- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-27122
ADEPT TECHNOLOGY, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 94-2900635
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 Rose Orchard Way
San Jose, California 95134
- ---------------------------------------- ----------
(Address of Principal executive offices) (Zip Code)
(408) 432-0888
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
The number of shares of the Registrant's common stock outstanding as of December
26, 1998 was 8,507,022.
- --------------------------------------------------------------------------------
ADEPT TECHNOLOGY, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 26, 1998 and June 30, 1998.......................... 3
Condensed Consolidated Statements of Income
Three and six month periods ended December 26, 1998 and
December 27, 1997............................................ 4
Condensed Consolidated Statements of Cash Flows
Three and six month periods ended December 26, 1998 and
December 27, 1997........................................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 20
Signatures.................................................... 20
Index to Exhibits............................................. 21
2
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 26, June 30,
1998 1998(1)
------- -------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,941 $ 9,603
Short-term investments 11,921 11,300
Accounts receivable, less allowance for doubtful accounts of
$654 at December 26, 1998 and $452 at June 30, 1998 17,828 19,904
Inventories 12,665 15,190
Deferred tax assets and prepaid expenses 4,617 4,766
------- -------
Total current assets 55,972 60,763
Property and equipment at cost 23,134 22,138
Less accumulated depreciation and amortization 17,247 16,285
------- -------
Net property and equipment 5,887 5,853
Other assets 1,786 1,342
------- -------
Total assets $63,645 $67,958
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,884 $ 5,226
Other accrued liabilities 8,198 10,063
------- -------
Total current liabilities 12,082 15,289
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
5,000 shares authorized, none issued and outstanding -- --
Common stock, no par value:
25,000 shares authorized; 8,507 and 8,723 issued and outstanding
at December 26, 1998 and June 30, 1998, respectively 48,577 50,225
Retained earnings 2,986 2,444
------- -------
Total shareholders' equity 51,563 52,669
------- -------
Total liabilities and shareholders' equity $63,645 $67,958
======= =======
<FN>
(1) Amounts derived from the Company's audited financial statements for the
year ended June 30, 1998.
See accompanying notes to condensed consolidated financial statements.
</FN>
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
---------------------- ----------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------- ------- ------- -------
Net revenues $19,398 $26,464 $39,595 $52,446
Cost of revenues 10,469 14,945 21,765 29,916
------- ------- ------- -------
Gross margin 8,929 11,519 17,830 22,530
Operating expenses:
Research, development and engineering 2,691 2,647 5,162 5,029
Selling, general and administrative 5,454 6,499 11,113 13,078
Nonrecurring compensation charge 675 675
------- ------- ------- -------
Total operating expenses 8,145 9,821 16,275 18,782
------- ------- ------- -------
Operating income 784 1,698 1,555 3,748
Interest income, net 233 230 448 486
------- ------- ------- -------
Income before provision for income taxes 1,017 1,928 2,003 4,234
Provision for income taxes 407 771 801 1,694
------- ------- ------- -------
Net income $ 610 $ 1,157 $ 1,202 $ 2,540
======= ======= ======= =======
Net income per share $ .07 $ .14 $ .14 $ .31
======= ======= ======= =======
Net income per share - assuming dilution $ .07 $ .13 $ .14 $ .29
======= ======= ======= =======
Shares used in computing basic net income per share 8,559 8,375 8,607 8,320
======= ======= ======= =======
Shares used in computing diluted net income per share 8,633 8,961 8,669 8,895
======= ======= ======= =======
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
4
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
----------------------------
December 26, December 27,
1998 1997
-------- --------
Operating activities
Net income $ 1,202 $ 2,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,560 1,471
(Gain) loss on disposal of property and equipment (6) 96
Tax benefit from stock plans 53
Nonrecurring compensation charge 675
Changes in operating assets and liabilities:
Accounts receivable 2,076 (2,985)
Inventories 2,253 (1,622)
Deferred tax assets and prepaid expenses 149 (809)
Other assets (473) 372
Accounts payable (1,342) 4,047
Other accrued liabilities (1,888) 210
-------- --------
Total adjustments 2,329 1,508
-------- --------
Net cash provided by operating activities 3,531 4,048
-------- --------
Investing activities
Purchase of property and equipment, net (1,274) (1,931)
Proceeds from sale of property and equipment 10 44
Proceeds from sale of long-term available for sale investments 1,000
Purchases of short-term available for sale investments (12,006) (7,012)
Proceeds from sale of short-term available for sale investments 11,385 9,929
-------- --------
Net cash provided by (used in) investing activities (1,885) 2,030
-------- --------
Financing activities
Proceeds from employee stock incentive program
and employee stock purchase plan 886 945
Repurchase of common stock (3,194)
-------- --------
Net cash provided by (used in) financing activities (2,308) 945
-------- --------
Increase (decrease) in cash and cash equivalents (662) 7,023
Cash and cash equivalents, beginning of period 9,603 11,101
Cash and cash equivalents, end of period $ 8,941 $ 18,124
======== ========
Supplemental disclosure of noncash activities:
Inventory capitalized into property, equipment and related tax $ 295 $ 324
Cash paid during the period for:
Interest $ 2 $ 9
Taxes $ 794 $ 3,022
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
5
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
1. General
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
However, certain information or footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The information
furnished in this report reflects all adjustments which, in the opinion of
management, are necessary for a fair statement of the consolidated
financial position, results of operations and cash flows as of and for the
interim periods. Such adjustments consist of items of a normal recurring
nature. The condensed consolidated financial statements included herein
should be read in conjunction with the audited financial statements and
notes thereto for the fiscal year ended June 30, 1998 included in the
Company's Form 10-K as filed with the Securities and Exchange Commission on
September 28, 1998. Results of operations for interim periods are not
necessarily indicative of the results of operations that may be expected
for the fiscal year ending June 30, 1999 or for any other future period.
2. Financial Instruments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-term investments consist principally of commercial paper and tax
exempt municipal bonds with maturities between three and twelve months,
market auction rate preferred stock and auction rate notes with maturities
of twelve months or less. Investments are classified as held-to-maturity,
trading, or available-for-sale at the time of purchase.
At December 26, 1998 and June 30, 1998, all of the Company's investments in
marketable securities were classified as available-for-sale and were
carried at fair market value which approximated cost. Material unrealized
gains and losses, if any, would have been recorded in shareholders' equity.
Fair market value is based on quoted market prices on the last day of the
fiscal period. The cost of the securities is based upon the specific
identification method. Realized gains or losses, interest, and dividends
are included in interest income. During fiscal year 1998 and the six months
ended December 26, 1998, realized and unrealized gains and losses on
available for sale investments were not material.
3. Inventories
December 26, June 30,
1998 1998
------- -------
Raw materials $ 5,809 $ 7,407
Work-in-process 2,834 4,916
Finished goods 4,022 2,867
------- -------
$12,665 $15,190
======= =======
6
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
4. Property and Equipment
Cost of property and equipment is summarized as follows:
December 26, June 30,
1998 1998
------- -------
Machinery and equipment $13,093 $12,395
Computer equipment 7,221 7,040
Office furniture and equipment 2,820 2,703
------- -------
$23,134 $22,138
======= =======
5. Stock Compensation
The Company reported a charge of $675,000 in the second quarter of fiscal 1998
for compensation expense related to the Emerging Issues Task Force Issue No.
97-12, "Accounting for Increased Share Authorizations in an IRS Section 423
Employee Stock Purchase Plan under APB Opinion No. 25, Accounting for Stock
Issued to Employees" which was approved by the EITF in September 1997. This
nonrecurring, non-cash charge represented the difference between 85% of the fair
market value of common stock on the date of the beginning of the offering period
and the fair market value of common stock on the date the shareholders approved
the increase in shares authorized for issuance, multiplied by the number of
shares in the 1995 Employee Stock Purchase Plan ("ESPP") that had been
subscribed for purchase by employees, but not authorized by the shareholders,
prior to the Company's annual meeting of shareholders. Shareholder approval was
granted to make available for issuance an additional 500,000 shares under the
ESPP on October 31, 1997. In November 1998, the Company's shareholders approved
the adoption of the 1998 Employee Stock Purchase Plan, which replaced the 1995
ESPP. An aggregate of 600,000 shares were initially reserved under the 1998
ESPP. The 1998 ESPP includes a provision that automatically increases the number
of shares reserved for issuance by the lesser of (i) 300,000, (ii) 3% of common
stock outstanding on the last day of the prior fiscal year, or (iii) such amount
as may be determined by the Board of Directors.
6. Income Taxes
The Company provides for income taxes during interim reporting periods
based upon an estimate of its annual effective tax rate. This estimate
reflects the utilization of tax credits, offset by taxes on the Company's
foreign operations.
7. Repurchase of Shares
In August 1998, the Board of Directors (Board) authorized the Company to
repurchase up to 450,000 shares of the Company's Common Stock on the open
market or in privately negotiated transactions. As of December 26, 1998,
the Company had repurchased 450,000 shares at an average per share price of
$7.10.
8. Net Income per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share".
7
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended Six months ended
----------------------------- -----------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------ ------ ------ ------
Numerator:
Net income for basic and diluted
earnings per share $ 610 $1,157 $1,202 $2,540
====== ====== ====== ======
Denominator:
For basic earnings per share
- weighted average shares 8,559 8,375 8,607 8,320
Effect of dilutive securities
- employee stock options 74 586 62 575
------ ------ ------ ------
For diluted earnings per share
- adjusted weighted average
shares and assumed conversion 8,633 8,961 8,669 8,895
====== ====== ====== ======
9. Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 (SFAS 130), "Reporting Comprehensive Income". This statement requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of prior periods for comparison
purposes is required. Comprehensive income generally represents all changes
in stockholders' equity except those resulting from investments or
contributions by stockholders. SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities, which prior to adoption
were reported separately in stockholders' equity if material, to be
included in other comprehensive income. The Company adopted FAS 130 in the
quarter ended September 26, 1998 and comprehensive income is materially the
same as net income in the accompanying condensed consolidated statements of
income.
In addition, during June 1997, the Financial Accounting Standards Board
issued Statement No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information". This statement replaces Statement No.
14 and changes the way public companies report segment information. This
statement is effective for fiscal years beginning after December 15, 1997
and will be adopted by the Company for the year ended June 30, 1999.
Adoption of this pronouncement is not expected to have a material impact on
the Company's financial statements.
10. Reclassification
Certain amounts presented in the financial statements for fiscal 1998 have
been reclassified to conform to the presentation for fiscal 1999.
8
ADEPT TECHNOLOGY, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
"Factors Affecting Future Operating Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
report and the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998, in particular the section titled "Factors Affecting Future
Operating Results".
OVERVIEW
The Company designs, manufactures and markets intelligent automation software
and hardware products for assembly, material handling and packaging
applications. The Company's products currently include machine controllers for
robot mechanisms and other flexible automation equipment, machine vision
systems, simulation software and a family of mechanisms including robots, linear
modules, vision-based flexible part feeders, as well as a line of Cartesian
scalable robots targeted for the electronics and assembly applications markets.
In recent years, the Company has expanded its robot product lines and developed
advanced software and sensing technologies that have enabled robots to perform a
wider range of functions. The Company has also expanded its channel of system
integrators and its international sales and marketing operations. As a result of
these developments, the nature and composition of the Company's revenues have
changed over time. Specifically, software license and service revenues, although
still relatively insignificant, have increased as a percentage of total revenues
in recent periods, and international sales comprise a significant portion of the
Company's revenues.
The Company sells its products through system integrators, its direct sales
force and original equipment manufacturers ("OEMs"). System integrators and OEMs
add application-specific hardware and software to the Company's products,
thereby enabling the Company to provide solutions to a diversified industry
base, including the electronics, telecommunications, appliances, pharmaceutical,
food processing and automotive components industries. The Company's net revenues
have declined in each of the last four fiscal quarters. Accordingly, the
Company's historical results of operations should not be relied upon as an
indication of future performance.
Results of Operations
Three Month and Six Month Periods Ended December 26, 1998 and December 27, 1997
Net revenues. The Company's net revenues decreased by 26.7% to $19.4 million for
the three months ended December 26, 1998 from $26.5 million for the three months
ended December 27, 1997. The Company's net revenues decreased by 24.5% to $39.6
million for the six months ended December 26, 1998 from $52.5 million for the
six months ended December 27, 1997. The decrease in net revenues for the three
and six months ended December 26, 1998 was primarily due to decreased product
sales, including robot and motion controller sales, and decreased service and
upgrade revenues. The decrease in revenue was partially offset by an increase in
software revenue. The revenue decline was seen throughout the markets and
industries the Company serves. The Company cannot estimate when or if a revival
in its key hardware markets will occur.
International sales, including sales to Canada, were $9.5 million or
approximately 48.7% of net revenues for the three months ended December 26, 1998
as compared with $10.1 million or 38.3% of net revenues for three months ended
December 27, 1997. International sales, including sales to Canada, were $19.0
million or approximately
9
ADEPT TECHNOLOGY, INC.
48.1% of net revenues for the six months ended December 26, 1998 as compared
with $20.4 million or 38.9% of net revenues for six months ended December 27,
1997. International sales as a percentage of total net revenues have increased
due to the greater relative decline in the Company's domestic sales in the three
and six months ended December 28, 1998 as compared to the same periods in the
prior year.
Gross margin. Gross margin percentage was 46.0% for the three months ended
December 26, 1998 compared to 43.5% for the three months ended December 27,
1997. Gross margin percentage was 45.0% for the six months ended December 28,
1998 compared to 43.0% for the three months ended December 27, 1997. The
increase in gross margin for the three and six months ended December 26, 1998
was primarily due to increased sales of higher margin software products combined
with reduced sales of lower margin hardware products. The Company expects to
continue to experience quarterly fluctuations in its gross margin percentage due
to changes in its sales and product mix.
Research, Development and Engineering. Research, development and engineering
expenses increased by 1.7% to $2.7 million or 13.9% of net revenues for the
three months ended December 26, 1998 from $2.6 million or 10.0% of net revenues
for the three months ended December 27, 1997. Research, development and
engineering expenses increased by 2.6% to $5.2 million or 13.0% of net revenues
for the six months ended December 26, 1998 from $5.0 million or 9.6% of net
revenues for the six months ended December 27, 1997. The increase in both the
three and six month periods was primarily due to increases in facilities
expenses and depreciation on capital equipment, partially offset by lower
project material spending. Research, development and engineering expenses for
the three months ended December 26, 1998 were partially offset by $127,000 of
third party development funding as compared with $161,000 of third party
development funding for the three months ended December 27, 1997. Research,
development and engineering expenses for the six months ended December 26, 1998
were partially offset by $270,000 of third party development funding as compared
with $325,000 of third party development funding for the six months ended
December 27, 1997. The Company expects that it will continue to receive third
party development funding from the government as well as other third parties
during fiscal 1999. There can be no assurance, however, that any funds budgeted
by the government or other third parties for the Company's development projects
will not be curtailed or eliminated at any time. Research, development and
engineering expenses as a percentage of net revenues fluctuated due to the
relative decline in the level of net revenues in the three and six months ended
December 26, 1998 as compared to the same periods in the prior year.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 16.1% to $5.5 million or 28.1% of net revenues for the three
months ended December 26, 1998, as compared with $6.5 million or 24.6% of net
revenues for the three months ended December 27, 1997. Selling, general and
administrative expenses decreased 15.0% to $11.1 million or 28.1% of net
revenues for the six months ended December 26, 1998, as compared with $13.1
million or 24.9% of net revenues for the six months ended December 27, 1997. The
decreased level of spending for both the three and six months ended December 26,
1998 was primarily attributable to lower headcount and compensation related
expenses, including commissions, and to a lesser extent, to foreign currency
gains on balance sheet remeasurement and the closure of the Company's Japan
office. In response to weakening markets for its hardware products, the Company
implemented a restructuring program in the fourth quarter of fiscal 1998 that
included, among other things, a headcount reduction. The increase in selling,
general and administrative expenses as a percentage of total revenue in the
three and six month periods ended December 26, 1998 as compared to the same
periods in the prior year was due to the relative decline in the level of net
revenues. The Company expects that selling, general and administrative expenses
will continue to fluctuate as a percentage of net revenues.
Compensation charge. The Company reported a charge of $675,000 in the second
quarter of fiscal 1998 for compensation expense related to the Emerging Issues
Task Force Issue No. 97-12, "Accounting for Increased Share Authorizations in an
IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25,
Accounting for Stock Issued to Employees" which was approved by the EITF in
September 1997. This nonrecurring, non-cash charge represented the difference
between 85% of the fair market value of common stock on the date of the
beginning of the offering period and the fair market value of common stock on
the date the shareholders approved the increase in shares authorized for
issuance, multiplied by the number of shares in the 1995 Employee Stock Purchase
Plan ("ESPP") that had been subscribed for purchase by employees, but not
10
ADEPT TECHNOLOGY, INC.
authorized by the shareholders, prior to the Company's Annual Meeting of
Shareholders. Shareholder approval was granted to make available for issuance an
additional 500,000 shares under the ESPP on October 31, 1997. In November 1998,
the Company's shareholders approved the adoption of the 1998 Employee Stock
Purchase Plan, which replaced the 1995 ESPP. An aggregate of 600,000 shares were
initially reserved under the 1998 ESPP. The 1998 ESPP includes a provision that
automatically increases the number of shares reserved for issuance by the lesser
of (i) 300,000, (ii) 3% of common stock outstanding on the last day of the prior
fiscal year, or (iii) such amount as may be determined by the Board of
Directors.
Interest Income, Net. Interest income, net for the three months ended December
26, 1998 was $233,000 compared to $230,000 for the three months ended December
27, 1997. Interest income, net for the six months ended December 26, 1998 was
$448,000 compared to $486,000 for the six months ended December 27, 1997.
Interest income, net declined for the six months ended December 26, 1998 as
compared to the same period in the prior year primarily as a result of a higher
concentration of tax advantaged investments yielding lower gross interest
income.
Provision for Income Taxes. The Company's effective tax rate for the three and
six month periods ended December 26, 1998 and December 27, 1997 was 40%.
Derivative Financial Instruments. The Company's product sales are predominantly
denominated in U.S. dollars. However, certain international operating expenses
are predominantly paid in their respective local currency. The Company generally
does not hedge its exposure to foreign currency exchange risk on local
operational expenses and revenues. Although the Company believes that unhedged
risk associated with foreign currency fluctuations for those transactions has
not been material to date, there can be no assurance that such risk will not
become material in the future or that the Company will not incur foreign
exchange transaction losses which will have an adverse effect on the Company's
results of operations. The Company makes yen-denominated purchases of certain
components and mechanical subsystems from Japanese suppliers. Based on the
amount of such purchases, current exchange rate fluctuations would not typically
be expected to result in material unfavorable foreign exchange transactions
included in cost of revenues. From time to time, the Company manages the
currency risk associated with the yen-denominated purchases using forward rate
currency contracts.
Liquidity and Capital Resources
As of December 26, 1998, the Company had working capital of approximately $43.9
million, including $8.9 million in cash and cash equivalents and $11.9 million
in short-term investments.
The Company's cash requirements during the six months ended December 26, 1998
were met primarily through cash provided by operations. Cash, cash equivalents
and short-term investments decreased $41,000 from June 30, 1998, primarily as a
result of $2.3 million of cash used in financing activities including $3.2
million of cash used to repurchase common stock, partially offset by proceeds
from employee stock incentive purchase plans; and to a lesser extent, to $1.3
million of capital expenditures; offset by $3.5 million of cash generated from
operating activities. Net cash provided by operating activities was primarily
attributable to net income adjusted by depreciation and amortization, and
decreased inventory and accounts receivable.
The Company currently anticipates capital expenditures of approximately $3.1
million during fiscal 1999, including approximately $700,000 for test fixtures,
tooling and other factory investments, approximately $400,000 for MIS equipment
and approximately $2.0 million for laboratory and other equipment. Included in
the MIS expenditures are costs associated with an enterprise resource planning
software system which is intended in part to address issues concerning Year 2000
compliance with the Company's internal MIS systems. The initial phase of this
system has been successfully implemented at the Company's San Jose headquarters
and makes the Company compliant in regards to Year 2000 for its internal
enterprise resource planning software system. In Europe, the Company is in the
process of upgrading its MIS systems. The Company has been advised by the third
party suppliers of these systems and upgrades that the upgrades will render the
Company's European MIS systems Year 2000 compliant.
11
ADEPT TECHNOLOGY, INC.
The Company believes that the existing cash and cash equivalent balances as well
as short-term investments and anticipated cash flow from operations will be
sufficient to support the Company's working capital requirements for at least
the next twelve months.
Year 2000 Disclosure
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in approximately one year, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
In fiscal 1998, the Company commenced a program, to be substantially completed
by the Fall of 1999, to review the Year 2000 compliance status of the software
and systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. The Company has contacted its
critical suppliers and major customers to determine whether the products
obtained by the Company from such vendors or sold by the customer to third
parties are Year 2000 compliant. The Company's suppliers and customers are under
no contractual obligation to provide such information to the Company. In
addition, the Company has implemented at its San Jose headquarters the initial
phase of a Year 2000 compliant enterprise resource planning system from a
third-party vendor and is also considering converting certain of its other
software and systems to commercial products that are known to be Year 2000
compliant. Additionally, in Europe, the Company is in the process of upgrading
its MIS systems. The Company has been advised by the third party suppliers of
these systems and upgrades that the upgrades will render the Company's European
MIS systems Year 2000 compliant. Implementation of software products of third
parties, however, will require the dedication of substantial administrative and
management information resources, the assistance of consulting personnel from
third party software vendors and the training of the Company's personnel using
such systems. Based on the information available to date, the Company believes
it will be able to complete its Year 2000 compliance review and make necessary
modifications prior to the end of 1999. Software or systems, which are deemed
critical to the Company's business, are scheduled to be Year 2000 compliant by
the end of calendar year 1999. Nevertheless, particularly to the extent the
Company is relying on the products of other vendors to resolve Year 2000 issues,
there can be no assurances that the Company will not experience delays in
implementing such products. If key systems, or a significant number of systems
were to fail as a result of Year 2000 problems, or the Company were to
experience delays implementing Year 2000 compliant software products, the
Company could incur substantial costs and disruption of its business, which
would potentially have a material adverse effect on the Company's business and
results of operations.
The Company in its ordinary course of business tests and evaluates its own
software products. The Company believes that its software products are generally
Year 2000 compliant, meaning that the use or occurrence of dates on or after
January 1, 2000 will not materially affect the performance of the Company's
software products with respect to four digit date dependent data or the ability
of such products to correctly create, store, process and output information
related to such date data. To the extent the Company's software products are not
fully Year 2000 compliant, there can be no assurance that the Company's software
products contain all necessary software routines and codes necessary for the
accurate calculation, display, storage and manipulation of data involving dates.
To the extent that the Company's products are sold through system integrators or
other third parties, there can be no assurances that users of the Company's
products will not experience Year 2000 problems as a result of the integration
of the Company's software with noncompliant Year 2000 products of such third
party suppliers. In addition, in certain circumstances, the Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of the Company's products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
To date the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance whether
involving the Company's own software products or the software of
12
ADEPT TECHNOLOGY, INC.
systems used in its internal operations. The Company has incurred costs of
approximately $2.9 million and expects to incur in total, approximately $3.2
million in connection with its implementation of a new enterprise resource
planning software system at its San Jose headquarters, which is Year 2000
compliant. Additionally, the Company has currently not developed a contingency
plan related to Year 2000. There can be no assurances that the Company's
resources spent on investigating and remedying Year 2000 compliance issues will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
FLUCTUATING OPERATING RESULTS
The Company's operating results have been historically and will continue to be
subject to significant quarterly and annual fluctuations due to a number of
factors, including fluctuations in capital spending domestically and
internationally or in one or more industries to which the Company sells its
products, new product introductions by the Company or its competitors, changes
in product mix and pricing by the Company, its suppliers or its competitors,
availability of components and raw materials, failure to manufacture a
sufficient volume of products in a timely and cost-effective manner, failure to
anticipate changing customer product requirements, lack of market acceptance or
shifts in the demand for the Company's products, changes in the mix of sales by
distribution channel, changes in the spending patterns of the Company's
customers and extraordinary events such as litigation or acquisitions. The
Company's gross margins may vary greatly depending on the mix of sales of lower
margin hardware products, particularly mechanical subsystems purchased from
third party vendors and higher margin software products.
The Company's operating results may also be affected by general economic and
other conditions affecting the timing of customer orders and capital spending.
For example, the Company's operations during the third and fourth quarters of
fiscal 1998 and the first and second quarters of fiscal 1999 were adversely
affected by a continuing downturn in hardware purchases by customers in the
electronics industry, particularly disk-drive and telecommunication
manufacturers. In connection with that downturn, the Company was forced to
affect a restructuring program in the fourth quarter of fiscal 1998. The Company
can not estimate when or if a revival in these key hardware markets will occur.
The Company generally recognizes product revenue upon shipment or, for certain
international sales, upon receipt by the customer. The Company's net revenues
and results of operations for a fiscal period will therefore be affected by the
timing of orders received and orders shipped during such period. A delay in
shipments near the end of a fiscal period, due for example to product
development delays or to delays in obtaining materials, could materially
adversely affect the Company's business, financial condition and results of
operations for such period. Moreover, continued investments in research and
development, capital equipment and ongoing customer service and support
capabilities will result in significant fixed costs which the Company will not
be able to reduce rapidly and, therefore, if the Company's sales for a
particular fiscal period are below expected levels, the Company's business,
financial condition and results of operations for such fiscal period could be
materially adversely affected. In addition, in the event that in some future
fiscal quarter the Company's net revenues or operating results were below the
expectations of public market analysts and investors, the price of the Company's
common stock could be materially adversely affected. There can be no assurance
that the Company will be able to increase or sustain profitability on a
quarterly or annual basis in the future.
SEASONALITY IN ORDERS
The Company has experienced and is expected to continue to experience
seasonality in product bookings. The Company has historically had higher
bookings for its products during the June quarter of each fiscal year and lower
bookings during the September quarter of each fiscal year, due primarily to the
slowdown in sales to European markets. In the past, the Company has generally
been able to maintain revenue levels during the September fiscal quarter by
filling backlog from the June fiscal quarter. In the event bookings for the
Company's products in the June fiscal quarter were lower than anticipated and
the Company's backlog at the end of the June fiscal quarter was insufficient to
compensate for lower bookings in the September fiscal quarter, the Company's
results of operations for the September fiscal quarter and future quarters could
be materially adversely affected.
13
ADEPT TECHNOLOGY, INC.
For example, as a result of reduced product bookings in each of the last three
fiscal quarters, net revenues fell in the quarters ended September 26, 1998 and
December 26, 1998. In addition, during fiscal 1998 as a whole, the Company's
revenues were adversely affected by a decline in orders from customers in the
disk-drive and telecommunications markets. The Company also believes that
backlog is not a useful measure of anticipated activity or future revenues,
because the orders constituting the Company's backlog are subject to changes in
delivery schedules and in certain instances are subject to cancellation without
significant penalty by the customer.
In addition, a significant percentage of the Company's product shipments occur
in the last month of each fiscal quarter. Historically, this has been due in
part, at times, to an inability of the Company to forecast the level of demand
for the Company's products or of the product mix for a particular fiscal
quarter. To address this problem the Company periodically stocks inventory
levels of completed robots, machine controllers and certain strategic
components. If shipments of the Company's products fail to meet forecasted
levels, the increased inventory levels could have a material adverse effect on
the Company's business, financial condition and results of operations.
CYCLICALITY OF CAPITAL SPENDING
Intelligent automation systems utilizing the Company's products can range in
price from $75,000 to several million dollars. Accordingly, the Company's
success is directly dependent upon the capital expenditure budgets of its
customers. The Company's 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 the Company's international customers are not in the Asian-Pacific
region, the Company believes that continuing instability in the Asian-Pacific
economies could also have a material adverse effect on the results of the
Company's operations as a result of a reduction in sales by the Company's
customers to those markets. Domestic or international recessions or a downturn
in one or more of the Company's major markets, such as the electronics,
telecommunications, appliances, pharmaceutical, food processing or automotive
components industries, and resulting cutbacks in capital spending would have a
direct, material adverse impact on the Company's business, financial condition
and results of operations.
SOLE OR SINGLE SOURCES OF SUPPLY AND LENGTHY PROCUREMENT LEAD TIMES
The Company obtains many key components and materials and some significant
mechanical subsystems from sole or single source suppliers with whom the Company
has no guaranteed supply arrangements. In addition, certain of the sole or
single sourced components and mechanical subsystems incorporated into the
Company's products have long procurement lead times. The Company's reliance on
sole or single source suppliers involves several significant risks, including
loss of control over the manufacturing process, the potential absence of
adequate supplier capacity, potential inability to obtain an adequate supply of
required components, materials or mechanical subsystems and reduced control over
manufacturing yields, costs, timely delivery, reliability and quality of
components, materials and mechanical subsystems. In the event that any
significant sole or single source supplier was unable or unwilling to
manufacture certain components, materials or mechanical subsystems in required
volumes, the Company would be required to identify and qualify acceptable
replacements. The process of qualifying suppliers may be lengthy, and there can
be no assurance that any additional sources would be available to the Company on
a timely basis or on acceptable terms. If supplies of such items were not
available from the Company's existing suppliers and a relationship with an
alternative vendor could not be timely developed, shipments of the Company's
products could be interrupted and reengineering of such products could be
required. The Company has experienced quality control or specification problems
with certain key components provided by sole source suppliers, and has had to
design around the particular flawed item. The Company has also experienced
delays in filling customer orders due to the failure of certain suppliers to
meet the Company's volume and schedule requirements. Certain suppliers of the
Company have also ceased manufacturing components which the Company requires for
its products, and the Company has been required to purchase sufficient supplies
for the estimated life of its product line. There can be no assurance that these
problems will not occur in the future with the Company's suppliers. Disruption
or termination of the Company's supply sources could require the Company to seek
alternative sources of supply, and could delay the Company's product shipments
and damage relationships with current and prospective customers, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. If the Company incorrectly forecasts
product mix for a particular
14
ADEPT TECHNOLOGY, INC.
period and the Company is unable to obtain sufficient supplies of any components
or mechanical subsystems on a timely basis due to long procurement lead times,
the Company's business, financial condition and results of operations could be
materially adversely affected. Moreover, if demand for a product for which the
Company has purchased a substantial amount of components fails to meet the
Company's expectations, the Company would be required to write off the excess
inventory, thereby materially adversely affecting the Company's results of
operations. A prolonged inability to obtain adequate timely deliveries of key
components would have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The market for intelligent automation products is highly competitive. The
Company competes with a number of robot companies, motion control companies,
machine vision companies and simulation software companies. Some of the
Company's competitors have substantially greater financial, technical, marketing
and other resources than the Company. Although to date the Company's competitors
have not offered a broad range of intelligent automation products, it is
possible that one or more of these competitors may in the future, through
acquisitions or otherwise, offer a more comprehensive line of products which are
competitive with the Company's. In addition, the Company may in the future face
competition from new entrants in one or more of its markets.
Many of the Company's competitors in the robot market are integrated
manufacturers of products that produce robotics equipment internally for their
own use and may also compete with the Company's products for sales to other
customers. Certain of these large manufacturing companies have greater
flexibility in pricing than the Company, because they generate substantial unit
volumes of robots for internal demand and may have access through their parent
companies to large sources of capital. There can be no assurance that any of the
Company's competitors will not seek to expand its presence in other markets in
which the Company competes.
The Company's principal competitors in the market for motion control systems
include Allen-Bradley Co. ("Allen-Bradley"), a subsidiary of Rockwell
International Corporation, in the United States, and Siemens AG in Europe. In
addition, the Company faces motion control competition from two major suppliers
of motion control boards, Galil Motion Control, Inc. and Delta Tau Data Systems
Inc. These motion control boards are purchased by end users which engineer their
own custom motion control systems. In the simulation software market, the
Company's competitors include Tecnomatix Technologies, Inc., an Israeli company
which sells mostly to major automotive manufacturers and Deneb Robotics Inc., a
subsidiary of Dassault Systemes. In the machine vision market, the Company faces
competition from Cognex Corporation, Robotic Vision Systems, Inc. and
Allen-Bradley.
There can be no assurance that current or potential competitors of the Company
will not develop products comparable or superior in terms of price and
performance features to those developed by the Company or adapt more quickly
than the Company to new or emerging technologies and changes in customer
requirements. In addition, no assurance can be given that the Company will not
be required to make substantial additional investments in connection with its
research, development, engineering, marketing and customer service efforts in
order to meet any competitive threat, or that the Company will be able to
compete successfully in the future. Increased competitive pressure could result
in a loss of sales or market share or cause the Company to lower prices for its
products, any of which could materially adversely affect the Company's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The intelligent automation industry is characterized by rapid technological
change and new product introductions and enhancements. The Company's ability to
remain competitive and its future success will depend in significant part upon
the technological quality of its products and processes relative to those of its
competitors and its ability both to continue to develop new and enhanced
products and to introduce such products at competitive prices and on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in selecting, developing and manufacturing new products or in
enhancing its existing products on a timely basis or at all, or that such new or
enhanced products will achieve market acceptance. The failure to successfully
select, develop and manufacture new products, or to timely enhance its existing
technologies and meet customers' technical
15
ADEPT TECHNOLOGY, INC.
specifications for any new products or enhancements, or to successfully market
new products, could materially adversely affect the Company's business,
financial condition and results of operations. New technology or product
introductions by the Company's competitors could also cause a decline in sales
or loss of market acceptance for the Company's existing products or force the
Company to significantly reduce the prices of its existing products. The failure
of the Company to develop, manufacture and sell new products in quantities
sufficient to offset a decline in revenues from existing products or to manage
product and related inventory transitions successfully could have a material
adverse effect on the Company's business, financial condition and results of
operations. The success of the Company 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, timely and efficient implementation of manufacturing processes and
effective sales, marketing and customer service. Because of the complexity of
the Company's products, significant delays may occur between a product's initial
introduction and commencement of the Company's volume production. The Company
has from time to time experienced delays in the introduction of, and certain
technical and manufacturing difficulties with, certain of its products and the
Company may experience technical and manufacturing difficulties and delays in
future introductions of new products and enhancements.
The Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and enhancements that keep pace with technological developments and
address the needs of its customers. The development and commercialization of new
products involve many risks, including the identification of new product
opportunities, the retention and hiring of appropriate research and development
personnel, the definition of the product's technical specifications and the
successful completion of the development process. Other risks would include the
successful marketing of the product, the risk of having customers embrace new
technological advances, additional customer service costs associated with
supporting new product introductions and additional customer service costs
required for field upgrades. There can be no assurance that the development of
these products will be completed in a timely manner or that such products will
achieve acceptance in the market. The development of these products has
required, and will require, the Company to expend significant financial and
management resources. If the Company is unable to successfully develop these or
other new products that respond to customer requirements or technological
changes, the Company's business, financial condition and results of operations
would be materially adversely affected.
SOFTWARE DEFECTS
New or existing software products or enhancements may contain errors or
performance problems when first introduced, when new versions or enhancements
are released or even after such products or enhancements have been used in the
marketplace for a period of time. Despite testing by the Company, such defects
may be discovered only after a product has been installed and used by customers.
There can be no assurance that such errors or performance problems will not be
discovered in future shipments of the Company's products. Such errors could
result in expensive and time consuming design modifications or large warranty
charges, damage customer relationships and result in loss of market share, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON SYSTEM INTEGRATORS
A substantial portion of the Company's 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 the
Company has from time to time experienced difficulty in collecting payments from
certain of these companies. To the extent the Company is unable to mitigate this
risk of collections from system integrators, the Company's results of operations
may be materially adversely affected. Furthermore, the Company's relationships
with its system integrators are generally not exclusive, and some of these
system integrators may expend a significant amount of effort or give higher
priority to selling products of the Company's competitors. There can be no
assurance that any of these system integrators will not discontinue its
relationship with the Company or form additional competing arrangements with the
Company's competitors. The Company believes that its ability to sell products to
system integrators will continue to be important to the Company's success.
Although to date none of the Company's system integrators has accounted for a
material percentage of the
16
ADEPT TECHNOLOGY, INC.
Company's net revenues, the loss of, or a significant reduction in revenues
from, system integrators to which the Company sells a significant amount of its
product could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, as the Company
enters new geographic and applications markets, it must locate system
integrators to assist the Company in building sales in those markets. There can
be no assurance that the Company will be successful in obtaining effective new
system integrators or in maintaining sales relationships with them. In the event
a number of the Company's system integrators experience financial problems,
terminate their relationships with the Company or substantially reduce the
amount of the Company's products they sell, or in the event the Company fails to
build an effective systems integrator channel in any new markets, the Company's
business, financial condition and results of operations could be materially
adversely affected.
INTERNATIONAL SALES AND PURCHASES
Net revenues from international sales, including sales to Canada, have accounted
for a significant portion of the Company's net revenues. In the first six months
of fiscal year 1999 and in each of the fiscal years 1998, 1997 and 1996 net
revenues from international sales accounted for approximately 48.1%, 40.5%,
35.8% and 39.4%, respectively, of the Company's net revenues. The Company
anticipates that international sales will continue to account for a significant
portion of its net revenues; however, there can be no assurance that
international sales will increase or that the current level of international
sales will be sustained. In addition, the Company currently purchases certain
components and mechanical subsystems from foreign suppliers. The Company's
operating results are subject to the risks inherent in international sales and
purchases, including, but not limited to, various regulatory requirements,
political and economic changes and disruptions, transportation delays, foreign
currency fluctuations, export/import controls, tariff regulations, higher
freight rates, difficulties in staffing and managing foreign sales operations,
greater difficulty in accounts receivable collection and potentially adverse tax
consequences. Duty, tariff and freight costs can materially increase the cost of
crucial components for the Company's products. Foreign exchange fluctuations may
render the Company's products less competitive relative to locally manufactured
product offerings, or could result in foreign exchange losses. In addition,
because substantially all of the Company's foreign sales are denominated in
United States dollars, increases in the value of the dollar relative to the
local currency would increase the price of the Company's products in foreign
markets and make the Company's products relatively more expensive and less price
competitive than competitors' products that are priced in local currencies.
There can be no assurance that these factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's business, financial condition and results of operations. The Company
anticipates that the recent turmoil in Asian financial markets and the recent
deterioration of the underlying economic conditions in certain Asian countries
may continue to have an impact on its sales to customers located in or whose
projects are based in those countries due to the impact of currency fluctuations
on the relative price of the Company's products and restrictions on government
spending imposed by the International Monetary Fund (the "IMF") on those
countries receiving the IMF's assistance. In addition, customers in those
countries may face reduced access to working capital to fund component
purchases, such as the Company's products, due to higher interest rates, reduced
bank lending due to contractions in the money supply or the deterioration in the
customer's or its bank's financial condition or the inability to access local
equity financing. A substantial majority of the Company's products are sold to
system integrators who incorporate the Company's products into systems sold and
installed to end-user customers. The Company also makes yen-denominated
purchases of certain components and mechanical subsystems from Japanese
suppliers. Depending on the amount of yen-denominated purchases, the Company may
engage in hedging transactions in the future. However, notwithstanding these
precautions, the Company remains 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. There can be no assurance that the Company's
current or any future currency exchange strategy will be successful in avoiding
exchange related losses or that any of the factors listed above will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
17
ADEPT TECHNOLOGY, INC.
COMPLIANCE WITH INTERNATIONAL STANDARDS
The Company's hardware products are required to comply with European Union
("EU") Low Voltage, Electro-Magnetic Compatibility, and Machinery Safety
Directives (laws) in certain European countries, including United Kingdom,
France, Germany and Italy. The EU mandates that the Company's products carry the
CE mark denoting that these products are manufactured in strict accordance to
design guidelines (Standards) in support of these directives. These Standards
can change and are subject to varying interpretation. New Standards impacting
machinery design go into effect each year. To date, the Company has retained TUV
Rheinland to help certify that its VME controller-based products, including
robots, meet applicable EU Directives and Standards. Although the Company's
existing products meet the requirements of the applicable Directives, there can
be no assurance that future products can be designed, within market window
constraints, to meet the future requirements. In the event any of the Company's
robot products or any other major hardware products do not meet the requirements
of the directives, the Company would be unable to legally sell these products in
Europe. The Company's financial condition and results of operations could be
materially adversely affected.
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in approximately one year, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
In fiscal 1998, the Company commenced a program, to be substantially completed
by the Fall of 1999, to review the Year 2000 compliance status of the software
and systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreement
to modify or replace all non-compliant products. The Company has contacted its
critical suppliers and major customers to determine whether the products
obtained by the Company from such vendors or sold by the customer to third
parties are Year 2000 compliant. The Company's suppliers and customers are under
no contractual obligation to provide such information to the Company. In
addition, the Company has implemented at its San Jose headquarters the initial
phase of a Year 2000 compliant enterprise resource planning system from a
third-party vendor and is also considering converting certain of its other
software and systems to commercial products that are known to be Year 2000
compliant. Additionally, in Europe, the Company is in the process of upgrading
its MIS systems. The Company has been advised by the third party suppliers of
these systems and upgrades that the upgrades will render the Company's European
MIS systems Year 2000 compliant. Implementation of software products of third
parties, however, will require the dedication of substantial administrative and
management information resources, the assistance of consulting personnel from
third party software vendors and the training of the Company's personnel using
such systems. Based on the information available to date, the Company believes
it will be able to complete its Year 2000 compliance review and make necessary
modifications prior to the end of 1999. Software or systems, which are deemed
critical to the Company's business, are scheduled to be Year 2000 compliant by
the end of calendar year 1999. Nevertheless, particularly to the extent the
Company is relying on the products of other vendors to resolve Year 2000 issues,
there can be no assurances that the Company will not experience delays in
implementing such products. If key systems, or a significant number of systems
were to fail as a result of Year 2000 problems, or the Company were to
experience delays implementing Year 2000 compliant software products, the
Company could incur substantial costs and disruption of its business, which
would potentially have a material adverse effect on the Company's business and
results of operations.
The Company in its ordinary course of business tests and evaluates its own
software products. The Company believes that its software products are generally
Year 2000 compliant, meaning that the use or occurrence of dates on or after
January 1, 2000 will not materially affect the performance of the Company's
software products with respect to four digit date dependent data or the ability
of such products to correctly create, store, process and output information
related to such date data. To the extent the Company's software products are not
fully Year 2000 compliant, there can be no assurance that the Company's software
products contain all necessary software routines and codes necessary for the
accurate calculation, display, storage and manipulation of data involving dates.
To the
18
ADEPT TECHNOLOGY, INC.
extent that the Company's products are sold through system integrators or other
third parties, there can be no assurances that users of the Company's products
will not experience Year 2000 problems as a result of the integration of the
Company's software with noncompliant Year 2000 products of such third party
suppliers. In addition, in certain circumstances, the Company has warranted that
the use or occurrence of dates on or after January 1, 2000 will not adversely
affect the performance of the Company's products with respect to four digit date
dependent data or the ability to create, store, process and output information
related to such data. If any of the Company's licensees experience Year 2000
problems, such licensees could assert claims for damages against the Company.
To date the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance whether
involving the Company's own software products or the software of systems used in
its internal operations. The Company has incurred costs of approximately $2.9
million and expects to incur in total, approximately $3.2 million in connection
with its implementation of a new enterprise resource planning software system at
its San Jose headquarters, which is Year 2000 compliant. Additionally, the
Company has currently not developed a contingency plan related to Year 2000.
There can be no assurances that the Company's resources spent on investigating
and remedying Year 2000 compliance issues will not have a material adverse
effect on the Company's business, financial condition and results of operations.
INTRODUCTION OF SINGLE EUROPEAN CURRENCY
The Company is in the process of addressing the issues raised by the
introduction of the Single European Currency (the "Euro") as of January 1, 1999
and transition to full adoption as of January 1, 2002. The Company's internal
systems that are affected by the initial introduction of the Euro are Euro
capable as of January 1, 1999. The Company does not presently expect that the
introduction and use of the Euro will materially affect the Company's foreign
exchange and hedging activities, or the Company's use of derivative instruments,
or will result in any material increase in costs to the Company. While the
Company will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the
Company's financial condition or overall trends in results of operations.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright and trade secret
protection and nondisclosure agreements to protect its proprietary rights. There
can be no assurance, however, that patent and copyright law and trade secret
protection will be adequate to deter misappropriation of its technology, that
any patents issued to the Company will not be challenged, invalidated or
circumvented, that the rights granted thereunder will provide competitive
advantages to the Company, or that the claims under any patent application will
be allowed. Company's products or design around any patents issued to the
Company. The Company 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 there can be no assurance that patents will
issue from currently pending or future applications or that the Company's
existing patents or any new patents that may be issued will be sufficient in
scope or strength to provide meaningful protection or any commercial advantage
to the Company. In addition, a substantial amount of the Company's sales are in
international markets and there can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property
rights.
The Company has from time to time received communications from third parties
asserting that the Company is infringing certain patents and other intellectual
property rights of others or seeking indemnification against such alleged
infringement. As claims arise, the Company evaluates their merits. No assurance
can be given that any of these claims will not result in protracted and costly
litigation, that damages for infringement will not be assessed or that should it
be necessary or desirable to obtain a license relating to one or more of the
Company's products or current or future technologies, the Company will be able
to do so on commercially reasonable terms or at all. Litigation, which could
result in substantial cost to and diversion of resources of the Company, may be
necessary to enforce patents or other intellectual property rights of the
Company or to defend the Company against claimed
19
ADEPT TECHNOLOGY, INC.
infringement of the rights of others. Any such litigation and the failure to
obtain necessary licenses or other rights could have a material adverse effect
on the Company's business, financial condition and results of operations. In
particular, some end users of the Company's products have notified the Company
that they have received a claim of patent infringement from the Jerome H.
Lemelson Foundation, alleging that its use of the Company's machine vision
products infringes certain patents issued to Mr. Lemelson. In addition, the
Company has been notified that other end users of the Company's AdeptVision VME
line and the predecessor line of Multibus machine vision products have received
letters from Mr. Lemelson which refer to Mr. Lemelson's patent portfolio and
offer the end user a license to the particular patents. Certain end users have
notified the Company that they may seek indemnification from the Company for
damages or expenses resulting from this matter. The Company cannot predict the
outcome of this or any similar litigation which may arise in the future, and
although such products have not represented a material portion of the Company's
net revenues in fiscal 1999, 1998, 1997 and 1996, there can be no assurance that
such litigation will not have a material adverse effect on the business,
financial condition or results of operations of the Company.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) The Exhibits listed on the accompanying index immediately
following the signature page are filed as part of this report.
b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended December 26, 1998.
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.
Date: February 9, 1999 By: /s/ Brian R. Carlisle
-----------------------------------
Brian R. Carlisle
Chairman of the Board, Chief
Executive Officer and Acting Chief
Financial Officer
20
ADEPT TECHNOLOGY, INC.
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBITS PAGE
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule. 22
21