SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2003 Commission File Number 0-8623
ROBOTIC VISION SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2400145
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
486 AMHERST STREET, NASHUA, NH 03063
(Address of principal executive offices)
Registrant's telephone number, including area code (603) 598-8400
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 twelve 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]
Number of shares of common stock outstanding as of October 29, 2003 73,618,063
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE)
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2003 2002
--------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 695 $ 220
Accounts receivable, net 10,475 13,574
Inventories 13,053 22,767
Prepaid expenses and other current assets 1,138 1,294
--------- ---------
Total current assets 25,361 37,855
Plant and equipment, net 3,304 5,733
Goodwill 1,554 1,554
Software development costs, net 5,789 6,864
Other assets 3,468 4,883
--------- ---------
$ 39,476 $ 56,889
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit facility $ 9,986 $ 7,132
Notes payable and current portion of long-term debt 8,837 4,781
Accounts payable current 2,757 7,641
Accounts payable past-due 6,673 3,403
Accrued expenses and other current liabilities 19,441 15,780
Deferred gross profit 3,252 1,839
--------- ---------
Total current liabilities 50,946 40,576
Long-term debt 1,253 3,076
--------- ---------
Total liabilities 52,199 43,652
Commitments and contingencies -- --
Stockholders' Equity:
Common stock, $.01 par value; shares authorized 100,000 shares,
issued and outstanding; June 30, 2003 - 62,777
and September 30, 2002 - 60,657 628 607
Additional paid-in capital 293,744 292,990
Accumulated deficit (305,416) (278,798)
Accumulated other comprehensive loss (1,679) (1,562)
--------- ---------
Total stockholders' equity (12,723) 13,237
--------- ---------
$ 39,476 $ 56,889
========= =========
See notes to consolidated financial statements.
2
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 10,125 $ 15,348 $ 29,901 $ 44,356
Cost of revenues 6,036 10,435 22,198 29,422
-------- -------- -------- --------
Gross profit 4,089 4,913 7,703 14,934
-------- -------- -------- --------
Operating costs and expenses:
Research and development expenses 2,456 4,497 7,973 13,785
Selling, general and administrative expenses 6,873 8,882 23,743 27,734
Restructuring and other charges 140 1,225 4,311 1,601
-------- -------- -------- --------
Loss from operations (5,380) (9,691) (28,324) (28,186)
Gain on sale of assets 350 -- 350 6,935
Other gains 2,126 -- 2,322 --
Interest expense, net (348) (301) (966) (898)
-------- -------- -------- --------
Loss before income taxes (3,252) (9,992) (26,618) (22,149)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (3,252) $ (9,992) $(26,618) $(22,149)
======== ======== ======== ========
Loss per share
Basic and diluted $ (0.05) $ (0.18) $ (0.44) $ (0.48)
======== ======== ======== ========
Weighted Average Shares
Basic and diluted 61,547 56,298 61,200 46,452
See notes to consolidated financial statements.
3
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS
ENDED JUNE 30,
--------------------------
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net loss $(26,618) $(22,149)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 4,745 7,291
Write-off of tangible and intangible assets -- 269
Loss on retirement of fixed assets 693 --
Non cash interest 12 --
Gain on shares exchanged for debt (1,126) --
Issuance of warrants and shares in lieu of cash 93 39
Bad debt provision 886 --
Inventory provision 3,703 --
Warranty provision 158 756
Gain on sale of assets (350) (6,935)
Changes in operating assets and liabilities (net of effects of business
acquired and assets sold)
Accounts receivable 2,213 1,805
Inventories 6,011 1,805
Prepaid expenses and other current assets 156 60
Other assets 668 (211)
Accounts payable current (4,884) 2,031
Accounts payable past-due 5,015 (3,935)
Accrued expenses and other current liabilities 3,404 (1,206)
Deferred gross profit 1,413 (1,102)
-------- --------
Net cash used in operating activities (3,808) (21,482)
INVESTING ACTIVITIES:
Additions to plant and equipment, net (197) (1,315)
Additions to software development costs (993) (1,466)
Proceeds from sale of assets 350 10,189
-------- --------
Net cash (used in) provided by investing activities (840) 7,408
-------- --------
FINANCING ACTIVITIES:
Issuance of convertible note 500 --
Issuance of promissory note 2,000 --
Proceeds from private placement of common stock, net of offering costs -- 13,591
Net proceeds from revolving credit facility 2,854 295
Repayment of long-term borrowings (213) (2,814)
-------- --------
Net cash provided by financing activities 5,141 11,072
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (18) (86)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 475 (3,088)
Beginning of period 220 3,554
======== ========
End of period $ 695 $ 466
======== ========
Supplemental Cash Flow Information:
Interest paid $ 481 $ 694
======== ========
Taxes paid $ 43 $ 91
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Cashless exercise of prepaid warrants for 11,921 shares of common stock in 2002 $ -- $ 7,067
======== ========
Issuance of 2,433 shares of common stock in payment of accrued warrant premium $ -- $ 1,951
======== ========
Discount on convertible debt $ 65 $ --
======== ========
Trade payables exchanged with shares of common stock $ 1,735 $ --
======== ========
See notes to consolidated financial statements.
4
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS OVERVIEW AND GOING CONCERN CONSIDERATIONS
The unaudited consolidated financial statements of Robotic Vision Systems,
Inc. and its subsidiaries (the "Company") include the consolidated balance sheet
as of June 30, 2003, the consolidated statements of operations for the three and
nine months ended June 30, 2003 and June 30, 2002 and the consolidated
statements of cash flows for the nine months ended June 30, 2003 and June 30,
2002 have been prepared by the Company. In the opinion of management, all
adjustments (which include mainly recurring adjustments) necessary to present
fairly the financial condition, results of operations and cash flows as of June
30, 2003 and for all periods presented have been made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 2002. The
operating results for the three and nine months ended June 30, 2003 are not
necessarily indicative of the operating results for the full fiscal year.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. However, because of
continuing negative cash flow, limited credit facilities, and the uncertainty of
the sale of the Company's Semiconductor Equipment Group ("SEG"), there is no
certainty that the Company will have the financial resources to continue in
business. The Company has incurred operating losses for fiscal 2002 and 2001
amounting to $40,539 and $83,226, respectively, and negative cash flows from
operations for fiscal 2002, 2001 and 2000 amounting to $25,905, $12,584 and
$21,222, respectively. In addition, as of June 30, 2003, the Company was not in
compliance with certain covenants of its revolving credit facility, which was
due to expire on April 28, 2003. The termination date has been extended seven
times by the lender, the latest of which extended the facility termination date
to October 31, 2003. The Company and the lender have a tentative agreement on an
eighth extension, which extends the termination date to November 30, 2003.
Further, the Company has debt payments due which relate to acquisitions the
Company has made. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In November 2002, the Company adopted a formal plan to sell the SEG
business. Accordingly, beginning with the Company's financial results for the
quarter ended December 31, 2002, the Consolidated Statements of Operations were
reclassified to present the results of the SEG business separately from
continuing operations. Furthermore, the Consolidated Balance Sheets were
reclassified to present the assets and liabilities of the SEG business under
discontinued operations and the Consolidated Statements of Cash Flows classified
separately the cash usage from discontinued operations. As such, SEC filings for
the Company's quarters ended December 31, 2002, and March 31, 2003, reported the
SEG business as a discontinued operation.
In the period since the formal plan was adopted, the semiconductor equipment
industry has entered the early stages of a growth cycle driven by rising
semiconductor industry sales. Also, during this period the SEG business has 1)
lowered its fixed costs and breakeven level of revenues, 2) reduced its
liabilities through a series of debt-for-equity exchanges, and 3) recruited an
experienced high technology executive to run the operations and oversee its
eventual sale. As a result, the Company believes that the SEG business will
generate positive cash flow from operations and return to profitability.
Consequently, the Company believes the timing of the SEG business' sale should
be lengthened to allow for the realization of a sale price that more closely
reflects the business' inherent value. Given this change in circumstances, there
exists the possibility that a disposition of the SEG business may not occur
within the timeframe imposed by generally accepted accounting principles to
continue presenting the SEG business as a discontinued operation in the
Company's financial statements. Accordingly, in the quarter ended June 30, 2003,
the Company has reclassified its financial statements to reflect the SEG
business as a continuing operation.
5
The Company has not changed its belief that the sale of the SEG business is
in the best interests of shareholders, nor has the Company changed its desire to
consummate a sale of the SEG business at the earliest date. The Company is
continuing discussions with interested buyers.
On April 17, 2003, the Company engaged the services of The U-Group LLC, for
the purposes of providing management assistance to the SEG business. The
services of The U-Group were terminated in October 2003 effective with the
hiring of Jim Havener, an experienced high-technology executive, to manage the
business and oversee its eventual sale.
On April 11, 2003, the Company entered into a Settlement and Release
Agreement with a major customer, which provided for the release of certain
claims among the parties and the payment of $1,000 to the Company. On the same
date, the Company entered into a Loan Agreement with this customer ("Lender"),
which provided for the loan of $4,000 to the Company, in two tranches, subject
to the conditions of each closing. The first closing occurred on April 11, 2003,
at which time the Company delivered to Lender a secured promissory note in the
amount of $2,000 with a maturity date of April 11, 2004, bearing an interest
rate of 10%. The second closing for the delivery of a separate promissory note
is subject to terms and conditions.
As of June 30, 2003, the Company came to agreement with certain suppliers to
SEG extinguishing $1,735 of past-due accounts payable balances owed to these
vendors and, in exchange, the Company will issue 1,361,308 shares of common
stock. This debt restructuring also included the cancellation of certain
purchase order commitments of the Company totaling approximately $2,340. The
Company is in continued discussions with other suppliers regarding the exchange
of debt for common stock. The Company believes that these steps will enhance the
prospects for an eventual sale of SEG at a higher price than would otherwise be
obtained.
The sale of SEG, if completed, is expected to result in sufficient proceeds
to pay down the Company's debt, reduce accounts payable, and provide working
capital for the Company's remaining businesses, however, no assurance can be
given that SEG will be sold at a price, or on sufficient terms, to allow for
such a result. Furthermore it cannot be assured that any further extensions to
the Company's credit facility will be granted or a new credit facility
established with a new lender. Thus, the Company's financial planning must
include a replacement of its current revolving credit agreement, additional
equity financing or generation of sufficient working capital to operate without
a credit facility. The Company is in discussions with several alternative
lenders and believes it will complete a lending agreement within the next 30
days.
Because the timing and proceeds of a prospective sale of SEG is uncertain,
the Company recognizes that it will require a supplemental infusion of capital.
This capital infusion may be required either for some short-term period prior to
the completion of a sale of the division, or for long-term self-sufficiency of
working capital. To that end, on December 4, 2002, Pat V. Costa, the Company's
Chairman, President and CEO, loaned the Company $500 and the Company issued a 9%
Convertible Senior Note. In September 2003, the Company completed a $5,000
private placement of its shares and warrants to accredited investors. The
Company intends to register the shares sold in this offering and the shares
underlying the warrants at the earliest possible date. The Company's plan also
calls for continued actions to control operating expenses, inventory levels, and
capital expenses, as well as to manage accounts payable and accounts receivable
to enhance cash flow.
If the Company does not sell SEG, it may not have sufficient working capital
to continue in business. Even if the Company were to complete such a sale, there
can be no assurance that the proceeds of a sale will be sufficient to finance
the Company's remaining businesses. In that event, the Company would be forced
either to seek additional financing.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30, 2003 SEPTEMBER 30, 2002
--------------- ------------------
Raw Materials $ 5,650 $ 11,645
Work-in-Process 2,885 6,651
Finished Goods 4,518 4,471
-------- --------
Total $ 13,053 $ 22,767
======== ========
Inventory on consignment was $330 and $1,671 at June 30, 2003 and September
30, 2002, respectively.
6
3. EARNINGS PER SHARE
Basic net loss per share is computed using the weighted average number of shares
outstanding during each period. Diluted net income (loss) per share reflects the
effect of the Company's outstanding stock options and warrants (using the
treasury stock method), except where such options and warrants would be
anti-dilutive. The calculations of net loss per share for the three and nine
months ended June 30, 2003 and June 30, 2002 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
BASIC AND DILUTED EPS
Net loss $ (3,252) $ (9,992) $(26,618) $(22,149)
Premium on warrants (11) (15) (13) (213)
Common stock dividend -- -- (18) --
-------- -------- -------- --------
Net loss - numerator (3,263) (10,007) (26,649) (22,362)
Weighted average number of common shares - denominator 61,547 56,298 61,200 46,452
-------- -------- -------- --------
Net loss per share - basic and diluted $ (0.05) $ (0.18) $ (0.44) $ (0.48)
======== ======== ======== ========
For the three and nine months ended June 30, 2003 and June 30, 2002,
potential common shares were anti-dilutive due to the loss for the period. For
the three months ended June 30, 2003 and June 30, 2002 and for the nine months
ended June 30, 2003 and June 30, 2002, the Company had potential common shares
excluded from the earnings per share calculations of 8,313, 13,133, 10,876 and
13,092, respectively.
4. COMPREHENSIVE INCOME (LOSS)
In addition to net income or loss, the only item that the Company currently
records as other comprehensive income or loss is the change in the cumulative
translation adjustment resulting from the changes in exchange rates and the
effect of those changes upon translation of the financial statements of the
Company's foreign operations. The following table presents information about the
Company's comprehensive loss for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss $ (3,252) $ (9,992) $(26,618) $(22,149)
Effect of foreign currency translation adjustments 107 (302) (117) (240)
-------- -------- -------- --------
Comprehensive loss $ (3,145) $(10,294) $(26,735) $(22,389)
======== ======== ======== ========
7
5. REVOLVING CREDIT FACILITY, NOTES PAYABLE AND LONG-TERM DEBT
REVOLVING CREDIT FACILITY
The Company has a $10,000 revolving credit facility, which was due to expire
on April 28, 2003. The termination date has been extended seven times by the
lender, the latest of which extended the facility termination date to October
31, 2003. The fifth extension contained modifications to certain conditions of
the loan agreement. The Company and the lender have a tentative agreement on an
eighth extension, which extends the termination date to November 30, 2003. The
Company is in discussions with several alternative lenders and believes it will
complete a lending agreement within the next 30 days. The current credit
facility allows for borrowings of up to 90% of eligible foreign receivables up
to $10,000 of availability provided under the Export-Import Bank of the United
States guarantee of certain foreign receivables and inventories, less the
aggregate amount of drawings under letters of credit and any bank reserves. At
June 30, 2003, the amount available under the line was $10,000 against which the
Company had $9,986 of borrowings, resulting in availability at June 30, 2003 of
$14, subject to the terms of the credit facility. Outstanding balances bear
interest at a variable rate as determined periodically by the bank (6% at June
30, 2003). At June 30, 2003, the Company was not in compliance with certain
covenants of the credit agreement, and therefore in technical default, although
the bank continues to make funds available for borrowings. There can be no
certainty that the bank will continue to make funds available and the bank may
immediately call for repayment of outstanding borrowings. Further, due to the
terms of the credit facility, there can be no certainty that there will be
available borrowings under the credit facility.
NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at June 30, 2003 and September 30, 2002
consisted of the following:
JUN 30 SEPT 30
2003 2002
-------- --------
Subordinated note payable - 8.25%, payable in equal quarterly installments of $281, currently due $ 567 $ 850
Abante note payable - 8%, currently due 1,000 1,000
Abante payable - non-interest bearing, discounted at 8%, payable in annual
installments of $500, through November 2006 1,771 1,695
AIID notes payable -- prime rate (4.00% at June 30, 2003 and 4.75% at September 30, 2002) 4,245 4,219
Promissory note, 10%, due April 11, 2004 2,000 --
9% Convertible Senior Note - due December 4, 2005 447 --
Other borrowings 60 93
-------- --------
Total notes payable and long-term debt 10,090 7,857
Less notes payable and current portion of long-term debt (8,837) (4,781)
-------- --------
Long-term debt $ 1,253 $ 3,076
======== ========
On November 21, 2001, the $1,500 note payable issued to the former
principals of Abante Automation Inc. ("Abante") came due, together with 8%
interest thereon from November 29, 2000. In connection with the acquisition of
Abante, the Company agreed to make post-closing installment payments to the
selling shareholders of Abante. These non-interest bearing payments were payable
in annual installments of not less than $500 through November 2005. On November
21, 2001, the first of five annual installments on the Abante payable also
became due, in the amount of $500. Pursuant to an oral agreement with the former
principals of Abante, the Company paid on November 21, 2001 the interest, $250
of note principal and approximately $112 of the first annual installment. The
balance of the sums originally due on November 21, 2001 were rescheduled for
payment in installments through the first quarter of fiscal 2003. In January
2002, the principals demanded current full payment of these amounts or
collateralization of the Company's future payment obligations. The Company did
not agree to the request for collateralization but continued to make certain
payments in accordance with the terms of that agreement, paying the interest,
$250 of note principal and approximately $150 of the first annual installment on
February 21, 2002, and paying approximately $238 of the first annual installment
on May 21, 2002. The Company did not make either the November 2002 note
principal payment of $1,000 or a significant portion of the November 2002 annual
installment payment of $500, and is therefore in default. Although the Company
has failed to make the installment payment, there is no provision in the
agreements that would require the acceleration of future payments due under this
arrangement. As a result, the Company has classified the payments due during
fiscal 2005 and 2006 in the amount of $754 as long-term debt in the accompanying
consolidated financial statements.
8
On January 3, 2002, a payment of $1,855 under a note issued to the former
shareholders of Auto Image ID, Inc. ("AIID") came due together with interest at
prime rate. On the due date, the Company paid the interest and approximately
$240 of note principal to certain of these shareholders. The Company reached an
agreement with the other former shareholders to pay the sums originally due on
January 3, 2002 in three approximately equal principal installments in April
2002, August 2002 and December 2002. In exchange for the deferral, the Company
issued warrants with an exercise price of $1.14 per share. The fair value of
these warrants (determined using Black-Scholes pricing model), totaling
approximately $137, was charged to operations through January 2003. In
accordance with the agreement with the other former stockholders, the Company
made note principal and interest payments on April 1, 2002 of approximately $516
and $31, respectively, and note principal and interest payments on August 1,
2002 of $536 and $29, respectively. The Company did not make the December 2002
and January 2003 installment payments due of $535 and $1,855, respectively, and
is therefore in default. Seven of the former shareholders have filed lawsuits
against the Company seeking payment of all amounts currently past due. There is
no provision in the AIID promissory notes giving rights of acceleration of the
future installments due in the event of default under the arrangement. In July
2003, the Company reached a settlement with certain of these noteholders. These
noteholders agreed to forbear from taking action to enforce their notes until
May 1, 2004 or the earlier occurrence of certain events. On October 29, 2003,
additional noteholders agreed to forbear from taking action until May 1, 2004.
The Company agreed to issue warrants to these noteholders and pay these
noteholders the outstanding interest that had accrued through June 1, 2003.
As of October 31, 2003, the Company was in default on an aggregate of
$14,339 of its borrowings.
Principal maturities of notes payable and long-term debt as of June 30, 2003
are as follows:
2003 $ 8,837
2004 500
2005 753
-------
Total $10,090
=======
On December 4, 2002, Pat V. Costa (the "Holder"), loaned the Company $500
and the Company issued a 9% Convertible Senior Note in the amount of $500. Under
the terms of this note, the Company is required to make semiannual interest
payments in cash on May 15 and November 15 of each year commencing May 2003, and
pay the principal amount on December 4, 2005. This note allows the Holder to
require earlier redemption by the Company in certain circumstances including the
sale of a division at a purchase price at least equal to the amounts then due
under this note. Thus, the Holder may require redemption at the time of the sale
of SEG. This note also allows for conversion into shares of common stock. The
note may be converted at any time by the Holder until the note is paid in full
or by the Company if at any time following the closing date the closing price of
the Company's Common Stock is greater, for 30 consecutive trading days, than
200% of the conversion price. The Holder's conversion price is equal to 125% of
the average closing price of our common stock for the thirty consecutive trading
days ending December 3, 2002, or $0.42 per share. This convertible debt
contained a beneficial conversion feature, and as the debt is immediately
convertible, the Company recorded a dividend in the amount of approximately $18
on December 4, 2002. The Company did not make the semiannual interest payment
due on May 15, 2003. On October 28, 2003, Pat V. Costa agreed to forbear from
exercising his rights with respect to this interest payment until January 14,
2005.
In connection with the 9% Convertible Senior Note, on December 4, 2002, the
Company issued warrants to Pat V. Costa. Under the terms of the warrants, the
Holder is entitled to purchase from the Company shares equal to 25% of the total
number of shares of Common Stock into which the Convertible Senior Note may be
converted or approximately 300,000 shares. The warrants have an exercise price
of $0.63. The Company recorded the fair value of these warrants of approximately
$65 as a discount to the debt using the Black-Scholes valuation model with the
following assumptions: volatility of 107% and risk-free interest rate of 2.49%.
This discount is being amortized over the period from December 4, 2002 to
December 4, 2005.
On December 4, 2002, as a condition to making the loan mentioned above and
in order to secure the prompt and complete repayment, the Company entered into a
Security Agreement with Pat V. Costa. Under the terms of this agreement, the
Company granted Mr. Costa a security interest in certain of the Company's
assets.
On April 11, 2003, the Company entered into a Settlement and Release
Agreement with a major customer, which provided for the release of certain
claims among the parties and the payment of $1,000 to the Company. On the same
date, the Company entered into a Loan Agreement with this customer ("Lender")
which provided for the loan of $4,000 to the Company, in two tranches, subject
to the conditions of each closing. The first closing occurred on April 11, 2003,
at which time the Company delivered to Lender a secured promissory note in the
amount of $2,000 with a maturity date of April 11, 2004, bearing an interest
rate of 10%. The second closing
9
for the delivery of a separate promissory note is subject to terms and
conditions. During the three month period ended June 30, 2003, the Company
recorded a $1,000 other gain relating to the settlement.
6. RESTRUCTURING CHARGES
In February 2003, the Company closed its New Berlin, WI and Tucson, AZ
facilities, and consolidated these SEG operations into its Hauppauge, NY
facility. This restructuring included costs related to the closing of these
facilities, writing off tangible and intangible assets and a reduction of
approximately 50 employees. The charge for this restructuring totaling $3,529
was comprised of facility exit costs of $2,486, property plant and equipment
write-offs of $427, severance charges of $228, and other asset write-offs of
$388.
Also during the nine month period ended June 30, 2003, the Company took
additional steps in order to reduce its costs, including a reduction of
approximately 25 employees at its Hauppauge, NY and Canton, MA facilities,
resulting in severance costs of approximately $180.
In November 2002, certain SEG senior management and technical employees were
granted retention agreements. These agreements allow for employees to receive
cash and stock benefits for remaining with the Company and continuing through
the sale of SEG. The current cash value of the award is approximately $720. The
Company is accruing these agreements over the expected service period, which has
been based upon the estimated timing of the sale of SEG. The Company accrued
approximately $600 as of June 30, 2003.
A summary of the 2003 remaining restructuring costs is as follows:
Q1 & Q2 Q3
LIABILITY AT FISCAL 2003 FISCAL 2003 CASH NON-CASH LIABILITY AT
SEPT. 30, AMOUNTS AMOUNTS AMOUNTS AMOUNTS JUNE 30,
2002 ACCRUED ACCRUED INCURRED INCURRED 2003
------------ ----------- ----------- ---- -------- ------------
Severance payments to employees $ 98 $ 270 $ 140 $ 391 $ -- $ 117
Exit costs from facilities 77 2,486 -- 192 -- 2,371
Write-off of tangible and intangible assets -- 815 -- -- 815 --
Retention agreements -- 600 -- -- -- 600
------ ------ ------ ------ ------ ------
Total $ 175 $4,171 $ 140 $ 583 $ 815 $3,088
====== ====== ====== ====== ====== ======
The Company also took steps in the prior year and recorded restructuring and
other charges of approximately $1,225 and $1,601, respectively, during the three
and nine months ended June 30, 2002. As of October 31, 2003, the Company is in
the final state of negotiating a settlement pertaining to the New Berlin, WI
facility.
7. WARRANTY COSTS
We estimate the cost of product warranties at the time revenue is recognized.
While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates, material usage and
service delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability may be required. We
recorded warranty provisions totaling $71 and $22 during the three month periods
ended June 30, 2003 and June 30, 2002, respectively, and $158 and $756 during
the nine month periods ended June 30, 2003 and 2002, respectively.
8. SALE OF PRODUCT LINE
As of December 15, 2001 the Company sold its one-dimensional material
handling product line ("material handling business"), which had been part of the
Company's Acuity CiMatrix division, to affiliates of SICK AG of Germany
("SICK"). The material handling business had designed, manufactured and marketed
one-dimensional bar code reading and machine vision systems and related products
used in the automatic identification and data collection market to track
packages for the parcel delivery services and material handling industries. The
sales price was $11,500, which included the right to receive $500 following the
expiration of a 16-month escrow to cover indemnification claims. The costs of
the transaction were approximately $800. The Company recorded a net gain of
$6,935 in the first quarter of fiscal 2002 related to the sale of the material
handling business. For the period from October 1, 2001 through December 15,
2001, the material handling business had revenues of approximately $2,800 and
had an operating loss of approximately $250.
10
On June 5, 2003, the Company came to an agreement with SICK on the remaining
escrow in the amount of $350 and recorded the amount as a net gain in the
quarter ended June 30, 2003, related to the sale of the material handling
business.
9. SEGMENT INFORMATION
The Company operates in two reportable segments serving the machine vision
industry. The Company has determined its reporting segments primarily based on
the nature of the products offered by the Semiconductor Equipment Group and the
Acuity CiMatrix division. The Semiconductor Equipment Group, which is comprised
of the Electronics subdivision, including Abante Automation, supplies inspection
equipment to the semiconductor industry. The Acuity CiMatrix division designs,
manufactures and markets 2-D data collection products and barcode reading
systems, as well as 2-D machine vision systems and lighting products for use in
industrial automation.
The accounting policies of each segment are the same as those described in
the annual report on Form 10-K. Sales between segments are determined based on
an intercompany price that is consistent with external customers. Intersegment
sales by the Acuity CiMatrix division were approximately $56 and $16 for the
nine months ended June 30, 2003 and June 30, 2002, respectively. All
intercompany profits are eliminated in consolidation. Other income (loss)
includes of unallocated corporate general and administrative expenses. Other
assets are comprised primarily of corporate accounts. Although certain research
activities are conducted by the Acuity CiMatrix division for the Semiconductor
Equipment Group, research and development expenses are reported in the segment
where the costs are incurred. The following table presents information about the
Company's reportable segments. All intercompany transactions have been
eliminated.
11
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
REVENUES:
Semiconductor Equipment .................................................... $ 5,032 $ 10,450 $ 16,078 $ 24,125
Acuity CiMatrix ............................................................ 5,093 4,898 13,823 20,231
-------- -------- -------- --------
Total Revenues ................................................... $ 10,125 $ 15,348 $ 29,901 $ 44,356
======== ======== ======== ========
LOSS FROM OPERATIONS:
Semiconductor Equipment .................................................... $ (3,180) $ (5,365) $(18,661) $(16,622)
Acuity CiMatrix .......................................................... (871) (2,017) (3,718) (5,238)
Other ...................................................................... (1,329) (2,309) (5,945) (6,326)
-------- -------- -------- --------
Total loss from operations ....................................... $ (5,380) $ (9,691) $(28,324) $(28,186)
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION:
Semiconductor Equipment .................................................... $ 873 $ 1,616 $ 2,805 $ 4,767
Acuity CiMatrix ............................................................ 551 712 1,804 2,255
Other ...................................................................... 41 67 136 269
-------- -------- -------- --------
Total depreciation and amortization .............................. $ 1,465 $ 2,395 $ 4,745 $ 7,291
======== ======== ======== ========
TOTAL ASSETS
Semiconductor Equipment .................................................... $ 24,452 $ 50,612 $ 24,452 $ 50,612
Acuity CiMatrix ............................................................ 13,486 20,300 13,486 20,300
Other ...................................................................... 1,538 1,702 1,538 1,702
-------- -------- -------- --------
Total assets ..................................................... $ 39,476 $ 72,614 $ 39,476 $ 72,614
======== ======== ======== ========
EXPENDITURES FOR PLANT AND EQUIPMENT, NET
Semiconductor Equipment .................................................... $ (43) $ 923 $ 173 $ 1,030
Acuity CiMatrix ............................................................ 6 3 24 246
Other ...................................................................... -- 16 -- 39
-------- -------- -------- --------
Total expenditures for plant and equipment, net .................. $ (37) $ 942 $ 197 $ 1,315
======== ======== ======== ========
CAPITALIZED AMOUNTS OF SOFTWARE DEVELOPMENT COSTS
Semiconductor Equipment .................................................... $ 146 $ 506 $ 534 $ 1,068
Acuity CiMatrix ............................................................ 153 131 459 398
-------- -------- -------- --------
Total capitalized amounts of software development costs .......... $ 299 $ 637 $ 993 $ 1,466
======== ======== ======== ========
10. SUBSEQUENT EVENTS
On August 5, 2003, the Company's $10,000 revolving credit facility, was
extended a fifth time by the lender, extending the facility termination date to
August 31, 2003, subject to the Company meeting certain conditions. This
amendment also included certain modifications to the loan agreement. On
September 19, 2003 the credit facility was extended a sixth time, extending the
facility termination date to September 30, 2003. On October 10, the credit
facility was extended a seventh time, extending the termination date to October
31, 2003. The Company and the lender have a tentative agreement on an eighth
extension, which extends the termination date to November, 2003.
In connection with the debt restructuring agreements for the period ended
June 30, 2003, discussed in note 1, the Company has also come to agreement with
certain suppliers during the period of July 1 to September 30, 2003. Under the
terms of these agreements, the Company will extinguish $1,071 of past-due
accounts payable balances owed to these vendors and, in exchange, the Company
will issue 837,619 shares of common stock. This debt restructuring also included
the cancellation of certain purchase order commitments of the Company totaling
approximately $425.
On September 26, 2003, the Company completed a $5,000 equity funding. The
offering, done as a PIPE (private investment in public equity) transaction,
resulted in net proceeds after transaction costs of approximately $4,500. In the
transaction, 10,000
12
common shares were issued at $0.50 per share and warrants for 5,000 common
shares exercisable over five years at $0.61 per share, the closing price of the
Company's common stock on the day prior to the closing date.
On October 24, 2003, the Company was informed by Nasdaq that its shares were
being delisted from the Nasdaq SmallCap Market effective October 28, 2003. In
making the determination, Nasdaq cited the Company's failure to file, by October
24, 2003, an amended Form 10-Q for the three months ended June 30, 2003. The
October 24 deadline had been set by a Nasdaq Listing Qualifications Hearing
Panel for the Company to amend its filing to comply with SAS 100.
The Company was informed by Nasdaq that, upon the filing of a compliant Form
10-Q, RVSI's shares will be eligible to trade on the real-time,
multiple-market-maker OTC Bulletin Board. The Company also has the right to
appeal the decision of the Nasdaq Qualifications Hearing Panel within 15 days of
the decision, and the Company has announced it intends to make such an appeal.
On October 20, 2003 the Company entered into a agreement with International
Product Technology, Inc.("IPT"), to sell IPT certain assets of its Systemation
Business, primarily consisting of inventory and intellectual property. Under the
terms of this agreement, the Company has sold IPT certain assets and in exchange
receive $40 in cash and a promissory note for the principal amount of
approximately $3,629.
13
11. RECENT ACCOUNTING PRONOUNCEMENTS
Restructuring -- In July 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (FAS 146), which nullifies
EITF Issue No. 94-3. FAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No. 94-3 had recognized the liability at the commitment date to an
exit plan. The Company adopted the provisions of FAS 146 effective for exit or
disposal activities initiated after December 31, 2002. The effect of adopting
FAS 146 is recognized in the consolidated financial statements.
Guarantees -- In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), Guarantor's Accounting And Disclosure Requirements For Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 addresses the
disclosure requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 were effective for the Company
in its quarter ended December 31, 2002. The liability recognition requirements
will be applicable prospectively to all guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material effect on the
Company's balance sheet or results of operations statements.
On April 30, 2003, the FASB issued FAS 149, Amendment of FAS 33 on
Derivative Instruments and Hedging Activities. FAS 149 is intended to result in
more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, FAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. FAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company does not
believe the adoption of FAS 149 will have a material effect on its consolidated
financial statements.
On May 15, 2003, the FASB issued FAS 150, Accounting for "Certain Financial
Instruments with Characteristics of both Liabilities and Equity". FAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. FAS 150 represents a significant
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. The Company does not believe the adoption of FAS
150 will have a material effect on its financial statements.
12. GOODWILL
In June 2001, the FASB issued FAS 141, Business Combinations, and FAS 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001 with early adoption permitted for companies with fiscal years
beginning after March 15, 2001. The Company adopted the new rules on accounting
for goodwill and other intangible assets beginning in the first quarter of
fiscal 2003. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives.
In accordance with FAS No. 142, The Company initiated a goodwill impairment
assessment during the second quarter of fiscal 2003. The results of this
analysis concluded that there was no impairment charge. The following table
presents the quarterly results of the Company on a comparable basis assuming
goodwill is not amortized:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
---------- ----------- ----------- ----------
REPORTED NET LOSS $ (3,252) $ (9,992) $ (26,618) $ (22,149)
Goodwill amortization -- 103 -- 311
---------- ---------- ---------- ----------
Adjusted net loss $ (3,252) $ (9,889) $ (26,818) $ (21,838)
========== ========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE:
Reported net loss $ (0.05) $ (0.18) $ (0.44) $ (0.48)
Goodwill amortization -- -- -- 0.01
---------- ---------- ---------- ----------
Adjusted net loss $ (0.05) $ (0.18) $ (0.44) $ (0.47)
========== ========== ========== ==========
14
13. STOCK-BASED COMPENSATION
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25 and
complies with the disclosure provisions of FASB FAS 123, as amended by FASB FAS
148. All equity-based awards to non-employees are accounted for at their fair
value in accordance with FASB SFAS No. 123 and Emerging Issues Task Force
("EITF") Abstract No. 96-18, Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in conjunction with Selling Goods or
Services. Under APB No. 25, compensation expense is based upon the difference,
if any, on the date of grant, between the fair value of the Company's stock and
the exercise price.
Had compensation cost for the Company's stock based compensation plans and
employee stock purchase plan been determined on the fair value at the grant
dates for awards under those plans, consistent with FASB SFAS No. 123, the
Company's net loss and net loss per share would have been reported at the
pro-forma amounts indicated below.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss: ...................................................... $ (3,252) $ (9,992) $(26,618) $(22,149)
Deduct: Total stock-based compensation expense
determined under the fair value based method for
all stock option awards (net of related tax
effects) ..................................................... (352) (598) (1,322) (1,468)
-------- -------- -------- --------
Net loss ................................................... $ (3,604) $(10,590) $(27,940) $(23,617)
-------- -------- -------- --------
Earnings per share:
Basic and diluted- as reported .............................. $ (0.05) $ (0.18) $ (0.44) $ (0.48)
-------- -------- -------- --------
Basic and diluted- pro forma ................................ $ (0.06) $ (0.19) $ (0.46) $ (0.51)
-------- -------- -------- --------
15
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our business activity involves the development, manufacture, marketing and
servicing of machine vision equipment for a variety of industries, including the
global semiconductor industry. Demand for products can change significantly from
period to period as a result of numerous factors including, but not limited to,
changes in global economic conditions, supply and demand for semiconductors and
competitive product offerings. Due to these and other factors, our historical
results of operations including the periods described herein may not be
indicative of future operating results.
As of December 15, 2001, we sold our one-dimensional material handling
product line ("material handling business"), which had been part of our Acuity
CiMatrix division, to affiliates of SICK AG of Germany for approximately $11.5
million. This price included the right to receive $0.5 million following the
expiration of a 16-month escrow to cover indemnification claims. The costs of
this transaction were approximately $0.8 million. On June 5, 2003, we came to an
agreement with SICK on the escrow in the amount of approximately $.4 million and
recorded the amount as a net gain in the quarter ended June 30, 2003. For the
period from October 1, 2001 through December 15, 2001, the material handling
business had revenues of approximately $2.8 million and had an operating loss of
approximately $0.25 million.
Our consolidated financial statements have been prepared assuming we will
continue as a going concern. However, because of continuing negative cash flow,
limited credit facilities, and the uncertainty of the sale of the Semiconductor
Equipment Group ("SEG"), there is no certainty that we will have the financial
resources to continue in business. We have incurred operating losses for fiscal
2002 and 2001 amounting to $40.5 million and $83.2 million, respectively, and
negative cash flows from operations for fiscal 2002, 2001 and 2000 amounting to
$25.9 million, $12.6 million and $21.2 million, respectively. In addition, we
were not as of June 30, 2003, in compliance with certain covenants of our
revolving credit facility, which was due to expire on April 28, 2003. The
termination date has been extended seven times by the lender, the latest of
which extended the facility termination date to October 31, 2003. The fifth
extension contained modifications to certain conditions of the loan agreement.
We have a tentative agreement with the lender on an eighth extension, which
extends the termination date to November 30, 2003. Further, we have debt
payments due which relate to acquisitions we have made. These conditions raise
substantial doubt about our ability to continue as a going concern.
In November 2002, we adopted a formal plan to sell the SEG business.
Accordingly, beginning with our financial results for the quarter ended December
31, 2002, the Consolidated Statements of Operations were reclassified to present
the results of the SEG business separately from continuing operations.
Furthermore, the Consolidated Balance Sheets were reclassified to present the
assets and liabilities of the SEG business under discontinued operations and the
Consolidated Statements of Cash Flows classified separately the cash usage from
discontinued operations. As such, SEC filings for our quarters ended December
31, 2002, and March 31, 2003, reported the SEG business as a discontinued
operation.
In the period since the formal plan was adopted, the semiconductor equipment
industry has entered the early stages of a growth cycle driven by rising
semiconductor industry sales. Also, during this period the SEG business has 1)
lowered its fixed costs and breakeven level of revenues, 2) reduced its
liabilities through a series of debt-for-equity exchanges, and 3) recruited an
experienced high technology executive to run the operations and oversee its
eventual sale. As a result, we believe that the SEG business will generate
positive cash flow from operations and return to profitability. Consequently, we
believe the timing of the SEG business' sale should be lengthened to allow for
the realization of a sale price that more closely reflects the business'
inherent value. Given this change in circumstances, there exists the possibility
that a disposition of the SEG business may not occur within the timeframe
imposed by generally accepted accounting principles to continue presenting the
SEG business as a discontinued operation in our financial statements.
Accordingly, in the quarter ended June 30, 2003, we have reclassified our
financial statements to reflect the SEG business as a continuing operation.
We have not changed our belief that the sale of the SEG business is in the
best interests of shareholders, nor have we changed our desire to consummate a
sale of the SEG business at the earliest date. We are in continuing discussions
with interested buyers.
On April 17, 2003, we engaged the services of The U-Group LLC, for the
purposes of providing management assistance to the SEG business. The
services of The U-Group were terminated in October 2003 effective with the
hiring of Jim Havener, an experienced high-technology executive, to manage the
business and oversee its eventual sale.
16
On April 11, 2003, we entered into a Settlement and Release Agreement with a
major customer, which provided for the release of certain claims among the
parties and the payment of $1.0 million to us. On the same date, we entered into
a Loan Agreement with this customer ("Lender"), which provided for the loan of
$4.0 million to us, in two tranches, subject to the conditions of each closing.
The first closing occurred on April 11, 2003, at which time we delivered to
Lender a secured promissory note in the amount of $2.0 million with a maturity
date of April 11, 2004, bearing an interest rate of 10%. The second closing for
the delivery of a separate promissory note is subject to terms and conditions.
As of June 30, 2003, we have come to agreement with certain suppliers to
SEG, extinguishing approximately $1.7 million of past-due accounts payable
balances owed to these vendors and, in exchange, we will issue 1,361,308 shares
of common stock. This debt restructuring also included the cancellation of
certain purchase order commitments of ours totaling approximately $2.3 million.
We are in continued discussions with other suppliers regarding the exchange of
debt for common stock. We believe that these steps will enhance the prospects
for an eventual sale of SEG at a higher price than would otherwise be obtained.
The sale of SEG, if completed, is expected to result in sufficient proceeds
to pay down our debt, reduce accounts payable, and provide working capital for
our remaining businesses, however, no assurance can be given that SEG will be
sold at a price, or on sufficient terms, to allow for such a result. Furthermore
we cannot be assured that any further extensions to the credit facility will be
granted or a new credit facility established with a new lender. Thus, our
financial planning must include a replacement of our current revolving credit
agreement, additional equity financing or generation of sufficient working
capital to operate without a credit facility. We are in discussions with several
alternative lenders and believe we will complete a lending agreement within the
next 30 days.
Because the timing and proceeds of a prospective sale of SEG is uncertain,
we recognize that we will require a supplemental infusion of capital. This
capital infusion may be required either for some short-term period prior to the
completion of a sale of the division, or for long-term self-sufficiency of
working capital. To that end, on December 4, 2002, Pat V. Costa, our Chairman,
President and CEO, loaned us $0.5 million and we issued a 9% Convertible Senior
Note. In September 2003, we completed a $5.0 million private placement of our
shares and warrants to accredited investors. We intend to register the shares
sold in this offering and the shares underlying the warrants at the earliest
possible date. Our plans also call for continued actions to control operating
expenses, inventory levels, and capital expenses, as well as to manage accounts
payable and accounts receivable to enhance cash flow.
If we do not sell SEG, we may not have sufficient working capital to
continue in business. While we believe that we will complete such a sale, there
can be no assurance that the proceeds of a sale will be sufficient to finance
our remaining businesses. In that event, we would be forced to seek additional
financing.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the 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.
Management believes the following critical accounting policies affect
the more significant judgments and estimates used in the preparation of the
consolidated financial statements. On an on-going basis, management evaluates
its estimates and judgments, including certain assumptions related to going
concern consideration, the allowance for doubtful accounts, inventories,
intangible assets, income taxes, warranty obligations, restructuring costs, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. These estimates form the basis for making
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates. We have identified certain critical accounting
policies, which are described below:
Revenue Recognition
In fiscal 2001, we changed our method of accounting for revenue on
certain semiconductor equipment sales to comply with SEC Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements."
Previously, we generally recognized revenue upon shipment to the customer, and
accrued the cost of providing any undelivered services associated with the
equipment at the time of revenue recognition. Under the new accounting method,
adopted as of October 1, 2000, we now recognize revenue based on the type of
equipment that is sold and the terms and conditions of the underlying sales
contracts including acceptance provisions.
17
We defer all or a portion of the gross profit on revenue transactions
that include acceptance provisions. If the amount due upon acceptance is 20% or
less of the total sales amount, we recognize as revenue the amount due upon
shipment. We record a receivable for 100% of the sales amount and the entire
cost of the product upon shipment. The portion of the receivable that is due
upon acceptance is recorded as deferred gross profit until such time as final
acceptance is received. When client acceptance is received, the deferred gross
profit is recognized in the statement of operations.
If the amount due upon acceptance is more than 20% of the total sales
amount, we recognize no revenue on the transaction. We record a receivable for
100% of the sales amount and remove 100% of the cost from inventory. The entire
receivable and entire inventory balance is then recorded with an offsetting
adjustment to deferred gross profit. When client acceptance is received, the
total sales and cost of sales are recognized in the statement of operations with
release from deferred gross profit.
Providing for Bad Debts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These
estimated allowances are periodically reviewed, on a case-by-case basis,
analyzing the customers' payment history and information regarding customers'
creditworthiness known to us. In addition, we record a reserve based on the size
and age of all receivable balances against which we do not have specific
reserves. If the financial condition of our customers was to deteriorate,
resulting in their inability to make payments, additional allowances may be
required.
Inventory Valuation
We reduce the carrying value of our inventory for estimated
obsolescence or excess inventory by the difference between the cost of inventory
and its estimated net realizable value based upon assumptions about future
demand and market conditions. There can be no assurance that we will not have to
take additional inventory provisions in the future, based upon a number of
factors including: changing business conditions; shortened product life cycles;
the introduction of new products and the effect of new technology.
Goodwill and Other Long-lived Asset Valuations
In June 2001, the FASB issued FAS 141, Business Combinations, and FAS
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001 with early adoption permitted for companies with fiscal
years beginning after March 15, 2001. We adopted the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
2003. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives.
In accordance with FAS 142, we initiated a goodwill impairment assessment
during the second quarter of fiscal 2003. The results of this analysis concluded
that there was no impairment charge.
Income Tax Provision
We record a valuation allowance against deferred tax assets when we
believe that it is more likely than not that these assets will not be realized.
Because of our recurring losses and negative cash flows, we have provided a
valuation allowance against all deferred taxes as of June 30, 2003 and September
30,2002.
Providing for Warranties
We estimate the cost of product warranties at the time revenue is
recognized. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component
suppliers, our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, and revisions to the estimated warranty
liability may be required. We recorded warranty provisions totaling $71, and $22
during the three months ended June 30, 2003, and June 30, 2002, respectively,
and $158 and $756 during the nine months ended June 30, 2003 and June 30, 2002,
respectively.
18
Restructuring
In July 2002, the FASB issued FAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, which nullifies EITF Issue No. 94-3. FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No. 94-3 had
recognized the liability at the commitment date to an exit plan. We adopted the
provisions of FAS 146 effective for exit or disposal activities initiated after
December 31, 2002. The effect of adopting FAS 146 is recognized in the
consolidated financial statements.
Stock-Based Compensation
In December 2002, the FASB issued FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends FAS 123. FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. FAS 148 also
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by FAS 123, we have
elected to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
Opinion No. 25," and has adopted the disclosure-only provisions of FAS 123.
Accordingly, for financial reporting purposes, compensation cost for stock
options granted to employees is measured as the excess, if any, of the estimated
fair market value of our stock at the date of the grant over the amount an
employee must pay to acquire the stock. Equity instruments issued to
nonemployees are accounted for in accordance with FAS 123 and Emerging Issues
Task Force ("EITF") Abstract No. 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services."
Litigation Reserves
We periodically assess our exposure to pending litigation and possible
unasserted claims against us in order to establish appropriate litigation
reserves. In establishing such reserves, we work with our counsel to consider
the availability of insurance coverage, the likelihood of prevailing on a claim,
the probable costs of defending the claim, and the prospects for, and costs of,
resolution of the matter. It is possible that the litigation reserves
established by us will not be sufficient to cove our actual liability and future
results of operations for any particular quarterly or annual period could be
materially adversely affected by the outcome of certain litigation or claims.
Results of Operations
For the three months ended June 30, 2003, bookings and revenues were $11.3
million and $10.1 million, respectively. This compares to bookings of $15.7
million and revenues of $15.3 million for the three months ended June 30, 2002.
Bookings and revenues in the nine months ended June 30, 2003 were $28.4 million
and $29.9 million, respectively, as compared to $43.9 million and $44.4 million
in the nine months ended June 30, 2002. The bookings and revenues in the nine
months ended June 30, 2002, included $1.7 million and $2.8 million,
respectively, associated with our material handling business. Excluding the
material handling business, bookings were $42.1 million and revenues were $41.5
million, respectively, in the nine months ended June 30, 2002. The decline in
our bookings and revenues in the current fiscal year is a reflection of a
general industry slowdown, as a result of which our customers have decreased
demand for our products,. the uncertainty surrounding the potential sale of SEG
as well as our financial constraints impacting our ability to procure inventory
necessary to satisfy customer orders
The gross profit margin was negatively affected by the decline in revenues.
The gross margins as a percentage of revenues were 40.4% and 25.8% in the three
and nine months ended June 30, 2003 compared to 32.0% and 33.7% in the three and
nine month periods ended June 30, 2002. The gross margin improvement in the
three months ended June 30, 2003, in comparison to the same period of the prior
year is due primarily to the lower level of manufacturing overhead expenses in
the current quarter as a result of cost reduction measures initiatived during
fiscal 2003. The lower gross margin in the nine months ended June 30, 2003, in
comparison to the same period of the prior year is largely attributable to a
$3.7 million inventory provision recorded in the quarter ended March 31, 2003.
Excluding the effects of the material handling business, margins were 33.8% of
revenues in the nine month period ended June 30, 2002. The lower gross profit
margin primarily reflects the impact of the fixed costs as a percentage of the
lower level of sales, as well as the impact of $3.7 million of inventory
provisions recorded in the nine months ended June 30, 2003.
19
Research and development expenses were $2.5 million, or 24% of revenues, in
the three months ended June 30, 2003, compared to $4.5 million, or 29% of
revenues, in the three months ended June 30, 2002. Research and development
expenses were $8.0 million, or 27% of revenues, in the nine months ended June
30, 2003, compared to $13.8 million, or 31% of revenues, in the nine months
ended June 30, 2002. Excluding the effects of the material handling business,
research and development expenses were $13.4 million or 32% of revenues in the
nine months ended June 30, 2002. The lower level of expenses reflects a lower
level of fixed costs as a result of cost reductions taken in fiscal 2002. In
fiscal 2003 and 2004, we intend to continue to invest in new wafer scanning
systems and enhanced capabilities for our lead scanning systems and also to
enhance our two-dimensional barcode reading products.
In the three and nine months ended June 30, 2003, we capitalized
approximately $0.3 million and $1.0 million in software development costs under
Statement of Financial Accounting Standards No. 86 as compared with $0.6 million
and $1.5 million in the three and nine month periods ended June 30, 2002. The
related amortization expense was $0.7 million and $2.1 million for the three and
nine month periods, respectively, during both fiscal 2003 and 2002. The
amortization costs are included in cost of sales.
Selling, general and administrative expenses were $6.9 million, or 68% of
revenues, in the three months ended June 30, 2003, compared to $8.9 million, or
58% of revenues, in the three months ended June 30, 2002. Selling, general and
administrative expenses were $23.7 million, or 79% of revenues, in the nine
months ended June 30, 2003, compared to $27.7 million, or 63% of revenues, in
the nine months ended June 30, 2002. Excluding the effects of the material
handling business, selling, general and administrative expenses in the nine
month period ended June 30, 2002 were $27.0 million, or 65% of revenues. Also,
as a result of the slowdown experienced by SEG, we identified certain purchase
commitments for products that have been discontinued. We have recorded a loss in
the amount of $1.1 million related to these commitments in the nine months ended
June 30, 2003. The loss associated with these purchase commitments is included
in selling, general and administrative expenses for the nine months ended June
30, 2003. The lower level of expenses in fiscal 2003 reflects a combination of
lower levels of variable selling expenses associated with the decrease in
revenues and the lower level of fixed costs, as a result of the many cost
reductions taken.
In February 2003, we closed our New Berlin, WI and Tucson, AZ facilities,
and consolidated these SEG operations into our Hauppauge, NY facility. This
restructuring included costs related to the closing of these facilities, writing
off tangible and intangible assets and a reduction of approximately 50
employees. The charge for this restructuring totaling $3.5 million was comprised
of facility exit costs of $2.5 million, property plant and equipment write-offs
of $0.4 million, severance charges of $0.2 million, and other asset write-offs
of $0.4 million.
Also during the nine month period ended June 30, 2003, we took additional
steps in order to reduce our costs, including a reduction of approximately 25
employees at our Hauppauge, NY and Canton, MA facilities, resulting in severance
costs of approximately $0.2 million.
In November 2002, certain SEG senior management and technical employees were
granted retention agreements. These agreements allow for employees to receive
cash and stock benefits for remaining with us and continuing through the sale of
SEG. The current cash value of the award is approximately $0.7 million. We are
accruing these agreements over the expected service period, which has been based
upon the estimated timing of the sale of SEG. We accrued approximately $0.6
million as of June 30, 2003.
20
A summary of the 2003 remaining restructuring costs is as follows:
LIABILITY Q1 & Q2 Q3
AT FISCAL 2003 FISCAL 2003 CASH NON-CASH LIABILITY AT
SEPT. 30, AMOUNTS AMOUNTS AMOUNTS AMOUNTS JUNE 30,
2002 ACCRUED ACCRUED INCURRED INCURRED 2003
--------- ----------- ----------- -------- -------- ----------
Severance payments to employees $ 98 $ 270 $ 140 $ 391 $ -- $ 117
Exit costs from facilities 77 2,486 -- 192 -- 2,371
Write-off of tangible and
intangible assets -- 815 -- -- 815 --
Retention agreements -- 600 -- -- -- 600
------ ------ ------ ------ ------ ------
Total $ 175 $4,171 $ 140 $ 583 $ 815 $3,088
====== ====== ====== ====== ====== ======
We also took steps in the prior year and recorded restructuring and other
charges of approximately $1.2 million and $1.6 million, respectively, during the
three and nine months ended June 30, 2002.
During the three months ended June 30, 2003, we came to agreement with
certain suppliers, extinguishing $1.7 million of past-due accounts payable
balances owed to these vendors and, in exchange, we will issue 1,361,308 shares
of common stock. This debt restructuring also included the cancellation of
certain purchase order commitments totaling approximately $2.3 million. We have
reported this gain from debt restructure of $1.1 million in other gains for the
quarter ended June 30, 2003.
Other gains for the three and nine month periods ended June 30, 2003
included a gain relating to a settlement with a major customer in the amount of
$1.0 million. On April 11, 2003, we entered into a Settlement and Release
Agreement with this customer, which provided for the release of certain claims
among the parties and the $1.0 million payment to us.
Net interest expense was $0.3 million and $1.0 million in the three and nine
month periods ended June 30, 2003, as compared to $0.3 million and $0.9 million
in the three and nine months ended June 30, 2002. The applicable interest rate
under the revolving credit facility is prime plus 2% as of June 30, 2003.
There were no tax provisions in the three and nine months ended June 30,
2003 and 2002, due to the losses incurred and full valuation allowance provided
against net operating loss carryforwards.
Liquidity And Capital Resources
On December 4, 2002, Pat V. Costa (the "Holder"), loaned us $0.5 million and
we issued a 9% Convertible Senior Note in the amount of $0.5 million. Under the
terms of this note, we are required to make semiannual interest payments in cash
on May 15 and November 15 of each year commencing May 2003 and pay the principal
amount on December 4, 2005. This note allows the Holder to require earlier
redemption by us in certain circumstances including the sale of a division at a
purchase price at least equal to the amounts then due under this note. Thus, the
Holder may require redemption at the time of the sale of SEG. This note also
allows for conversion into shares of common stock. The note may be converted at
any time by the Holder until the note is paid in full or by us if at any time
following the closing date the closing price of our Common Stock is greater, for
30 consecutive trading days, than 200% of the conversion price. The Holder's
conversion price is equal to 125% of the average closing price of our common
stock for the thirty consecutive trading days ending on December 3, 2002, or
$0.42 per share. This convertible debt contained a beneficial conversion
feature, and as the debt is immediately convertible, we recorded a dividend in
the amount of approximately $18 thousand on December 4, 2002. We did not make
the semiannual interest payment due on May 15, 2003. On October 28, 2003, Pat V.
Costa agreed to forbear from exercising his rights with respect to this interest
payment until January 14, 2005.
In connection with the 9% Convertible Senior Note, on December 4, 2002, we
issued warrants to Pat V. Costa. Under the terms of the warrants, the Holder is
entitled to purchase shares equal to 25% of the total number of shares of common
stock into which the Convertible Senior Note may be converted, or approximately
300,000 shares. The warrants have an exercise price of $0.63. We recorded the
fair value of these warrants of approximately $65 as a discount to the debt
using the Black-Scholes valuation model with the following assumptions:
volatility of 107% and risk-free interest rate of 2.49%. This discount is being
amortized over the period from December 4, 2002 to December 4, 2005.
21
On December 4, 2002, as a condition to making the loan mentioned above and
in order to secure the prompt and complete repayment, we entered into a Security
Agreement with Pat V. Costa in connection with the 9% Convertible Senior Note.
Under the terms of this agreement, we granted Mr. Costa a security interest in
certain of our assets.
Our cash balance increased $0.5 million, to $0.7 million, in the nine months
ended June 30, 2003, as a result of $3.8 million of net cash used in operating
activities, $0.8 million of net cash used by investing activities, and $5.1
million of net cash provided by financing activities.
The $3.8 million of net cash used in operating activities was primarily a
result of the $26.6 million loss from operations in the nine months ended June
30, 2003, offset in part by a decrease in inventory of $6.0 million, the
write-off of tangible and intangible assets of $4.7 million, depreciation and
amortization of $4.7 million, inventory provisions of $3.7 million, increase in
accrued expenses of $3.4 million, a decrease in accounts receivable of $2.2
million and an increase in deferred gross profit of $1.4 million.
Additions to plant and equipment were $0.2 million in the nine month period
ended June 30, 2003, as compared to $1.3 million in fiscal 2002. The capitalized
software development costs for fiscal 2003 were $1.0 million as compared with
$1.5 million in fiscal 2002.
We have a $10.0 million credit facility, which was due to expire on April
28, 2003. The termination date has been extended seven times by the lender, the
latest of which extended the facility termination date to October 31, 2003. The
fifth extension also contains certained modifications to the loan agreement. We
have a tentative agreement on an eighth extension, which extends the termination
date to November 30, 2003. The Company is currently seeking an alternative
financing source. We are in discussions with several alternative lenders and
believe we will complete a lending agreement within the next 30 days. This
credit facility allows for borrowings of up to 90% of eligible foreign
receivables up to $10 million of availability provided under the Export-Import
Bank of the United States guarantee of certain foreign receivables and
inventories, less the aggregate amount of drawings under letters of credit and
bank reserves. At June 30, 2003, the amount available under the line was $10.0
million, against which we had $9.986 million of borrowings, resulting in
availability at June 30, 2003 of $14 thousand, subject to the terms of the
credit facility. Outstanding balances bear interest at a variable rate as
determined periodically by the bank (6% at June 30, 2003). We are not in
compliance with certain covenants of the credit agreement, and therefore in
technical default on the facility, although, the bank continues to make funds
available for borrowings. There can be no certainty that the bank will continue
to make funds available and the bank may immediately call for repayment of
outstanding borrowings. Further, due to the terms of the credit facility, there
can be no certainty that there will be available borrowings under the line. As
of October 31, 2003, we were in default of an aggregate of $14.3 million of our
borrowings.
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, because of continuing negative cash
flow, limited credit facilities, and the uncertainty of the sale of SEG, there
is no certainty that we will have the financial resources to continue in
business. We have incurred net losses in fiscal 2002 amounting to $41.8 million,
and $104.4 million in fiscal 2001. Net cash used in operating activities
amounted to $25.9 million, $12.6 million and $21.2 million in fiscal 2002, 2001
and 2000, respectively. In addition, we are in technical default of our credit
facility which may not be extended beyond October 31, 2003. The bank may
immediately call for repayment of outstanding borrowings under this credit
facility. These conditions raise substantial doubt about our ability to continue
as a going concern.
In November 2002, we adopted a formal plan to sell the SEG business.
Accordingly, beginning with our financial results for the quarter ended December
31, 2002, the Consolidated Statements of Operations were reclassified to present
the results of the SEG business separately from continuing operations.
Furthermore, the Consolidated Balance Sheets were reclassified to present the
assets and liabilities of the SEG business under discontinued operations and the
Consolidated Statements of Cash Flows classified separately the cash usage from
discontinued operations. As such, SEC filings for our quarters ended December
31, 2002, and March 31, 2003, reported the SEG business as a discontinued
operation.
In the period since the formal plan was adopted, the semiconductor equipment
industry has entered the early stages of a growth cycle driven by rising
semiconductor industry sales. Also, during this period the SEG business has 1)
lowered its fixed costs and breakeven level of revenues, 2) reduced its
liabilities through a series of debt-for-equity exchanges, and 3) recruited an
experienced high technology executive to run the operations and oversee its
eventual sale. As a result, we believe that the SEG business will generate
positive cash flow from operations and return to profitability. Consequently, we
believe the timing of the SEG business' sale should be lengthened to allow for
the realization of a sale price that more closely reflects the business'
inherent value. Given this change in circumstances, there exists the possibility
that a disposition of the SEG business may not occur within the timeframe
imposed by generally accepted accounting principles to continue presenting the
SEG business as a discontinued operation in our
22
financial statements. Accordingly, in the quarter ended June 30, 2003, we have
reclassified our financial statements to reflect the SEG business as a
continuing operation.
We have not changed our belief that the sale of the SEG business is in the
best interests of shareholders, nor have we changed our desire to consummate a
sale of the SEG business at the earliest date. We are in continuing discussions
with interested buyers.
On April 17, 2003, we engaged the services of The U-Group LLC, for the
purposes of providing management assistance to the SEG business. The services of
The U-Group were terminated in October 2003 effective with the hiring of Jim
Havener, an experienced high-technology executive, to manage the business and
oversee its eventual sale.
On April 11, 2003, we entered into a Settlement and Release Agreement with a
major customer, which provided for the release of certain claims among the
parties and the payment of $1.0 million to us. On the same date, we entered into
a Loan Agreement with this customer ("Lender"), which provided for the loan of
$4.0 million to us, in two tranches, subject to the conditions of each closing.
The first closing occurred on April 11, 2003, at which time we delivered to
Lender a secured promissory note in the amount of $2.0 million, with a maturity
date of April 11, 2004, bearing an interest rate of 10%. The second closing for
the delivery of a separate promissory note is subject to terms and conditions.
As of June 30, 2003, we have come to agreement with certain suppliers,
extinguishing $1.7 million of past-due accounts payable balances owed to these
vendors and in exchange, will issue 1,361,308 shares of common stock. This debt
restructuring also included the cancellation of certain purchase order
commitments of ours totaling approximately $2.3 million. We are in continued
discussions with other suppliers regarding the exchange of debt for common
stock. We believe that these steps will enhance the prospects for an eventual
sale of SEG at a higher price than would otherwise be obtained.
On September 26, 2003, we completed a $5.0 million equity funding. The
offering, done as a PIPE (private investment in public equity) transaction,
resulted in net proceeds after transaction costs of approximately $4.5 million.
In the transaction, 10 million common shares were issued at $0.50 per share and
warrants for 5 million common shares exercisable over five years at $0.61 per
share, the closing price of our common stock on the day prior to the closing
date.
Also, we continue to implement plans to control operating expenses,
inventory levels, and capital expenditures as well as plans to manage accounts
payable and accounts receivable to enhance cash flows. The sale of SEG, if
completed, is expected to result in sufficient proceeds to pay down our debt,
reduce accounts payable, and provide working capital for our remaining
businesses. Upon such sale, the assets supporting our current revolving credit
agreement will be substantially reduced and we cannot be assured that this
credit facility will continue to be extended or a new credit facility
established with a new lender. Thus, our financial planning must include a
replacement of our current revolving credit agreement, additional equity
financing or generation of sufficient working capital to operate without a
credit facility.
If we do not succeed in eventually selling SEG, we may have insufficient
working capital to continue in business. While we believe that we will complete
such a sale, there can be no assurance that the proceeds of a sale will be
sufficient to finance our remaining businesses. In that event, we would be
forced either to seek additional financing.
We have operating lease agreements for equipment, and manufacturing and
office facilities. The minimum noncancelable lease payments under these
agreements are as follows (in thousands):
TWELVE MONTH PERIOD ENDING JUNE 30: FACILITIES EQUIPMENT TOTAL
----------------------------------- ---------- --------- -------
2004 $1,505 $ 43 $1,548
2005 1,400 23 1,423
2006 1,025 7 1,032
2007 918 -- 918
------ ------ ------
Total $4,848 $ 73 $4,921
====== ====== ======
Purchase Commitments -- As of June 30, 2003, we had approximately $15.5
million of purchase commitments with vendors. Approximately $14.8 million was
for the Semiconductor Equipment Group, and included computers and manufactures
components for the division's lead and wafer scanning product lines.
Approximately $0.7 million was for the Acuity CiMatrix division and
23
included computers, PC boards, cameras, and manufactured components for the
division's machine vision and two-dimensional inspection product lines. We are
required to take delivery of this inventory over the next three years.
Substantially all deliveries are expected to be taken in the next eighteen
months.
Effect of Inflation
Management believes that during the three and nine months ended June 30,
2003 the effect of inflation was not material.
Recent Accounting Pronouncements
Restructuring -- In July 2002, the FASB issued Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (FAS 146), which nullifies
EITF Issue No. 94-3. FAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No. 94-3 had recognized the liability at the commitment date to an
exit plan. We adopted the provisions of FAS 146 effective for exit or disposal
activities initiated after December 31, 2002. The effect of adopting FAS 146 is
recognized in the consolidated financial statements.
Guarantees -- In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), Guarantor's Accounting And Disclosure Requirements For Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 addresses the
disclosure requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 were effective for us in our
quarter ended December 31, 2002. The liability recognition requirements will be
applicable prospectively to all guarantees issued or modified after December 31,
2002. The adoption of FIN 45 did not have an impact on our consolidated balance
sheet or statement of operations.
On April 30, 2003, the FASB issued FAS 149, Amendment of FAS 33 on
Derivative Instruments and Hedging Activities. FAS 149 is intended to result in
more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, FAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. FAS 149 is effective for
contracts entered into or modified after June 30, 2003. We do not believe the
adoption of FAS 149 will have a material effect on our consolidated financial
statements.
On May 15, 2003, the FASB issued FAS 150, Accounting for "Certain Financial
Instruments with Characteristics of both Liabilites and Equity". FAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. FAS 150 represents a significant
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. We do not believe the adoption of FAS 150 will have
a material effect on our financial statements.
Forward-Looking Statements And Associated Risks
This report contains forward-looking statements including statements
regarding, among other items, financing activities and anticipated trends in our
business, which are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements are based largely on
our expectations and are subject to a number of risks and uncertainties, some of
which cannot be predicted or quantified and are beyond our control, including
the following: we may not have sufficient resources to continue as a going
concern; any significant downturn in the highly cyclical semiconductor industry
or in general business conditions would likely result in a reduction of demand
for our products and would be detrimental to our business; we will be unable to
achieve profitable operations unless we increase quarterly revenues or make
further cost reductions; we are in default of our revolving credit facility;; a
loss of or decrease in purchases by one of our significant customers could
materially and adversely affect our revenues and profitability; economic
difficulties encountered by certain of our foreign customers may result in order
cancellations and reduced collections of outstanding receivables; development of
our products requires significant lead time and we may fail to correctly
anticipate the technical needs of our markets; inadequate cash flows and
restrictions in our banking arrangements may impede production and prevent us
from investing sufficient funds in research and development; the loss of key
personnel could have a material adverse effect on our business; the large number
of shares available for future sale could adversely affect the price of our
common stock; and the volatility of our stock price could adversely affect the
value of an investment in our common stock.
24
Future events and actual results could differ materially from those set
forth in, contemplated by, or underlying the forward-looking statements.
Statements in this report, including those set forth above, describe factors,
among others, that could contribute to or cause such differences.
This 10-Q should be read in conjunction with detailed risk factors in our
annual report on Form 10-K, and other filings with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial instruments that potentially subject us to concentrations of
credit-risk consist principally of cash equivalents and trade receivables. We
place our cash equivalents with high-quality financial institutions, limit the
amount of credit exposure to any one institution and have established investment
guidelines relative to diversification and maturities designed to maintain
safety and liquidity. Our trade receivables result primarily from sales to
semiconductor manufacturers located in North America, Japan, the Pacific Rim and
Europe. Receivables are denominated in U.S. dollars, mostly from major
corporations or distributors or are supported by letters of credit. We maintain
reserves for potential credit losses and such losses have been immaterial.
We are exposed to the impact of fluctuation in interest rates, primarily
through our borrowing activities. Our policy has been to use U.S. dollar
denominated borrowings to fund our working capital requirements. The interest
rates on our current borrowings fluctuate with current market rates. The extent
of risk associated with an increase in the interest rate on our borrowings is
not quantifiable or predictable because of the variability of future interest
rates and our future financing requirements.
We believe that our exposure to currency exchange fluctuation risk is
insignificant because the operations of our international subsidiaries are
immaterial. Sales of our U.S. divisions to foreign customers are primarily U.S.
dollar denominated. During fiscal 2002 and 2003, we did not engage in foreign
currency hedging activities. Based on a hypothetical ten percent adverse
movement in foreign currency exchange rates, the potential losses in future
earnings, fair value of foreign currency sensitive instruments, and cash flows
are immaterial, although the actual effects may differ materially from the
hypothetical analysis.
We estimate the fair value of our notes payable and long-term liabilities
based on quoted market prices for the same or similar issues or on current rates
offered to us for debt of the same remaining maturities. For all other balance
sheet financial instruments, the carrying amount approximates fair value.
ITEM 4. CONTROLS AND PROCEDURES
Our management carried out an evaluation, with the participation of our
Chief Executive Officer (also acting, at the time, as our Chief Financial
Officer), of the effectiveness of our disclosure controls and procedures as of
June 30, 2003. Based upon that evaluation and after consultation with our audit
committee, our Chief Executive Officer concluded that our disclosure controls
and procedures were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
In our Quarterly Report on Form 10-Q for our six month fiscal period ended
March 31, 2003, we disclosed that our senior management team had concluded as
regards our three month fiscal period ended December 31, 2002 that there were
deficiencies in the operation of our internal controls which adversely affected
our ability to record, process, summarize and report financial data and that we
were in the process of determining appropriate corrective action to strengthen
our internal controls and procedures.
Our management, together with the Audit Committee of our Board of Directors,
has reviewed the circumstances that led Deloitte & Touche LLP, our former
auditors, to require us to disclose in our Quarterly Report on Form 10-Q for our
three month fiscal quarter ended December 31, 2002 in their required verbiage
the existence of such internal control deficiencies. Our management and Audit
Committee took note of the fact that our corporate finance personnel had been
absorbed in the weeks following the close of our fiscal quarter ended December
31, 2002 in the assembly and presentation of financial data to satisfy the
requests of a prospective purchaser of our Semiconductor Equipment Group. In
this context, they also took note of our former auditor's observation that the
review of that
25
fiscal quarter's divisional financial results by our corporate finance personnel
has been insufficient, thereby requiring our former auditors to perform a more
extensive review of divisional financial results than they otherwise would have
done in connection with their review of our Quarterly Report on Form 10-Q for
that fiscal period. Assessing the several adjustments to our quarterly operating
results for our fiscal quarter ended December 31, 2002 required by our former
auditors, all of which were acceptable to us, our management and Audit Committee
observed that none of these adjustments were recorded in connection with any
deficiency or material weakness of, and did not relate to any failure in our
internal controls. Our management and Audit Committee also took note that, in
response to an inquiry by our Audit Committee, our former auditor had stated
that these adjustments were not symptomatic of any pervasive deficiency in our
internal controls and that no remedial actions to improve our internal controls
were required. Consequently, our management and Audit Committee has determined
that our disclosure of internal controls deficiencies in our Quarterly Report on
Form 10-Q for our fiscal quarter ended December 31, 2002 was unwarranted. We
have taken measures to ensure that there will be no future diversion of our
corporate finance personnel from their customary tasks related to the
preparation and review of our quarterly and other periodic public filings.
In connection with our filing of this Form 10-Q/A, we reevaluated our
position relative to the sale of the SEG business and its related treatment as a
discontinued operation. In the third quarter ended June 30, 2003, we determined
that the Company would be willing and able to operate the SEG business until
such time as we can obtain a sale price which in our opinion more closely
reflects the inherent value of the SEG business. Based upon our reassessment of
this change to our original plan, and the likelihood that we will not sell the
SEG business within the permitted time frame and, as such, the requirements for
reporting SEG as a discontinued operation are no longer met. Therefore, we have
reclassified our financial statements to reflect the SEG business as a
continuing operation.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A number of purported securities class actions were filed beginning on or
about June 11, 2001 against us, Pat V. Costa, our Chief Executive Officer, and
Frank Edwards, our former Chief Financial Officer, in the Federal District Court
for the District of Massachusetts. The action was consolidated as In Re Robotic
Vision Systems, Inc. Securities Litigation, Master File No. 01-CV-10876 (RGS). A
final judgment was entered July 21, 2003. The settlement amount will be covered
from our directors and officers liability insurance policy.
In February 2003, four of the former shareholders of Auto Image ID, Inc.
filed an action in the United States District Court for the Eastern District of
Pennsylvania, C. A. No. 03-841, seeking payments of approximately $2 million of
amounts allegedly owed under promissory notes issued to them by us in connection
with our purchase of Auto Image ID, Inc. in January 2001. The parties to this
action have agreed to settle the matter. The plaintiffs agreed to forbear in
acting to collect on the promissory notes until May 1, 2004 or the earlier
occurrence of certain events and we agreed to issue to the plaintiffs warrants
to purchase 321,382 shares of our common stock. The parties filed a stipulation
of dismissal on July 7, 2003.
In May 2002, a purported shareholder derivative action entitled Mead Ann
Krim v. Pat V. Costa, et al., Civil Action No. 19604-NC, was filed in the Court
of Chancery of the State of Delaware against the members of our Board of
Directors, and against us as a nominal defendant. The complaint sought damages
from us as a result of the statements at issue in the now settled securities
class actions. The action was dismissed with predjudice as to the plaintiff
only, on May 14, 2003.
In September 2002, McDonald Investments Inc. filed a demand for arbitration
with the American Arbitration Association claiming entitlement to certain
advisory fees in connection with the financing we completed in May 2002. On May
19, 2003, we entered into an agreement with McDonald Investments, Inc. to settle
this dispute. Pursuant to this agreement, we are required to issue warrants to
purchase 150,000 shares of our common stock and pay a limited amount of
McDonald's fees related to this dispute.
In addition to legal proceedings discussed in our annual report on Form 10-K
for the year ended September 30, 2002, we are presently involved in other
litigation matters in the normal course of business. Based upon discussion with
our legal counsel, management does not expect that these matters will have a
material adverse impact on our consolidated financial statements.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
As of June 30, 2003, we agreed to issue 1,361,308 shares of common stock to
certain suppliers in exchange for the cancellation of our debt obligations to
such suppliers, which in the aggregate equaled approximately $1,735,000. The
common stock was not registered under the Securities Act of 1933 because the
common stock was offered and sold in a transaction not involving a public
offering, exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
No Description
------- ------------
10.23 Extension to the Revolving Credit and Security
Agreement, dated May 30, 2003, between PNC
Bank, National Association (as lender and
agent) and Registrant (as borrower). *
10.24 Extension to the Revolving Credit and Security
Agreement, dated August 14, 2003, between PNC
Bank, National Association (as lender and
agent) and Registrant (as borrower). *
10.25 Extension to the Revolving Credit and Security
Agreement, dated September 19, 2003, between
PNC Bank, National Association (as lender and
agent) and Registrant (as borrower).
10.26 Extension to the Revolving Credit and Security
Agreement, dated October 10, 2003, between PNC Bank,
National Association (as lender and agent) and
Registrant (as borrower).
10.27 Asset Purchase Agreement, dated October 20, 2003,
between International Product Technology, Inc. (as
buyer) and Registrant (as seller).
31.1 Rule 13a-14(a) Certification
31.2 Rule 13a-14(a) Certification
32.1 Section 1350 Certification
27
o Previoulsy filed with this quarterly report on Form 10-Q for the quarterly
period ended June 30, 2003.
(b) Reports on Form 8-K for the quarter ended June 30, 2003.
28
During the quarter ended June 30, 2003, we filed or submitted the following
current reports on Form 8-K
Current report on Form 8-K, dated April 11, 2003, was filed on April 14,
2003. The items reported were:
Item 5 - Other Events and Required FD Disclosure, which reported the
issuance of a press release announcing that we had resumed normal
business relations with a major customer who was providing us with a
meaningful loan package; and
Item 7 - Financial Statements and Exhibits, which identified the
exhibit filed with the Form 8-K.
Current report on Form 8-K, dated May 2, 2003, was filed on May 2, 2003.
The items reported were: Item 5 - Other Events and Required FD Disclosure,
which reported the issuance of a press release announcing that John Connolly
had resigned as our Chief Financial Officer and that Jeffrey Lucas had
joined our company to help oversee many of the financial areas previously
assigned to Mr. Connolly.
Item 7 - Financial Statements and Exhibits, which identified the
exhibit filed with the Form 8-K.
Current report on Form 8-K, dated May 20, 2003, was submitted on May 20,
2003. The items reported were:
Item 7 - Financial Statements and Exhibits, which identified the
exhibit furnished with the Form 8-K; and
Item 9 - Regulation FD Disclosure, which reported the issuance of a
press release announcing our financial results for the quarter ended
March 31, 2003.
Current report on Form 8-K, dated May 20, 2003, was submitted on May 20,
2003. The item reported was:
Item 9 - Regulation FD Disclosure, which furnished the Section 906
certification that accompanied our quarterly report on Form 10-Q for the
quarter ended March 31, 2003.
Current report on Form 8-K, dated June 20, 2003, was filed on June 25,
2003, and an amendment thereto was filed on June 27, 2003. The items
reported were:
Item 4 - Change in Registrant's Certifying Accountant, which
reported that on June 20, 2003, Deloitte and Touche, LLP had resigned as
our independent accountants;
Item 5 - Other Events and Required FD Disclosure, which reported the
issuance of a press release announcing our receipt of a Nasdaq
Determination Letter; and
Item 7 - Financial Statements and Exhibits, which identified the
exhibits filed with the Form 8-K.
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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.
ROBOTIC VISION SYSTEMS, INC.
Registrant
Dated: October 31, 2003 /s/ PAT V. COSTA
----------------
PAT V. COSTA
President and CEO
(Principal Executive Officer)
30