result in our prices being uncompetitive in
markets where business is transacted in the local currency. 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 and elsewhere, we may
have to provide discounts or otherwise effectively reduce our prices, resulting
in a lower margin on products sold in Europe and other relevant locations.
Continued change in the values of the euro 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 weakness in underlying economic conditions in certain
Asian countries may continue to impact our sales to OEM customers who deliver
to, are located in, or whose projects are based in those Asian countries. 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 have limited cash resources, and the possibility of future operating losses,
negative cash flow and debt obligations could impair our operations and
revenue-generating activities and adversely affect our results of operations.
We have limited cash resources, and because of certain regulatory restrictions
impeding 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, although this portion is estimated at less than $500,000. As of
April 2, 2005, we had an aggregate cash balance of $3.4 million, and a short
term credit facility of up to $4.0 million, under which no amounts were
outstanding which expired on April 22, 2005. We have received a commitment
letter on a new credit facility of up to $5.0 million subject to completion of
final documentation and customary closing conditions. We currently depend on
funds generated from operating activities plus our cash and the funds available
through our credit facility to meet our operating requirements. As a result, if
any of our assumptions, some of which are described below, are incorrect, we may
have difficulty satisfying our obligations in a timely manner. Our ability to
25
effectively operate and grow our business is predicated upon certain
assumptions, including (i) that we will experience 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, (ii) that we will not incur additional
unplanned capital expenditures in fiscal 2005, (iii) that funds remain available
under our existing credit facility or a new credit facility.
If our projected revenue falls below current estimates or if operating expenses
exceed current estimates beyond our available cash resources, we may be forced
to curtail our operations, or, at a minimum, 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. Any of these actions would
adversely impact our business and results of operations.
The long sales cycle, customer evaluation process, and implementation period of
our products may increase the costs of obtaining orders and reduce the
predictability of our earnings.
Our products are technologically complex. Prospective customers generally must
commit significant resources to test and evaluate our products and to install
and integrate them into larger systems. Orders expected in one quarter may shift
to another quarter or be cancelled with little advance notice as a result of the
customers' budgetary constraints, internal acceptance reviews, and other factors
affecting the timing of customers' purchase decisions. In addition, customers
often require a significant number of product presentations and demonstrations,
in some instances evaluating equipment on site, before reaching a sufficient
level of confidence in the product's performance and compatibility with the
customer's requirements to place an order. As a result, our sales process is
often subject to delays associated with lengthy evaluation and approvals that
typically accompany capital expenditure approval processes. 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, prospective
customers may be reluctant to purchase our products, which would have an adverse
effect on our revenue.
Sales of our products depend on the capital spending patterns of our customers,
which tend to be cyclical; we have experienced reduced demand in some of the
industries in which we operate, which has and may continue to adversely affect
our revenue and we may not be able to quickly ramp up if demand significantly
increases.
Intelligent automation systems using our products can range in price from
$25,000 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, a significant portion of our revenues comes from sales in
this region, and 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 electronic/communications and food and pharmaceuticals industries, and
resulting cutbacks in capital spending would have a direct, negative impact on
our business.
Downturns in the industries we serve often occur in connection with, or
anticipation of, maturing product cycles for both companies and their customers
and declines in general economic conditions. Industry downturns have been
characterized by reduced demand for 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
while at the same time, continue to motivate and retain key employees. In fiscal
2005, U.S. manufacturing markets remain soft. 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 additional
cost reductions in fiscal 2003, 2004 and 2005 to further realign our business.
Despite this restructuring activity, our ability to reduce expenses in response
to any downturn in any of these industries 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
26
or purchase inventories for products that we cannot sell. We believe our future
performance will continue to be affected by the cyclical nature of these
industries, and thus, any future downturn in these industries could therefore
harm our revenue and gross margin if demand drops or average selling prices
decline.
Industry upturns have been characterized by abrupt increases in demand for
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.
We have significant dependence on outsourced manufacturing capabilities and
single source suppliers. If we experience disruptions in the supply of one or
more key components, we may be 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 increased reliance on outsourced manufacturing and other
capabilities, and particularly 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 for significant price increases in the components and
mechanical subsystems;
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 do not have contracts with certain of our sole or single source suppliers. If
any one of our 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. We have limited control over the quality of certain manufactured
products and their acceptance by our customers. 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. Any quality issues could result in customer dissatisfaction, lost sales,
and increased warranty costs. 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 such product line.
Problems of this nature with our suppliers may occur in the future.
Disruption, significant price increases, 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,
require us to absorb a significant price increase or risk pricing ourselves out
of the market, 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 and
cost effective 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, or due to component price increases
causes us to be priced out of the market, we would be required to write off the
excess inventory. A prolonged inability to obtain adequate timely deliveries of
key components or obtain components at prices within our business model could
have a material adverse effect on our business, financial condition and results
of operations.
27
If we cannot identify and make acquisitions of other technologies and products,
our ability to expand our operations and increase our revenue may be impaired.
In the past, a significant portion of our growth was attributable to
acquisitions of other technologies and businesses. We expect that acquisitions
of complementary products, technologies in the future may play an important role
in our ability to expand our operations and increase our revenue. 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 will 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.
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
revenue 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 revenue 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.
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Over the past three years, our total expenditures for research and development
have declined. We have limited resources to allocate to research and development
and must allocate our resources among a wide variety of projects. Because of
intense competition in our industry, the cost of failing to invest in strategic
products is high. If we fail to adequately invest in research and development,
we may be unable to compete effectively in the intelligent automation markets in
which we operate.
If we fail to maintain and enhance an effective system of internal controls and
disclosure controls, we may not be able to accurately report our financial
results or obtain an unqualified attestation report from our independent
auditors in the future, which could subject us to regulatory sanctions or
litigation, harm our operating results and cause the trading price of our stock
to decline.
Effective internal controls required under Section 404 of the Sarbanes-Oxley Act
of 2002 and disclosure controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, our business and operating results could be
harmed. We have in the past discovered, and may in the future discover, areas of
our internal controls and disclosure controls that need improvement. For
example, after our second quarter of fiscal 2005, our external auditors
identified a "material weakness" in the course of their review which meant that
they believed that there was "a significant deficiency, or a combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected." Although we believe we have strengthened our internal
controls to address the matter that gave rise to the "material weakness," we
seek to continue improving our internal controls and disclosure controls. To
prepare for compliance with Section 404, we have undertaken certain actions
including the adoption of an internal plan, which includes a timeline and
schedule of activities for the evaluation, testing and remediation, as
necessary, of internal controls. These actions have resulted in and are likely
to continue to result in increased expenses, and have required and are likely to
continue to require significant efforts by management and other employees. In
the future, our independent auditors must evaluate management's assessment
concerning the effectiveness of our internal controls over financial reporting
and render an opinion on our assessment and the effectiveness of our internal
controls over financial reporting. We cannot be certain that our internal
controls measures will be timely or successful to ensure that we implement and
maintain adequate controls over our financial processes and reporting in the
future and our independent auditors may not be able to render an unqualified
attestation concerning our assessment and the effectiveness of our internal
controls. Any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could subject us to regulatory
sanctions, harm our business and operating results or cause us to fail to meet
our reporting obligations. Inferior internal controls could also harm our
reputation and cause investors to lose confidence in our reported financial
information, which could have a negative impact on the trading price of our
stock.
We may incur credit risk related losses because many of the resellers we sell to
are small operations with limited financial resources.
A substantial portion of our sales are 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 revenue or credit losses.
Proposed regulations related to equity compensation could adversely affect our
results of operations.
On December 16, 2004, the Financial Accounting Standards Board issued Statement
123R, Share-Based Payment, which is a revision of Statement 123, Accounting for
Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends Statement No. 95, Statement
of Cash Flows. Statement 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values and does not allow proforma disclosure as
an alternative to financial statement recognition. Statement 123R will be
effective for Adept for the quarter ending October 1, 2005. Adept is currently
evaluating option valuation methodologies and assumptions in light of FAS 123R
pronouncement guidelines related to employee stock options. Current estimates of
option values using the Black-Scholes method may not be indicative of results
from the final methodology adopted by the Company for reporting under Statement
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123R guidelines, and recognition of compensation costs for stock options granted
at fair market value could adversely affect our results of operations. Adept
expects the adoption will have a significant impact on our Condensed
Consolidated Statements of Operations.
We do not generally have long-term contracts with our customers, and our order
bookings and backlog cannot be relied upon as a future indicator of sales.
We generally do not have long-term contracts with our customers and existing
contracts and purchase commitments may, under certain circumstances, be
cancelled. As a result, our agreements with our customers do not provide
meaningful assurance of future sales. Furthermore, our customers are not
required to make minimum purchases and may cease purchasing our products at any
time without penalty. Backlog should not be relied on as a measure of
anticipated demand for our products or future revenue, 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. Because our customers are free to purchase products from our
competitors, we are exposed to competitive price pressure on each order. Any
reductions, cancellations or deferrals in customer orders could have a negative
impact on our financial condition and results of operations.
We have completed a management reorganization and have hired additional critical
management team personnel, and we may not successfully retain these personnel or
realize the expected benefits of the changes.
We hired our Chief Executive Officer, Mr. Robert Bucher, in November 2003. In
December 2003, our employment relationships with our former Chief Executive
Officer and Vice President, Research and Development, were terminated. We have
made and are continuing to make other changes in the management team, including
the elimination of some positions and the replacement of certain other
personnel. In March 2004, we promoted Matt Murphy to Vice President of
Operations and Product Development. In May and June 2004, we recruited a new
Vice President of Business Development, Vice President of Service and Support,
and a Chief Financial Officer. To achieve benefits from these personnel changes,
we must retain the services of Mr. Bucher, Mr. Strickland, our CFO, and other
key managerial personnel. In connection with this effort, we must minimize any
business interruption or distraction of personnel as a result of these changes
and our reorganization efforts. We cannot guarantee that we will be successful
in doing so, or that such management and personnel changes will result in, or
contribute to, improved operating results.
We have engaged in substantial restructuring activities in the past, and may
need to implement further restructurings in the future, and our restructuring
efforts may negatively impact our business.
The intelligent automation industry is subject to rapid change. We have
responded to increased 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 our businesses to meet competitive
pressures and customer needs, we cannot assure that we will be successful in
continuing to implement these restructuring activities or that the reductions in
workforce and other cost-cutting measures will not harm our business operations
and prospects. Our inability to structure our operations based on evolving
market conditions could negatively impact our business. We also cannot be
certain 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. Restructuring activities can create unanticipated
consequences and adverse impacts on the business, and we cannot be sure that any
future restructuring efforts will be successful.
We market and sell our products primarily through an indirect channel comprised
of third party resellers, and are subject to certain risks associated with this
method of product marketing and distribution.
We believe that our ability to sell products to system integrators and OEMs will
continue to be important to our success. However, 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
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significant reduction in revenue 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.
We cannot control the procurement, either with respect to the timing or amount
of orders placed, by our resellers. We also cannot control the sales or
marketing efforts of the systems integrators and OEMs who sell our products,
which may result in lower revenue if they do not successfully market and sell
our products or choose instead to promote competing products.
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.
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. Our current or any future currency exchange risk management
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.
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 have also reduced headcount in connection with our restructurings and made
changes in other senior personnel including the hiring of a new Chief Financial
Officer at the beginning of fiscal 2005 and the promotion of our Vice President
of Operations and Product Development and the hiring of a Vice President of
Business Development, and Vice President, Service Operations, which changes may
lead to employee questions regarding future actions by Adept leading to
additional retention difficulties. Other than the CEO's offer letter, and offer
letters with certain of our officers that include only basic compensation terms,
we have no employment agreements with our senior management.
Forecasting our estimated annual effective tax rate is complex and subject to
uncertainty, and material differences between forecasted and actual tax rates
could have a material impact on our results of operations.
Forecasts of our income tax position and resultant effective tax rate are
complex and subject to uncertainty because our income tax position for each year
combines the effects of a mix of profits and losses earned by us and our
subsidiaries in tax jurisdictions with a broad range of income tax rates as well
as benefits from available deferred tax assets and costs resulting from tax
audits. To forecast our global tax rate, pre-tax profits and losses by
jurisdiction are estimated and tax expense by jurisdiction is calculated. If the
mix of profits and losses, our ability to use tax credits, or effective tax
rates by jurisdiction is different than those estimates, our actual tax rate
could be materially different than forecasted, which could have a material
impact on our results of operations.
We operate in several geo-political regions where the legal system tends to be
pro-labor. If we become subject to unfair hiring or termination claims, we could
be prevented from hiring needed personnel, incur liability for damages and/or
incur substantial costs in defending ourselves.
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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. We may also experience actions against us for employment terminations
which are perceived to be unjustified. Although to date we have not experienced
any material claims, defending ourselves from these claims could divert the
attention of our management away from our operations.
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 our hardware products do not comply with standards set forth by the European
Union, we will not be able to sell them in Europe.
The hardware products we sell in the European Union are required to comply with
European Union Low Voltage, Electro-Magnetic Compatibility and Machinery Safety
directives. The European Union mandates that our products carry the CE mark
denoting that these products are manufactured in strict accordance to design
guidelines in support of these directives. These guidelines are subject to
change and to varying interpretation. New guidelines impacting machinery design
go into effect each year. To date, we have retained TUV Rheinland to help
certify that our controller-based products, including some of our robots, meet
applicable European Union directives and guidelines. Although our existing
certified products meet the requirements of the applicable European Union
directives, we cannot provide any assurance that future products can be
designed, within market window constraints, to meet the future requirements. If
any of our robot products or any other major hardware products do not meet the
requirements of the European Union directives, we would be unable to legally
sell these products in Europe. Thus, our business, financial condition and
results of operations could be harmed. Such directives and guidelines could
change in the future, forcing us to redesign or withdraw from the market one or
more of our existing products that may have been originally approved for sale.
Our 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
32
not be issued from currently pending or future applications. Moreover, our
existing patents or any new patents that may be issued may not be sufficient in
scope or strength to provide meaningful protection or any commercial advantage
to us.
We may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
We may face costly intellectual property infringement claims.
We have received in the past, and may receive in the future, 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. The asserted claims and/or initiated litigation could
include claims against us or our manufacturers, suppliers, or customers,
alleging infringement of their proprietary rights with respect to our existing
or future products or components of those products. There are numerous patents
in the automation components industry. It is not always practicable to determine
in advance whether a product or any of its components infringes the intellectual
property rights of others. As a result, from time to time, we may be forced to
respond to intellectual property infringement claims to protect our rights or
defend a customer's rights. These claims, regardless of merit, could consume
valuable management time, result in costly litigation, or cause product shipment
delays, all of which could seriously harm our business, operating results and
financial condition. In settling these claims, we may be required to enter into
royalty or licensing agreements with the third parties claiming infringement.
These royalty or licensing agreements, if available, may not have terms
favorable to us. Being forced to enter into a license agreement with unfavorable
terms could seriously harm our business, operating results and financial
condition. Any potential intellectual property litigation could force us to do
one or more of the following:
o pay damages, license fees or royalties to the party claiming
infringement;
o stop selling products or providing services that use the challenged
intellectual property;
o obtain a license from the owner of the infringed intellectual property
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o redesign the challenged technology, which could be time-consuming and
costly.
If we were forced to take any of these actions, our business, financial
condition and results of operations may suffer.
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.
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 workforce
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 goodwill
impairment write-offs, amortization of intangible assets other than
goodwill, 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.
33
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.
Risks Related to Our Industry
The market for intelligent automation products is intensely competitive, which
may make it difficult to manage and grow our business or to maintain or enhance
our profitability.
We compete with a number of robot, motion control, machine vision, and
simulation software companies. Many of our competitors have substantially
greater financial, technical, and marketing resources than we do. 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.
We believe that other 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.
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
revenue may decline.
We market products for the electronic/communications, automotive, appliance,
food, 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.
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We may not receive significant revenue from our current research and development
efforts for several years, if at all.
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 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 revenue
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 revenue would decline.
We must comply with U.S. Department of Commerce regulations in shipping our
software products and other technologies outside the United States. Any
significant future difficulty in complying could harm our business, financial
condition and results of operations.
Risks Related to our Stock
Our common stock trades on the OTC Bulletin Board, which may negatively impact
the trading activity and price of our common stock.
Our common stock trades on the OTC Bulletin Board, which is generally considered
less liquid and efficient than Nasdaq and other listed exchanges. Trading in our
stock has been relatively thin with increased price volatility because smaller
quantities of shares are bought and sold, transactions may take longer to
complete, and securities analysts' and news media coverage of Adept has
diminished. These factors could result in lower prices and larger spreads in the
bid and ask prices for our common stock. We completed a 1-for-5 reverse stock
split effective February 25, 2005, and this could further reduce liquidity.
Reduced liquidity may reduce the value of our common stock and our ability to
use our equity as consideration for an acquisition or other corporate
opportunity. In addition, the reverse split decreased the number of shares
outstanding, giving individual orders the potential to create increased
volatility in our stock price. Our stock's OTC status could result in a number
of other negative implications, including the potential loss of confidence by
suppliers, customers, and employees, the lack of institutional investor
interest, the availability of fewer business development and other strategic
opportunities, and the additional cost of compensating our employees using cash
and equity compensation.
The conversion of our outstanding warrants and a note and the sale of a
substantial amount of our common stock, including shares issued upon exercise of
outstanding options, warrants, or our convertible note in the public market
could adversely affect the prevailing market price of our common stock.
We had an aggregate of 6,134,418 shares of common stock outstanding as of May
13, 2005. In November 2003, we completed a private placement of an aggregate of
approximately 2.2 million shares of common stock to several accredited
35
investors. Investors in the 2003 financing also received warrants to purchase an
aggregate of approximately 1.1 million shares of common stock at an exercise
price of $6.25 per share, with certain proportionate anti-dilution protections,
and these warrants could be exercised at any time. We have also issued a $3.0
million convertible note due June 30, 2006 to our landlord, convertible at the
option of the holder at a price of $5.00 per share for 600,000 shares. We have
registered for resale by the investors the shares of common stock issued and
issuable upon exercise of the warrants issued in the 2003 financing, in addition
to 614,827 shares acquired by JDS Uniphase Corporation upon conversion of its
preferred stock of Adept and the shares issuable upon conversion of the
convertible note. The resulting shares carry certain other rights, including
piggyback registration rights, participation rights and co-sale rights in
certain equity sales by us or our management. Selling security holders included
in the registration statement are offering up to an aggregate of approximately
4.5 million shares of our common stock, 1,711,112 shares of which are not
currently outstanding but may be in the future.
Additionally, at May 13, 2005, options to purchase approximately 773,318 shares
of our common stock were outstanding under our stock option plans, and an
aggregate of 1,159,747 shares of common stock were issued or reserved for
issuance under our stock option plans. We also issue shares under our employee
stock purchase plan. Shares of common stock issued under these plans will be
freely tradable in the public market, subject to the Rule 144 limitations
applicable to our affiliates. Silicon Valley Bank (SVB) also holds a warrant to
purchase 20,000 shares of our common stock, with an exercise price of $5.00 per
share. The exercise of options, and conversion of the warrants and note will
significantly increase the number of conversion shares outstanding, diluting the
ownership interests of our existing shareholders. Further, the sale of a
substantial amount of our common stock, including shares issued upon exercise of
these outstanding options or issuable upon exercise of our warrants, convertible
notes, or future options in the public market could adversely affect the
prevailing market price of our common stock.
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.
The Board of Directors has the authority to issue, without further action by our
shareholders, up to 1,000,000 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. 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 fluctuations in operating results;
o our liquidity needs and constraints;
o our restructuring activities and changes in management and other
personnel;
o the trading of our common stock on the OTC Bulletin Board;
o the business environment, including the operating results and stock
prices of companies in the industries we serve;
o future announcements concerning our business or that of our competitors
or customers;
o the introduction of new products or changes in product pricing policies
by us or our competitors;
o litigation regarding proprietary rights or other matters;
o change in analysts' earnings estimates;
o developments in the financial markets;
o general conditions in the intelligent automation industry; and
o perceived dilution from stock issuances for acquisitions, our 2003
equity financing, the convertible note conversion, the SVB financing
warrant, and other transactions.
36
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.
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.
Recent legislation, higher liability insurance costs and other increased costs
of being public are likely to impact our future consolidated financial position
and results of operations.
Recently there have been significant regulatory changes, including the
Sarbanes-Oxley Act of 2002 and rules and regulations promulgated as a result of
the Sarbanes-Oxley Act, and there may be new accounting pronouncements or
regulatory rulings that will have an impact on our future financial position and
results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes and
proposed legislative initiatives following several highly publicized corporate
accounting and corporate governance failures are likely to increase general and
administrative costs. In addition, insurance companies significantly increased
insurance rates as a result of higher claims over the past year, and our rates
for our various insurance policies increased as well. These and other potential
changes could materially increase the expenses we report under generally
accepted accounting principles and adversely affect our financial position and
operating results.
37
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
amounts and related weighted-average interest rates for our investment
portfolio, all of which matures in less than twelve months.
April 2 Fair
(in thousands) 2005 Value
-------------- ---- -----
Cash and cash equivalents .......... $ 3,364 $ 3,364
Average rate ...................... 1.0% 1.0%
Total Investment Securities ..... $ -- $ --
Average rate ...................... -- --
We mitigate default risk by investing in high credit quality securities and by
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. Our portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity and contains what management believes to be 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. We have historically
employed, but do not currently employ, a currency hedging strategy.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the fiscal quarter ended April 2, 2005, Adept carried out an
evaluation, under the supervision and with the participation of members of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of Adept's disclosure controls
and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of
1934. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of April 2, 2005, our disclosure controls and
procedures, designed to ensure that information related to Adept and our
consolidated subsidiaries is recorded, processed, and reported timely and is
accumulated and made known to our Chief Executive Officer and Chief Financial
Officer to allow timely decisions regarding required disclosures were effective.
In relation to the quarter ended January 1, 2005, our independent auditors Ernst
& Young LLP, advised us that they observed a material weakness related to our
internal controls over financial reporting as defined in Public Company
Accounting Oversight Board ("PCAOB") Standard No. 2. This material weakness
related to a failure to correctly apply FAS 52 to currency-related transactions.
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 that
period . We have reviewed prior quarterly and annual financial statements, and
have determined that we did not make a similar error in prior periods. Adept
management believes this internal control deficiency has been remediated through
improved processes covering foreign exchange transactions, and continuous
compliance review by the Corporate Controller. We are continuing to strengthen
our internal control procedures to ensure all aspects of our financial reporting
process, including FAS 52 application, are reviewed and approved by our
Corporate Controller to evidence full compliance with U.S. generally accepted
accounting principles. In addition, we have hired several additional personnel
in our accounting and reporting function, updated our revenue recognition
policy, and added expertise in accounting for all new contracts to enhance our
internal controls.
Our 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
38
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.
We continue to improve and refine our internal controls as an ongoing process.
Other than as summarized above, there have been no changes in our internal
controls over financial reporting or other factors that have materially
affected, or are reasonably likely to materially affect, our internal controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings or claims, either
asserted or unasserted, which arise in the ordinary course of our business. We
have reviewed pending legal matters and believe that the resolution of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
Adept has in the past received communications from third parties asserting that
we have infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement. While it is not
feasible to predict or determine the likelihood or outcome of any actual or
potential actions from such assertions against us, we believe the ultimate
resolution of these matters will not have a material adverse effect on our
financial position, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 17, 2005, the Board of Directors amended the 2001 Stock Option Plan to
make the option vesting upon certain events provisions consistent with those of
Adept's other equity incentive plans.
39
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report.
3.1 Certificate of Amendment of Articles of Incorporation of Adept
Technology, Inc. (incorporated by reference to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on February
25, 2005.
3.2 Amendment to Bylaws of Adept Technology, Inc.
10.1 Amended and Restated 2004 Director Option Plan (incorporated by
reference to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 15, 2005 (the "March 8-K")).
10.2 Summary of Executive Officer Compensation, as amended (incorporated by
reference to the March 8-K).
10.3 Cash Bonus Plan (incorporated by reference to the March 8-K).
10.4 Amended 2001 Stock Option Plan.
10.5 Summary of Non-Employee Director Compensation, as amended (incorporated
by reference to the March 8-K).
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 by the Chief Executive Officer and the Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
40
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/ Robert R. Strickland
----------------------------------------
Robert R. Strickland
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: May 17, 2005
41
INDEX TO EXHIBITS
3.1 Certificate of Amendment of Articles of Incorporation of Adept
Technology, Inc. (incorporated by reference to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on February
25, 2005.
3.2 Amendment to Bylaws of Adept Technology, Inc.
10.1 Amended and Restated 2004 Director Option Plan (incorporated by
reference to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 15, 2005 (the "March 8-K").
10.2 Summary of Executive Officer Compensation (incorporated by reference to
the March 8-K).
10.3 Cash Bonus Plan (incorporated by reference to the March 8-K).
10.4 Amended 2001 Stock Option Plan.
10.5 Summary of Non-Employee Director Compensation, as amended (incorporated
by reference to the March 8-K).
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 by the Chief Executive Officer and the Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
42