Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-27122
ADEPT TECHNOLOGY, INC.
(Exact name of Registrant as Specified in its Charter)
California 94-2900635
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3011 Triad Drive, Livermore, California 94550
(Address of Principal Executive Offices) (Zip Code)
(925) 245-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES [_] NO [X ]
The number of shares of the Registrant's common stock outstanding as of February
6, 2004 was 29,673,581.
1
ADEPT TECHNOLOGY, INC.
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 27, 2003 and June 30, 2003........................................... 3
Condensed Consolidated Statements of Operations
Three and six months ended December 27, 2003 and December 28, 2002............ 4
Condensed Consolidated Statements of Cash Flows
Three and six months ended December 27, 2003 and December 28, 2002............ 5
Notes to Condensed Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 35
Item 4. Controls and Procedures............................................... 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 36
Item 2. Changes in Securities and Use of Proceeds............................ 36
Item 4. Submission of Matters to a Vote For Security Holders................. 37
Item 6. Exhibits and Reports on Form 8-K...................................... 37
Signatures.................................................................... 39
Index to Exhibits............................................................. 40
2
ADEPT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 27, June 30,
2003 2003
--------- ---------
(unaudited)
---------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 6,111 $ 3,234
Short-term investments ........................................................... 1,900 --
Accounts receivable, less allowance for doubtful accounts of $1,493 at
December 27, 2003 and $1,124 at June 30, 2003 ............................... 12,585 10,948
Inventories ...................................................................... 8,217 7,122
Prepaid assets and other current assets .......................................... 1,094 717
--------- ---------
Total current assets ......................................................... 29,907 22,021
Property and equipment at cost ........................................................ 11,401 11,751
Less accumulated depreciation and amortization ........................................ 9,179 8,591
--------- ---------
Property and equipment, net ........................................................... 2,222 3,160
Goodwill .............................................................................. 7,671 7,671
Other intangibles, net ................................................................ 820 1,176
Other assets .......................................................................... 1,492 1,753
--------- ---------
Total assets ................................................................. $ 42,112 $ 35,781
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................................. $ 6,692 $ 6,094
Accrued payroll and related expenses ............................................. 1,475 1,535
Accrued warranty ................................................................. 2,117 1,833
Deferred revenue ................................................................. 1,383 1,145
Accrued restructuring charges .................................................... 2,872 3,122
Other accrued liabilities ........................................................ 353 1,014
Short term debt .................................................................. 1,032 97
--------- ---------
Total current liabilities .................................................... 15,924 14,840
Long term liabilities:
Restructuring charges ............................................................ 166 383
Subordinated convertible note .................................................... 3,000 3,000
Income tax payable ............................................................... 1,890 1,988
Other long term liabilities ...................................................... 1,173 2,153
Commitments and contingencies
Redeemable convertible preferred stock, no par value:
5,000 shares authorized, no shares issued and outstanding at
December 27, 2003 and 100 shares issued and outstanding at June 30, 2003 (liquidation
preference - $25,000) .............................................................. -- 25,000
Shareholders' equity (deficit):
Preferred stock, no par value:
5,000 shares authorized, none issued and outstanding ............................ -- --
Common stock, no par value:
70,000 shares authorized, 29,656 and 15,392 shares issued and outstanding
at December 27, 2003 and June 30, 2003, respectively ............................ 143,247 108,868
Accumulated deficit .................................................................. (123,288) (120,451)
--------- ---------
Total shareholders' equity (deficit) ............................................ 19,959 (11,583)
--------- ---------
Total liabilities, redeemable convertible preferred stock and shareholders'
equity (deficit) .............................................................. $ 42,112 $ 35,781
========= =========
See accompanying notes.
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Six months ended
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net revenue ......................................... $ 11,480 $ 10,748 $ 23,297 $ 21,023
Cost of revenue ..................................... 7,130 7,773 14,575 16,032
-------- -------- -------- --------
Gross margin ........................................ 4,350 2,975 8,722 4,991
Operating expenses:
Research, development and engineering ......... 1,857 3,071 3,719 6,593
Selling, general and administrative ........... 3,755 6,477 7,202 12,920
Restructuring charges ......................... -- -- -- 1,136
Amortization of intangible assets ............. 178 199 356 348
-------- -------- -------- --------
Total operating expenses ............................ 5,790 9,747 11,277 20,997
-------- -------- -------- --------
Operating loss ...................................... (1,440) (6,772) (2,555) (16,006)
Interest income ..................................... 25 41 44 223
-------- -------- -------- --------
Interest expense .................................... 156 11 307 14
-------- -------- -------- --------
Loss before income taxes ............................ (1,571) (6,742) (2,818) (15,797)
Provision for income taxes .......................... 6 -- 19 31
-------- -------- -------- --------
Net loss ............................................ $ (1,577) $ (6,742) $ (2,837) $(15,828)
======== ======== ======== ========
Basic and diluted net loss per share ................ $ (0.07) $ (0.45) $ (0.15) $ (1.08)
======== ======== ======== ========
Number of shares used in computing per share amounts:
Basic ......................................... 21,794 15,074 18,594 14,701
======== ======== ======== ========
Diluted ....................................... 21,794 15,074 18,594 14,701
======== ======== ======== ========
See accompanying notes
4
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended
---------------------------
December 27, December 28,
2003 2002
-------- --------
Operating activities
Net loss ..................................................................... $ (2,837) $(15,828)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................... 1,019 1,417
Amortization of intangibles ................................................ 356 348
Asset impairment charges ................................................... -- 15
Loss on disposal of property and equipment ................................. 56 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ..................................................... (1,637) 2,111
Inventories ............................................................. (1,095) 1,008
Prepaid expenses and other current assets ............................... (377) (2,042)
Other assets ............................................................ 261 213
Accounts payable ........................................................ 598 1,160
Other accrued liabilities ............................................... (199) (1,586)
Accrued restructuring charges ........................................... (467) (855)
Other long term liabilities ............................................. (1,078) 857
-------- --------
Net cash used in operating activities ....................................... (5,400) (13,182)
-------- --------
Investing activities
Business acquisitions, net of cash acquired .................................. -- (198)
Purchase of property and equipment, net ...................................... (137) (282)
Purchases of short-term available-for-sale investments ....................... (1,900) (9,275)
Sales of short-term available-for-sale investments ........................... -- 13,581
-------- --------
Net cash used in investing activities ........................................ (2,037) (3,826)
-------- --------
Financing activities
Net proceeds from issuance of common stock ................................... 9,355 --
Net borrowings under short-term debt ......................................... 935 --
Proceeds from employee stock incentive program and employee
stock purchase plan, net of repurchases and cancellations .................. 24 153
-------- --------
Net cash provided by financing activities .................................... 10,314 153
-------- --------
Increase (decrease) in cash and cash equivalents .............................. 2,877 (9,203)
Cash and cash equivalents, beginning of period ................................ 3,234 17,375
-------- --------
Cash and cash equivalents, end of period ...................................... $ 6,111 $ 8,172
======== ========
Supplemental disclosure of cash flow activity:
Cash paid for interest ...................................................... $ 177 $ 3
Cash paid for income taxes .................................................. $ 22 $ --
Supplemental disclosure of non-cash financing activities:
Conversion of JDS Uniphase preferred stock into Adept common stock .......... $ 25,000 $ --
Issuance of common stock pursuant to terms of Meta acquisition agreement* ... $ -- $ 825
Issuance of common stock into escrow pursuant to terms of line of credit
agreement with former Meta shareholder .................................... $ -- $ 113
Issuance of common stock pursuant to terms of Chad acquisition agreement .... $ -- $ 425
*On March 10, 2003, the Company and the former shareholder of Meta terminated
the $800,000 loan agreement and the Company cancelled the 100,000 shares, valued
at $113,000, issued into escrow
See accompanying notes.
5
ADEPT TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in this report reflects all
adjustments that, in the opinion of management, are necessary for a fair
statement of the consolidated financial position, results of operations and cash
flows as of and for the interim periods. Such adjustments consist of items of a
normal recurring nature, except as discussed in these notes. The condensed
consolidated financial statements included in this quarterly report on Form 10-Q
should be read in conjunction with the audited financial statements and notes
thereto for the fiscal year ended June 30, 2003 included in Adept Technology,
Inc.'s ("Adept" or the "Company") Form 10-K as filed with the Securities and
Exchange Commission on September 29, 2003 and amended by Forms 10-K/A filed on
October 8, 2003 and November 11, 2003.
The results for such periods are not necessarily indicative of the results to be
expected for the full fiscal year or for any other future period.
The Company has experienced declining revenue in each of the last two fiscal
years and has incurred operating losses in the first two quarters of fiscal 2004
and in each of the last four fiscal years. During these periods, the Company
also consumed significant cash and other financial resources. In response to
these conditions, the Company reduced operating costs and employee headcount,
and restructured certain operating lease commitments in fiscal 2002 and fiscal
2003. These adjustments to its operations have significantly reduced its cash
consumption. The Company has also accelerated the phase-in of newer generation
products which have increased margins and, in November 2003, completed a common
stock and warrant financing, as discussed in Notes 6 and 10.
The condensed consolidated financial statements have been prepared assuming that
Adept will continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Net Loss per Share
Basic net loss per share is based on the weighted average number of shares of
common stock outstanding during the period, excluding restricted stock, while
diluted net loss per share is based on the weighted average number of shares of
common stock outstanding during the period and the dilutive effects of common
stock equivalents (primarily stock options, warrants and a convertible note),
determined using the treasury stock method, outstanding during the period,
unless the effect of including the common stock equivalents is anti-dilutive.
There were no differences between basic and diluted net loss per share for any
periods presented.
Derivative Financial Instruments
A foreign currency hedging program was used to hedge the Company's exposure to
foreign currency exchange risk on international operational assets and
liabilities. Realized and unrealized gains and losses on forward currency
contracts that are effective as hedges of assets and liabilities are recognized
in income. Adept recognized losses of $35,000 and $129,000 for the three and six
months ended December 28, 2002, respectively. As of March 2003, the Company
determined that its international activities held or conducted in foreign
currency did not warrant the cost associated with a hedging program due to
decreased exposure of foreign currency exchange risk on international
operational assets and liabilities. As a result, the Company suspended its
foreign currency hedging program in March 2003.
2. Financial Instruments
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term investments
consist principally of commercial paper and tax exempt municipal bonds with
maturities between three and 12 months, market auction rate preferred stock and
auction rate notes with maturities of 12 months or less. Investments are
classified as held-to-maturity, trading, or available-for-sale at the time of
purchase. At December 27, 2003, short-term investments are carried at cost,
which approximates fair value.
6
3. Inventories
Inventories are stated at the lower of standard cost, which approximates actual
(first-in, first-out method) or market (estimated net realizable value). The
components of inventory are as follows:
December 27, June 30,
(in thousands) 2003 2003
------ ------
Raw materials ....... $3,502 $2,422
Work-in-process ..... 2,920 1,858
Finished goods ...... 1,795 2,842
------ ------
$8,217 $7,122
====== ======
4. Warranties
The Company offers a two year parts and one year labor limited warranty for all
of its hardware component products. The specific terms and conditions of those
warranties are set forth in the Company's "Terms and Conditions of Sale", which
is published in sales catalogs and on each sales order acknowledgement. The
Company estimates the costs that may be incurred under its limited warranty, and
records a liability at the time product revenue is recognized. Factors that
affect the Company's warranty liability include the number of installed units,
historical and anticipated rates of warranty claims, and costs per claim. The
Company periodically assesses the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.
Changes in the Company's product liability during fiscal 2004 are as follows:
Six months ended
--------------------------
December 27, December 28,
(in thousands) 2003 2002
------------ ------------
Balance at beginning of fiscal year $ 1,833 $ 1,566
Warranties issued ................. 787 621
Change in warranty provision ...... (50) (15)
Warranty claims ................... (453) (443)
------- -------
Balance at end of period .......... $ 2,117 $ 1,729
======= =======
5. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
December 27, June 30,
(in thousands) 2003 2003
------- -------
Cost:
Machinery and equipment ................. $ 2,821 $ 3,023
Computer equipment ...................... 5,839 5,865
Office furniture and equipment .......... 2,741 2,863
------- -------
11,401 11,751
Accumulated depreciation and amortization 9,179 8,591
------- -------
Net property and equipment .............. $ 2,222 $ 3,160
======= =======
6. Financing Arrangements
On March 21, 2003, the Company and Silicon Valley Bank ("SVB") entered into an
Accounts Receivable Purchase Agreement (the "Purchase Agreement"). Under the
Purchase Agreement, the Company may sell certain of its receivables to SVB on a
full recourse basis for an amount equal to 70% of the face amount of such
purchased receivables with the aggregate face amount of purchased receivables
not to exceed $2.5 million. Upon collection of the receivables and after
deducting interest charges and allowed fees, SVB will remit the balance of the
remaining 30% of the invoice to the Company. In connection with the Purchase
Agreement, the Company granted to SVB a security interest in substantially all
of its assets. Additionally, the Company issued Silicon Valley Bank a warrant to
purchase 100,000 shares of Adept's common stock at a price of $1.00 per share.
The warrant may be exercised on or after September 21, 2003, expires March 21,
2008 and was valued at $20,000 on the date of grant by the Company using the
Black Scholes model. As of December 27, 2003, the warrant has not been exercised
and there was $1.0 million outstanding under the Purchase Agreement. The Company
is required to pay a monthly finance charge equal to 2% of the average daily
gross amount of unpaid purchased receivables. In January 2004, SVB lowered the
monthly finance charge to 1% of the average daily gross amount of unpaid
purchased receivables. The Purchase Agreement includes certain provisions with
which the Company must comply, including but not limited to, the payment of the
Company's employee payroll and state and federal tax obligations as and when
due, the submittal of
7
certain financial and other specified information to SVB on a periodic basis,
and the maintenance of the Company's deposit and investment accounts with SVB.
In addition, the Company cannot transfer or grant a security interest in its
assets without SVB's consent, except for certain ordinary course transactions,
file a voluntary petition for bankruptcy or have filed against Adept an
involuntary petition for relief, or make any transfers to any of its
subsidiaries of money or other assets with an aggregate value in excess of $0.24
million in any fiscal quarter, net of any payments by such subsidiaries to the
Company. Certain of the Company's wholly-owned subsidiaries were also required
to execute a guaranty of all the Company's obligations to SVB and all such
guarantees have been executed. The Company would be deemed in default under the
Purchase Agreement if the Company failed to timely pay any amount owed to SVB;
in the event of its bankruptcy or an assignment for the benefit of creditors; if
the Company becomes insolvent or is generally not paying its debts as they
become due or it is left with unreasonably small capital; if any involuntary
lien or attachment is issued against the Company's assets that is not discharged
within ten days; if the Company materially breaches any of its representations
or if the Company breaches any provisions under the agreement which is not cured
within three business days; if any event of default occurs under any agreement
between the Company and SVB, or any guaranty or subordination agreement executed
in connection with the Purchase Agreement; or if there is a material adverse
change in the Company's business, operations or condition or a material
impairment of its ability to pay its obligations under the agreement or of the
value of SVB's security interest in the Company's assets. In the event of
default under the Purchase Agreement, SVB may cease buying the Company's
receivables, Adept must repurchase upon SVB's demand any outstanding receivables
and pay any obligations under the agreement, including SVB's costs. Adept was in
compliance with these provisions as of December 27, 2003. Since the Company's
obligation to repay SVB is not conditioned on the collection of the related
accounts receivable balances, the Company has recorded the amounts due under
this agreement as short-term debt in the accompanying consolidated balance
sheet.
On August 6, 2003, the Company completed a lease restructuring with Tri-Valley
Campus LLC, the landlord for its Livermore, California corporate headquarters
and facilities, which has significantly reduced the Company's quarterly lease
expenses. Under the lease amendment, the Company was released of its lease
obligations for two unoccupied buildings in Livermore and received a rent
reduction on the occupied building from $1.55 to $1.10 per square foot for a
lease term extending until May 31, 2011. In addition, the lease amendment
carries liquidated damages in the event of default on the lease payments
equivalent to one year of rent obligations on the original lease. In the event
of Adept's bankruptcy or a failure to make payments to the landlord of its
Livermore, California facilities within three days after a written notice from
the landlord, a default would be triggered on the lease. Finally, under the
lease amendment the Company agreed to relocate once to another facility anywhere
in the South or East Bay Area between San Jose, California and Livermore,
California at the landlord's option, provided that the new facility is
comparable to the existing facility and upon providing the Company reasonable
notice and paying the Company's moving expenses.
In connection with the lease restructuring, the Company issued a three-year,
$3.0 million convertible subordinated note due June 30, 2006 to the landlord,
bearing an annual interest rate of 6.0%. Principal and interest are payable in
cash, unless the landlord elects to convert the principal amount of the note
into the Company's common stock. Interest on the principal amount converted may
be paid, at the election of the Company, in cash, by converting such interest
into principal amount or by issuance of Company common stock. The note is
convertible at any time at the option of the holder into the Company's common
stock at a conversion price of $1.00 per share and the resulting shares carry
certain other rights, including piggyback registration rights, participation
rights and co-sale rights in certain equity sales by Adept or its management.
The Company was in compliance with these provisions as of December 27, 2003.
This liability is recorded as long-term Subordinated Convertible Note in the
accompanying consolidated balance sheet. Payment under the note will be
accelerated in the event of a default, including the insolvency or bankruptcy of
the Company, the Company's failure to pay its obligations under the note when
due, the Company's default on certain material agreements, including the
Livermore lease, the occurrence of a material adverse change with respect to the
Company's business or ability to pay its obligations under the note, or a change
of control of Adept without the landlord's consent.
On November 18, 2003, the Company completed a private placement of an aggregate
of approximately 11.1 million shares of common stock to several accredited
investors for a total purchase price of $10.0 million, referred to as the 2003
financing. Net proceeds from the 2003 financing after estimated costs and
expenses were approximately $9.4 million. The investors also received warrants
to purchase an aggregate of approximately 5.6 million shares of common stock at
an exercise price of $1.25 per share, with certain proportionate anti-dilution
protections. The warrants have a term of exercise beginning on May 18, 2004 and
expiring on November 18, 2008. Under the terms of these warrants, the Company
may call the warrants, thereby forcing a cash exercise, in certain circumstances
after the common stock has closed at or above $2.50 per share, subject to any
adjustment for stock splits or similar events, for 20 consecutive trading days
during which a registration statement covering the warrant shares is effective
to permit sales under the registration statement for at least 15 trading days.
The call right is subject to a 30-day advance notice by Adept, which notice
period must be extended for a number of days equal to the number of days for
which the registration statement covering the warrant shares is not effective to
permit sales under the registration statement.
Simultaneous with the completion of the financing, pursuant to an agreement
dated November 14, 2003, the Company's preferred stockholder, JDS Uniphase
Corporation ("JDSU"), converted its preferred stock which it acquired in 2001
into approximately 3.1 million shares of Adept common stock and surrendered its
remaining shares of preferred stock to the Company. Per the terms of the
Company's promissory note with its preferred stockholder, the Company repaid the
$1.0 million promissory note out of the proceeds from the financing. The JDSU
Agreement terminates the rights and obligations, including the previous board
observer rights and voting agreements of JDSU, under the Securities Purchase and
Investor Rights Agreement, dated as of October 22, 2001, between
8
JDSU and Adept pursuant to which JDSU acquired its shares of preferred stock
from Adept which were subsequently converted and surrendered under the JDSU
Agreement, as well as the $1.0 million promissory note dated October 30, 2002
issued by Adept in favor of JDSU.
7. Transactions With Related and Certain Other Parties
On October 28, 2003, Brian Carlisle, Adept's then Chief Executive Officer,
loaned Adept $200,000, with an interest rate per annum of 6.0% based on a
365-day calendar year, payable two years from the date of the loan. On November
15, 2003, Adept paid in full all principal and interest on the loan. There was
no penalty incurred for the prepayment of the principal sum.
8. Accrued Restructuring Charges
The following table summarizes the Company's accrued restructuring costs at
December 27, 2003:
Amounts Amounts
Balance Utilized Utilized Balance
June 30, Q1 Fiscal Q2 Fiscal December 27,
(in thousands) 2003 2004 2004 2003
------ ------ ------ ------
Cash Cash
------ ------
Employee severance costs ... $ 184 $ 45 $ 139 $ --
Lease commitments .......... 3,321 146 137 3,038
------ ------ ------ ------
Total ................... 3,505 $ 191 $ 276 $3,038
====== ====== ====== ======
The Company did not incur any restructuring charges for the six months ended
December 27, 2003. At December 27, 2003, the accrued restructuring balance of
$3.0 million consists of approximately $2,872,000 in short-term restructuring
charges and $166,000 in long-term restructuring charges. These charges were made
during fiscal 2002 and fiscal 2003 and are comprised entirely of cash charges
that are expected to be paid over the next eight quarters, against
non-cancelable lease commitments. On January 16, 2004, the Company completed a
settlement of litigation with the landlord of its San Jose facility (See Note
18).
9. Legal Proceedings
In March 2003, Adept vacated its San Jose facility and ceased paying rent on the
lease. In May 2003, DL Rose Orchard, L.P., owner of the property leased by Adept
at 150 Rose Orchard Way and 180 Rose Orchard Way in San Jose, California, filed
an action against Adept in Santa Clara Superior Court (NO. CV817195) alleging
that Adept breached the leases for the Rose Orchard Way properties by ceasing
rent payments and vacating the property. The complaint claimed damages for
unpaid rent through April 2003, the worth at the time of the award of rent
through the balance of the leases, an award of all costs necessary to ready the
premises to be re-leased and payment of plaintiff costs and attorney's fees.
Adept answered the complaint on July 15, 2003 and vigorously defended the
lawsuit. As the Company had vacated this facility, it recorded expenses in the
amount of $2.3 million in fiscal 2003 for the remaining unpaid rent associated
with this lease; however, the Company did not set aside the cash associated with
such unpaid rent expense. On November 17, 2003, the parties reached an agreement
in principle to resolve all outstanding claims between them. On January 16,
2004, the Company entered into a settlement agreement and mutual general release
with the landlord (See Note 18).
From time to time, the Company is party to various legal proceedings or claims,
either asserted or unasserted, which arise in the ordinary course of its
business. The Company has reviewed pending legal matters and believes that the
resolution of these matters will not have a material adverse effect on its
business, financial condition or results of operations.
Adept has in the past received communications from third parties asserting that
it has infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement.
Some end users of the Company's products have notified the Company that they
have received a claim of patent infringement from the Jerome H. Lemelson
Foundation, alleging that their use of Adept's machine vision products infringes
certain patents issued to Mr. Lemelson. In addition, the Company has been
notified that other end users of the Company's AdeptVision VME line and the
predecessor line of Multibus machine vision products have received letters from
Mr. Lemelson which refer to Mr. Lemelson's patent portfolio and offer the end
user a license to the particular patents. Some of these end users have notified
the Company that they may seek indemnification from Adept for any damages or
expenses resulting from this matter. In January 2004, in a litigation matter not
involving Adept, the U.S. District Court of Las Vegas held that the claims of 14
Lemelson patents are invalid and unenforceable regarding machine vision systems
and bar code readers. Adept is not aware of any appeal of this decision at this
time.
While it is not feasible to predict or determine the likelihood or outcome of
any actions against the Company, it believes the ultimate resolution of these
matters will not have a material adverse effect on its financial position,
results of operations or cash flows.
9
10. Redeemable Convertible Preferred Stock
On October 29, 2001, Adept completed a private placement with JDSU of $25.0
million of its convertible preferred stock consisting of 78,000 shares of Series
A Convertible Preferred Stock and 22,000 shares of Series B Convertible
Preferred Stock, pursuant to a Securities Purchase and Investor Rights Agreement
between the parties.
In December 2002, Adept and JDSU agreed to terminate the supply, development and
license agreement entered into by them in October 2001. Under this agreement,
Adept was obligated to work with JDSU's internal automation organization, OPA,
to develop solutions for component and module manufacturing processes for
sub-micron tolerance assemblies. JDSU retained sole rights for fiberoptic
applications developed under this contract. For non-fiberoptic applications of
component and module manufacturing processes developed by OPA, Adept was
obligated to pay up to $1.0 million each fiscal quarter for the planned
five-quarter effort. Due to changing economic and business circumstances and the
curtailment of development by JDSU and shutdown of their OPA operations, both
parties determined that these development services were no longer in their
mutual best interests. As part of the termination, Adept executed a $1.0 million
promissory note in favor of JDSU earning interest at a rate of 7% per year
payable on or before September 30, 2004.
In November 2003, simultaneous with the completion of the 2003 financing,
pursuant to the JDSU Agreement described in note 6, JDSU agreed to convert its
shares of preferred stock of Adept into approximately 3.1 million shares of
Adept's common stock, equal to approximately 19.9% of Adept's outstanding common
stock prior to the 2003 financing, and to surrender its remaining shares of
preferred stock to Adept. Pursuant to the terms of its $1.0 million promissory
note with Adept, JDSU was repaid in full all principal and interest accrued on
the promissory note with a portion of the proceeds of the 2003 financing. The
JDSU Agreement terminates the rights and obligations, including the previous
board observer rights and voting agreements of JDSU, under the Securities
Purchase and Investor Rights Agreement. The JDSU Agreement also provides that
JDSU is entitled to certain information rights with respect to Adept, including
its annual and quarterly reports and SEC filings, piggyback registration rights
where Adept is filing a registration statement for a public offering of
securities to be issued by Adept or sold by any of its stockholders (excluding
registration statements relating to any employee benefit plan or any merger or
other corporate reorganization), indemnification rights in connection with any
registration of JDSU shares completed by Adept and certain indemnification
rights of up to $3.0 million in connection with the transactions contemplated by
the JDSU Agreement.
11. Income Taxes
The Company typically provides for income taxes during interim reporting periods
based upon an estimate of its annual effective tax rate. The Company has ceased
to recognize the current tax benefit of its operating losses because realization
is not assured as required by SFAS No. 109. For the six months ended December
27, 2003, the Company recorded a tax provision related to its state franchise
taxes and a provision related the operations of its Singapore branch.
The Company also maintains a liability to cover the cost of additional tax
exposure items on the filing of federal and state income tax returns as well as
filings in foreign jurisdictions. Each of these filing jurisdictions may audit
the tax returns filed and propose adjustments. Adjustments arise from a variety
of factors, including different interpretations of statutes and regulations.
12. Goodwill and Intangible Assets
The have been no changes to the carrying amount of goodwill for the six months
ended December 27, 2003:
(in thousands) Components Solutions Total
---------- --------- -----
Balance at June 30, 2003 ................... $3,176 $4,495 $7,671
Changes to goodwill ........................ -- -- --
------ ------ ------
Balance at December 27, 2003 ............... $3,176 $4,495 $7,671
====== ====== ======
There is no goodwill related to the Services and Support segment.
In accordance with SFAS 142, the following is a summary of the gross carrying
amount and accumulated amortization, aggregate amortization expense, and
estimated amortization expense for the next five successive fiscal years related
to the intangible assets subject to amortization.
10
(in thousands) As of December 27, 2003
-------------------------------------------
Gross Carrying Accumulated Net Carrying
Amortized intangible assets Amount Amortization Amount
------ ------------ ------
Developed technology $2,532 $(1,752) $780
Non-compete agreements 380 (340) 40
------ ------- ----
Total $2,912 $(2,092) $820
====== ======= ====
The aggregate amortization expense for six months ended December 27, 2003
totaled $356,000 and the estimated amortization expense for the next five years
is as follows:
(in thousands) Amount
--------
Remaining for fiscal year 2004 325
For fiscal year 2005 267
For fiscal year 2006 195
For fiscal year 2007 33
--------
$ 820
========
13. Net Loss per Share
Basic net loss per share is computed by dividing net loss, the numerator, by the
weighted average number of shares of common stock outstanding, the denominator,
during the period. Diluted net income per share gives effect to equity
instruments considered to be potential common shares, if dilutive, computed
using the treasury stock method of accounting. During the three and six months
ended December 27, 2003 and December 28, 2002, dilutive net loss per share was
computed without the effect of equity instruments considered to be potential
common shares as the impact would be anti-dilutive to the net loss.
Three months ended, Six months ended
-------------------------- --------------------------
December 27, December 28, December 27, December 28,
(in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
Net loss ........................... $ (1,577) $ (6,742) $ (2,837) $(15,828)
Basic and diluted shares outstanding 21,793 15,074 18,594 14,701
======== ======== ======== ========
Basic and diluted net loss per share $ (0.07) $ (0.45) $ (0.15) $ (1.08)
======== ======== ======== ========
14. Impact of Recently Issued Accounting Standards
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133,"Accounting for Derivative Instruments and Hedging
Activities." In particular, SFAS 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
(2) clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45),
and (4) amends certain other existing pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material impact on the Company's
financial position or results of operations.
15. Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in APB Opinion 25 whereby options are granted at market price,
and therefore no compensation costs are recognized. The Company has elected to
retain its
11
current method of accounting as described above and has adopted the disclosure
requirements of SFAS 123 and SFAS 148. If compensation expense for the Company's
stock option plans had been determined based upon fair values at the grant dates
for awards under those plans in accordance with SFAS 123, the Company's pro
forma net earnings and net earnings per share would be as follows:
Three months ended, Six months ended,
--------------------------- --------------------------
December 27, December 28, December 27, December 28,
(in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
Net loss, as reported ............................. $ (1,577) $ (6,742) $ (2,837) $(15,828)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ..... (71) (786) (447) (1,841)
-------- -------- -------- --------
Pro forma net loss ................................ $ (1,648) $ (7,528) $ (3,284) $(17,669)
======== ======== ======== ========
Basic and diluted loss per common share:
As reported .................................... $ (0.07) $ (0.45) $ (0.15) $ (1.08)
======== ======== ======== ========
Pro forma ...................................... $ (0.08) $ (0.50) $ (0.18) $ (1.20)
======== ======== ======== ========
16. Segment Information
Adept's chief operating decision maker is its Chief Executive Officer, or CEO.
Adept's CEO reviews the Company's consolidated results across three segments:
Components, Solutions and Services and Support.
The Components segment provides intelligent automation software and hardware
component products externally to customers and internally to the other two
business segments for support and integration into higher level assemblies.
The Solutions segment takes products purchased from the Components segment
together with materials from third parties, and produces an integrated family of
process ready platforms for the semiconductor, electronics and precision
assembly and other markets, which are driven towards standard offerings.
The Services and Support segment provides support services to our customers
including providing information regarding the use of the Company's automation
equipment, assisting with the ongoing support of installed systems, consulting
services for applications, and training courses ranging from system operation
and maintenance to advanced programming geared for manufacturing engineers who
design and implement automation lines.
The Company evaluates performance and allocates resources based on segment
revenue and segment operating (loss) income. Segment operating (loss) income is
comprised of income before unallocated research and development expenses,
unallocated selling, general and administrative expenses, interest income, and
interest and other expenses.
Management does not fully allocate research and development expenses and
selling, general and administrative expenses when making capital spending and
expense funding decisions or assessing segment performance. There is no
inter-segment revenue recognized. Transfers between segments are recorded at
cost.
Segment information for total assets and capital expenditures is not presented
as such information is not used in measuring segment performance or allocating
resources among segments.
Three months ended Six months ended
-------------------------- ---------------------------
December 27, December 28, December 27, December 28,
(in thousands) 2003 2002 2003 2002
-------- -------- -------- --------
Revenue:
Components ...................... $ 6,423 $ 5,863 $ 12,807 $ 11,883
Solutions ....................... 843 1,328 2,013 2,306
Services and Support ............ 4,214 3,557 8,477 6,834
-------- -------- -------- --------
Total revenue ................... $ 11,480 $ 10,748 $ 23,297 $ 21,023
======== ======== ======== ========
Operating income (loss):
Components ...................... $ 440 $ (1,839) $ 239 $ (4,249)
Solutions ....................... (162) (965) (16) (2,170)
Services and Support ............ 1,173 955 2,585 1,389
-------- -------- -------- --------
Segment profit (loss) ........... 1,451 (1,849) 2,808 (5,030)
Unallocated research, development
and engineering and selling, .
general and administrative ... (2,713) (4,724) (5,007) (9,491)
Restructuring charges ........... -- -- -- (1,136)
Amortization of intangibles ..... (178) (199) (356) (349)
Interest income ................. 25 41 44 223
Interest expense ................ (156) (11) (307) (14)
-------- -------- -------- --------
Loss before income taxes ......... $ (1,571) $ (6,742) $ (2,818) $(15,797)
======== ======== ======== ========
12
17. Comprehensive Income
For the three and six months ended December 27, 2003 and December 28, 2002,
there were no significant differences between the Company's comprehensive loss
and its net loss.
18. Subsequent Event
On January 16, 2004, the Company reached a final settlement with the landlord of
its San Jose facility regarding its lease obligations for that facility. Under
the terms of the settlement agreement and mutual general release, Adept paid the
landlord of its San Jose facility approximately $1.65 million on January 26,
2004 and the landlord agreed to dismiss the action brought against Adept in
Santa Clara Superior Court (NO. CV817195). The landlord's full release will take
effect 93 days after January 26, 2004, except in the event that the Company
initiates any legal proceeding against the landlord or files any voluntary
petition or suffers the filing of an involuntary petition by its creditors under
bankruptcy, reorganization or other relief to debtors. The parties also
acknowledged the termination of the lease agreements that were the subject of
the litigation. Adept had previously recorded restructuring charges, during
fiscal 2003, for the remaining unpaid rent associated with the lease obligations
of its San Jose facility. Since the settlement amount including legal fees is
less than the amount the Company previously accrued for, it expects that the
adjustment will result in a positive income statement impact in the third
quarter of fiscal 2004.
On January 21, 2004 the Company announced its decision to expand its
manufacturing outsource program and close its Orange County, California
manufacturing facility to consolidate operations at its Livermore facility. The
Company expects to complete the Orange County, California consolidation and
incur a significant charge not to exceed $8.0 million, which could include the
impairment of goodwill associated with the CHAD acquisition by the end of the
third quarter of fiscal 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
o the current economic environment affecting us and the markets we
serve;
o sources of revenue and anticipated revenue, including the contribution
from the growth of new products and markets;
o our estimates regarding our liquidity and capital requirements;
o marketing and commercialization of our products under development;
o our ability to attract customers and the market acceptance of our
products;
o our ability to establish relationships with suppliers, systems
integrators and OEMs for the supply and distribution of our products;
o results of any current or future litigation;
o plans for future acquisitions and for the integration of recent
acquisitions;
o plans for future products and services and for enhancements of
existing products and services; and
o our intellectual property.
In some cases, forward-looking statements can be identified by terms such as
"may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "estimate," "predict," "potential," or the negative of these terms,
and similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions subject to risks and uncertainties. Given these uncertainties,
undue reliance should not be placed on these forward-looking statements. Also,
these forward-
13
looking statements represent our estimates and assumptions only as of the date
of this report.
OVERVIEW
We provide intelligent production automation products, components and services
to our customers in many industries. This mix varies considerably from period to
period due to a variety of market and economic factors. We utilize our
comprehensive product portfolio of high precision mechanical components and
application development software (not generally sold separately) to deliver
automation solutions that meet our customer's increasingly complex manufacturing
requirements. We offer our customers a comprehensive and tailored automation
solution that we call Rapid Deployment Automation, or RDA, that reduces the time
and cost to design, engineer and launch products into high-volume production.
Other benefits of our RDA solution include increased manufacturing flexibility
for future product generations, less customized engineering and reduced
dependence on production engineers. We intend to continue to enhance our RDA
capabilities by providing differentiated, value-added integrated systems to
further penetrate selected emerging markets. Our products currently include
system design software, process knowledge software, real-time vision and motion
controls, machine vision systems, robot mechanisms, precision solutions and
other flexible automation equipment. In recent years, we have expanded our robot
product lines and developed advanced software and sensing technologies that have
enabled robots to perform a wider range of functions. In fiscal 2003, we
introduced Amps in Base (AIB) technology with our line of Cobra robots. These
low cost Scara robots have had a positive impact on our gross margins during the
first two quarters of fiscal 2004. Gross margins are expected to continue to
gradually improve over the next several quarters as we integrate AIB technology
into our entire product line.
International sales generally comprise between 30% and 50% of our total revenue
for any given quarter.
This discussion summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the
quarter ended December 27, 2003. Unless otherwise indicated, references to any
quarter in this Management's Discussion and Analysis of Financial Condition and
Results of Operations refer to our fiscal quarter ended December 27, 2003. This
discussion should be read with the consolidated financial statements and
financial statement footnotes included in this Quarterly Report on Form 10-Q and
in conjunction with the audited financial statements and notes thereto for the
fiscal year ended June 30, 2003 included in the Company's Form 10-K as filed
with the Securities and Exchange Commission on September 29, 2003, and amended
by Forms 10-K/A filed on October 8, 2003 and November 12, 2003.
On January 21, 2004, we announced our decision to expand our manufacturing
outsource program and close our Orange County, California manufacturing facility
to consolidate operations at our Livermore facility. We currently expect to
complete the Orange County, California manufacturing consolidation and incur a
significant charge not to exceed $8.0 million, which could include the
impairment of goodwill associated with the CHAD acquisition by the end of the
third quarter of fiscal 2004.
On November 18, 2003, we completed a private placement of an aggregate of
approximately 11.1 million shares of common stock to several accredited
investors for a total purchase price of $10.0 million, referred to as the 2003
financing. Net proceeds from the 2003 financing after estimated costs and
expenses were approximately $9.4 million. The investors also received warrants
to purchase an aggregate of approximately 5.6 million shares of common stock at
an exercise price of $1.25 per share, with certain proportionate anti-dilution
protections. The warrants have a term of exercise beginning on May 18, 2004 and
expiring on November 18, 2008. Under the terms of these warrants, we may call
the warrants, thereby forcing a cash exercise, in certain circumstances after
the common stock has closed at or above $2.50 per share, subject to any
adjustment for stock splits or similar events, for 20 consecutive trading days
during which a registration statement covering the warrant shares is effective
and can be used to sell the registered shares for at least 15 trading days. The
call right is subject to a 30 day advance notice by Adept, which notice period
must be extended for a number of days equal to the number of days for which the
registration statement covering the warrant shares is not effective for sales of
the registered shares.
Simultaneous with the completion of the 2003 financing, pursuant to an agreement
dated November 14, 2003 between JDS Uniphase Corporation (referred to as JDSU)
and us, referred to as the JDSU Agreement, JDSU agreed to convert its shares of
our preferred stock to acquire approximately 3.1 million shares of our common
stock, equal to approximately 19.9% of Adept's outstanding common stock prior to
the 2003 financing, and to surrender its remaining shares of preferred stock to
us. Pursuant to the terms of its $1.0 million promissory note dated October 30,
2002 with us, JDSU was repaid in full all principal and interest accrued on the
promissory note with a portion of the proceeds of the 2003 financing. The JDSU
Agreement also provides that JDSU is entitled to certain information rights with
respect to us, including our annual and quarterly reports and SEC filings,
piggyback registration rights where we are filing a registration statement for a
public offering of securities to be issued by us or sold by any of our
stockholders (excluding registration statements relating to any employee benefit
plan or any merger or other corporate reorganization), indemnification rights in
connection with any registration of JDSU shares completed by us and certain
indemnification rights of up to $3.0 million in connection with the transactions
contemplated by the JDSU Agreement. The JDSU Agreement terminates the rights and
obligations, including the previous board observer rights and voting agreements
of JDSU, under the Securities Purchase and Investor Rights Agreement, dated as
of October 22, 2001, between JDSU and us, pursuant to which JDSU acquired the
100,000 shares of preferred stock from us which were subsequently converted and
surrendered under the JDSU Agreement, as well as the $1.0 million promissory
note dated October 30, 2002 issued by us in favor of JDSU.
14
The terms of one of the purchase agreements for the 2003 financing provide the
investors party to the agreement the right to designate one person for election
to Adept's board of directors, for so long as the investors collectively
beneficially own at least five percent of Adept's outstanding common stock, and
require Adept to use commercially reasonable efforts to cause such designee to
be elected to the board. Effective upon the closing of the 2003 financing, the
investors' designee, Robert J. Majteles, was appointed to our board of directors
to fill a seat vacated by the resignation of Brian Carlisle as a director.
In November 2003, Mr. Robert Bucher joined Adept as our Chief Executive Officer
and Chairman of the Board. Brian Carlisle served as Adept's Chief Executive
Officer and Chairman of the Board from June 1983 to November 2003, at which time
Mr. Carlisle resigned as Chief Executive Officer and Chairman of the Board to
serve as Adept's President. Effective December 5, 2003, Mr. Carlisle ceased
employment with Adept and no longer serves as President. Bruce Shimano served as
a director of Adept and as Vice President, Research and Development and
Secretary of Adept from June 1983 to December 2003. Mr. Shimano resigned as a
director of Adept effective December 2, 2003. Effective December 5, 2003, Mr.
Shimano also ceased employment with Adept and no longer serves as Adept's Vice
President, Research and Development and Secretary or as a director. As of
December 27, 2003, we have not accrued any expenses related to the departure of
Brian Carlisle or Bruce Shimano.
On August 6, 2003, we completed a lease restructuring with Tri-Valley Campus
LLC, the landlord for our Livermore, California corporate headquarters and
facilities, which has significantly reduced our quarterly lease expenses. Under
the lease amendment, we were released of our lease obligations for two
unoccupied buildings in Livermore and received a rent reduction on the occupied
building from $1.55 to $1.10 per square foot for a lease term extending until
May 31, 2011. In addition, the lease amendment carries liquidated damages in the
event of default on the lease payments equivalent to one year of rent
obligations on the original lease. In the event of Adept's bankruptcy or a
failure to make payments to the landlord of our Livermore, California facilities
within three days after a written notice from the landlord, a default would be
triggered on the lease. Finally, under the lease amendment we agreed to relocate
once to another facility anywhere in the South or East Bay Area between San
Jose, California and Livermore, California at the landlord's option, provided
that the new facility is comparable and that the landlord gives Adept reasonable
notice and pays our moving expenses.
In connection with the lease restructuring, we issued a three-year, $3.0 million
convertible subordinated note due June 30, 2006 to the landlord bearing an
annual interest rate of 6.0%. Principal and interest are payable in cash, unless
the landlord elects to convert the principal amount of the note into our common
stock. Interest on the principal amount may be paid, at the election of the
Adept, in cash, by converting such interest into principal amount or by issuance
of our common stock. The note is convertible at any time at the option of the
holder into our common stock at a conversion price of $1.00 per share and the
resulting shares carry certain other rights, including piggyback registration
rights, participation rights and co-sale rights in certain equity sales by Adept
or our management. We were in compliance with these provisions as of December
27, 2003. This liability was recorded as long term Subordinated Convertible Note
in the consolidated balance sheet in this quarterly report on Form 10-Q. Payment
under the note will be accelerated in the event of a default, including the
insolvency or bankruptcy of Adept, Adept's failure to pay our obligations under
the note when due, Adept's default on certain material agreements, including the
Livermore lease, the occurrence of a material adverse change with respect to
Adept's business or ability to pay our obligations under the note, or a change
of control of Adept without the landlord's consent.
In March 2003, we vacated our San Jose facility and ceased paying rent on the
lease. In May 2003, DL Rose Orchard, L.P., owner of the property leased by Adept
at 150 Rose Orchard Way and 180 Rose Orchard Way in San Jose, California, filed
an action against Adept in Santa Clara Superior Court (NO. CV817195) alleging
that Adept breached the leases for the Rose Orchard Way properties by ceasing
rent payments and vacating the property. As we had vacated this facility, we
recorded expenses in the amount of $2.3 million, in fiscal 2003, for the
remaining unpaid rent associated with this lease; however we did not set aside
the cash associated with such unpaid rent expense. On November 17, 2003, the
parties reached an agreement in principle to resolve all outstanding claims
between them. On January 16, 2004, we entered into a settlement agreement and
mutual general release with the landlord of our San Jose facility regarding our
lease obligations for that facility. Under the terms of the settlement
agreement, we paid the landlord of our San Jose facility approximately $1.65
million on January 26, 2004 and the landlord agreed to dismiss the complaint.
The landlord's full release will take effect 93 days after January 26, 2004,
except in the event that we initiate any legal proceeding against the landlord
or file any voluntary petition or suffer the filing of an involuntary petition
by our creditors under bankruptcy, reorganization or other relief to debtors. We
had previously recorded restructuring charges during fiscal 2003, for the
remaining unpaid rent associated with the lease obligations of our San Jose
facility. Since the settlement amount including legal fees is less than the
amount we previously accrued for, we expect that the adjustment will result in a
positive income statement impact in the third quarter of fiscal 2004.
Critical Accounting Policies
Management's discussion and analysis of Adept's financial condition and results
of operations are based upon Adept's consolidated financial statements which
have been prepared in conformity with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates, judgments and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
15
reported amounts of revenue and expenses during the reporting period. On an
on-going basis, we evaluate our estimates, including those related to fixed
price contracts, product returns, warranty obligations, bad debt, inventories,
cancellation costs associated with long-term commitments, investments,
intangible assets, income taxes, restructuring, service contracts, contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making estimates and judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those estimates and
could have a material impact on our consolidated financial statements, and it is
possible that such changes could occur in the near term.
We have identified the accounting principles which we believe are most critical
to our reported financial status by considering accounting policies that involve
the most complex or subjective decisions or assessments. These accounting
policies described below include:
o revenue recognition;
o allowance for doubtful accounts;
o inventories;
o warranty reserve;
o goodwill and other intangible assets;
o identified intangible assets; and
o deferred tax valuation allowance.
Revenue Recognition. We recognize product revenue, in accordance with Staff
Accounting Bulletin 101, ("SAB 101"), when persuasive evidence of a
non-cancelable arrangement exists, delivery has occurred and/or services have
been rendered, the price is fixed or determinable, collectibility is reasonably
assured, legal title and economic risk is transferred to the customer, and when
an economic exchange has taken place. If a significant portion of the price is
due after our normal payment terms, which are 30 to 90 days from the invoice
date, we account for the price as not being fixed and determinable. In these
cases, if all of the other conditions referred to above are met, we recognize
the revenue as the invoice becomes due. In Japan, we sell our products through a
reseller, and we have separate agreements with this reseller for each of our
product lines that it sells. For all RDA Real-Time Control and RDA Mechanical
Components with this reseller, we have a pass-through arrangement, such that
under this arrangement, we defer 100% of the revenue upon shipment and the
reseller is not obligated to remit payment to us until they receive payment from
the end user. When all other aspects of SAB 101 have been satisfied, we
recognize revenue upon payment from the end user. For all other product lines,
no pass-through arrangement exists. For these products we follow our normal
revenue recognition policies.
We recognize software revenue, primarily related to our simulation software
products, in accordance with the American Institute of Certified Public
Accountants' Statement of Position 97-2 ("SOP 97-2") on Software Revenue
Recognition. License revenue is recognized on shipment of the product provided
that no significant vendor or post-contract support obligations remain and that
collection of the resulting receivable is deemed probable by management.
Insignificant vendor and post-contract support obligations are accrued upon
shipment of the licensed product. For software that is installed and integrated
by the customer, revenue is recognized upon shipment assuming functionality has
already been proven in prior sales and there are no customizations that would
cause a substantial acceptance risk. For software that is installed and
integrated by Adept, revenue is recognized upon customer signoff of a Final
Product Acceptance (FPA) form.
Service revenue includes training, consulting and customer support. Revenue from
training and consulting is recognized at the time the service is performed and
the customer has accepted the work.
Deferred revenue primarily relates to items deferred under SAB 101.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We assess the customer's ability to pay based on a number of
factors, including our past transaction history with the customer and credit
worthiness of the customer. Management specifically analyzes accounts receivable
and historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowances for doubtful accounts. We do not
generally request collateral from our customers. If the financial condition of
our customers were to deteriorate in the future, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Specifically our policy is to record specific reserves against known doubtful
accounts. Additionally, a general reserve is calculated based on the greater of
0.5% of consolidated accounts receivable or 20% of consolidated accounts
receivable more than 120 days past due. Specific reserves are netted out of the
respective receivable balances for purposes of calculating the general reserve.
On an ongoing basis, we evaluate the credit worthiness of our customers and
should the default rate change or the financial positions of our customers
change, we may increase the general reserve percentage.
16
Inventories. Inventories are stated at the lower of standard cost, which
approximates actual cost (first-in, first-out method) or market (estimated net
realizable value). We perform a detailed assessment of inventory at each balance
sheet date, which includes, among other factors, a review of component demand
requirements, product lifecycle and product development plans, and quality
issues. As a result of this assessment, we write down inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of the inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual demand and market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required.
Manufacturing inventory includes raw materials, work-in-process, and finished
goods. All work-in-process inventories with work orders that are open in excess
of 180 days are fully written down. The remaining inventory valuation provisions
are based on an excess and obsolete systems report, which captures all obsolete
parts and products and all other inventory, which have quantities on hand in
excess of one year's projected demand. Individual line item exceptions are
identified for either inclusion or exclusion from the inventory valuation
provision. The materials control group and cost accounting function monitor the
line item exceptions and make periodic adjustments as necessary.
Warranty Reserve. We provide for the estimated cost of product warranties at the
time revenue is recognized. While we engage in extensive product quality
programs and processes, including activity monitoring and evaluating the quality
of our components suppliers, our warranty obligation is affected by product
failure rates, material usage and service labor and delivery costs incurred in
correcting a product failure. Should actual product failure rates, material
usage, service labor or delivery costs differ from our estimates, revisions to
the estimated warranty liability may be required.
Goodwill and Other Intangible Assets. The purchase method of accounting for
acquisitions requires extensive use of accounting estimates and judgments to
allocate the purchase price over the fair value of identifiable net assets of
acquired companies, with any excess allocated to goodwill. Other intangible
assets primarily represent developed technology and non-compete covenants.
Adept accounts for goodwill under SFAS 142, "Goodwill and Other Intangible
Assets," which requires us to review for impairment of goodwill on an annual
basis, and between annual tests whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. This impairment review
involves a two-step process.
Step 1- Compare the fair value of the reporting units to their
carrying amounts. If a unit's fair value exceeds its carrying amount,
no further work is performed and no impairment charge is necessary.
For each reporting unit where the carrying amount exceeds fair value,
step 2 is performed.
Step 2- Compare the implied fair value of the reporting unit to its
carrying amount. If the carrying amount of the reporting unit's
goodwill exceeds its implied fair value, an impairment loss will be
recognized in an amount equal to that excess.
We performed our goodwill impairment tests upon adoption of SFAS 142 and again
during the fourth quarters of fiscal 2002 and 2003. In the fourth quarter of
fiscal 2002, we recorded a goodwill impairment charge of $6.6 million as a
result of the annual impairment update. Results of the fiscal 2003 annual
impairment testing did not indicate an impairment of our then existing goodwill,
and therefore we were not required to record a goodwill impairment charge in
fiscal 2003. Upon adoption of SFAS 142 on July 1, 2001, we ceased amortization
of our existing net goodwill balance.
Identified Intangible Assets. Acquisition-related intangibles include developed
technology and non-compete agreements and are amortized on a straight-line basis
over periods ranging from 2-4 years. Identified intangible assets are regularly
reviewed to determine whether facts and circumstances exist which indicate that
the useful life is shorter than originally estimated or the carrying amount of
assets may not be recoverable. The company assesses the recoverability of
identified intangible assets by comparing the projected undiscounted net cash
flows associated with the related asset or group of assets over their remaining
lives against their respective carrying amounts. Impairment, if any, is based on
the excess of the carrying amount over the fair value of those assets.
Deferred Tax Valuation Allowance. We record a valuation allowance to reduce
deferred tax assets to the amount that is most likely to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize deferred tax assets
in the future in excess of our net recorded amount, an adjustment to the
deferred tax asset would increase the income in the period such determination
was made. Likewise, should we have a net deferred tax asset and determine that
we would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax assets would be charged to income in
the period that such determination was made.
17
Results of Operations
Three and Six Months Ended December 27, 2003 and December 28, 2002
Net revenue. Net revenue for the three months ended December 27, 2003 was $11.5
million, an increase of 6.8% from net revenue of $10.7 million for the three
months ended December 28, 2002. Net revenue for the six months ended December
27, 2003 was $23.3 million, an increase of 10.8% from net revenue of $21.0
million for the six months ended December 28, 2002. The increase reflects
revenue growth in our Components and Services segments, partially offset by a
decrease in revenue in our Solutions segment. Components revenue increased 9.1%
to $6.4 million for the three months ended December 27, 2003 from $5.9 million
for the three months ended December 28, 2002. Components revenue increased 7.2%
to $12.8 million in revenue for the six months ended December 27, 2003 compared
to $11.9 million in revenue for the six months ended December 28, 2002. The
increase reflects increased demand for our new Smart Cobra robot as well as an
improvement in general market conditions for capital equipment manufacturers.
Services and Support revenue increased 19.2% to $4.2 million for the three
months ended December 27, 2003 from $3.5 million for the three months ended
December 28, 2002. Services and Support revenue increased 25.0% to $8.5 million
for the six months ended December 27, 2003 from $6.8 million for the six months
ended December 28, 2002. The increase is primarily due to increased shipments
and servicing of end of life products. Solutions revenue decreased 36.5% to $0.8
million for the three months ended December 27, 2003 from $1.3 million for the
three months ended December 28, 2002. Solutions revenue decreased 12.7% to $2.0
million for the six months ended December 27, 2003 from $2.3 million for the six
months ended December 28, 2002.
Domestic and international revenue between segments for the three and six months
ended December 27, 2003 and December 28, 2002 are as follows:
Three months ended Six months ended
---------------------------- ----------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------ ------ ------- -------
Domestic revenue:
Components $3,770 $4,007 $ 6,995 $ 7,311
Solutions 715 1,329 1,849 2,092
Services 2,318 2,255 4,697 4,435
------ ------ ------- -------
Total $6,803 $7,591 $13,541 $13,838
====== ====== ======= =======
International revenue:
Components $2,653 $1,855 $ 5,812 $ 4,571
Solutions 127 -- 163 215
Services 1,897 1,302 3,781 2,399
------ ------ ------- -------
Total $4,677 $3,157 $ 9,756 $ 7,185
====== ====== ======= =======
Our domestic sales totaled $6.8 million for the three months ended December 27,
2003, compared with $7.6 million for the three months ended December 28, 2002, a
decrease of 10.4%. Our domestic sales totaled $13.5 million for the six months
ended December 27, 2003, compared with $13.8 million for the six months ended
December 28, 2002, a decrease of 2.2%. Decreases in domestic revenue for the
Components and Solutions segments were offset in part by an increase in domestic
Service revenue. Components revenue for the first half of 2004 decreased from
the same period a year ago because components revenue for the first half of 2003
included proceeds from a non-recurring contract with a semiconductor capital
equipment OEM. Solutions revenue for the first half of 2004 decreased from the
same period a year ago primarily due to delays in receiving final acceptance
sign off on various projects. Service revenue for the first half of 2004
increased from the same period a year ago primarily due to increased shipments
and servicing of end of life products offset in part by declines in field
service, training and applications revenue. Our international sales totaled $4.7
million for the three months ended December 27, 2003, compared with $3.2 million
for the three months ended December 28, 2002, an increase of 48.1%. Our
international sales totaled $9.8 million for the six months ended December 27,
2003, compared with $7.2 million for the six months ended December 28, 2002, an
increase of 35.8%. The growth in international sales was driven by increased
sales, especially in Europe, of components products and Adept services.
Components revenue for the first half of fiscal 2004 increased from the same
period a year ago primarily due to increased demand in Europe. Service revenue
for the first half of fiscal 2004 increased from the same period a year ago
primarily due to customers investing in extending the useful life of existing
equipment rather than committing capital expenditures to purchase new equipment.
The strength of the Euro combined with increased shipments and servicing of end
of life products also contributed to the increase.
Gross margin. Gross margin as a percentage of net revenue was 37.9% for the
three months ended December 27, 2003 compared to 27.7% for the three months
ended December 28, 2002. Gross margin as a percentage of net revenue was 37.4%
for the six months ended December 27, 2003 compared to 23.7% for the six months
ended December 28, 2002. The improvement in gross margin primarily reflects
higher standard margins due to increased sales of higher margin products and
lower fixed manufacturing expenses resulting from facilities consolidation and
the restructuring of the lease obligations for our Livermore facilities as
described in Overview.
Research, Development and Engineering Expenses. Research, development and
engineering expenses decreased by 39.5% to $1.9 million, or 16.2% of net
revenue, for the three months ended December 27, 2003 from $3.1 million, or
28.6% of net revenue, for the three months ended December 28, 2002. Research,
development and engineering expenses decreased by 43.6% to $3.7 million, or
18
16.0% of net revenue, for the six months ended December 27, 2003 from $6.6
million, or 31.4% of net revenue, for the six months ended December 28, 2002.
The decrease in expense for the three and six months ended December 27, 2003 as
compared to the three and six months ended December 28, 2002 was primarily
attributable to restructuring activities in fiscal 2003. Cost reduction measures
implemented as part of restructuring activities in fiscal 2003 included
significant headcount reductions and facilities consolidation and lease
restructuring.
Salary and related expenses decreased by approximately $0.4 million, or 25.7%,
for the three months ended December 27, 2003 as compared to the three months
ended December 28, 2002. Salary and related expenses decreased by approximately
$1.4 million, or 37.3%, for the six months ended December 27, 2003 as compared
to the six months ended December 28, 2002. The decrease in salary and related
expenses for the three and six months ended December 27, 2003 is primarily a
result of a 40.5% reduction in headcount related to restructuring activities.
Facilities expenses decreased by $0.6 million, or 62.4%, for the three months
ended December 27, 2003 as compared to the three months ended December 28, 2002.
Facilities expenses decreased by $1.2 million, or 60.1%, for the six months
ended December 27, 2003 as compared to the six months ended December 28, 2002.
The decrease in facilities expenses is a result of facilities consolidation and
the restructuring of our lease obligations for our Livermore facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.8 million, or 32.7% of net revenue, for the
three months ended December 27, 2003, as compared with $6.5 million, or 60.3% of
net revenue, for the three months ended December 28, 2002. Selling, general and
administrative expenses were $7.2 million, or 31.0% of net revenue, for the six
months ended December 27, 2003, as compared with $12.9 million, or 61.5% of net
revenue, for the six months ended December 28, 2002.
The decrease in expense for the three and six months ended December 27, 2003 as
compared to the six months ended December 28, 2002 was primarily attributable to
restructuring activities in fiscal 2003. Cost reduction measures implemented as
part of restructuring activities in fiscal 2003 included significant headcount
reductions and facilities consolidation and lease restructuring.
Salary and related expenses decreased by approximately $0.7 million, or 21.1%,
for the three months ended December 27, 2003 as compared to the three months
ended December 28, 2002. Salary and related expenses decreased by approximately
$2.2 million, or 32.3%, for the six months ended December 27, 2003 as compared
to the six months ended December 28, 2002. The decrease in salary and related
expenses for the three and six months ended December 27, 2003 is primarily a
result of a 32.9% reduction in headcount related to restructuring activities.
Facilities expenses decreased by $0.7 million, or 54.7%, for the three months
ended December 27, 2003 as compared to the three months ended December 28, 2002.
Facilities expenses decreased by $1.3 million, or 58.0%, for the six months
ended December 27, 2003 as compared to the six months ended December 28, 2002.
The decrease in facilities expenses is a result of facilities consolidation and
the restructuring of our lease obligations for our Livermore facilities. The
decrease is also attributable to a $1.0 million accrual recorded during the
three and six months ended December 28, 2002 for the promissory note due to
JDSU.
Accrued Restructuring Charges. We did not record any restructuring charges for
the three and six months ended December 27, 2003. At December 27, 2003, the
accrued restructuring balance of $3.0 million consists of approximately
$2,872,000 in short-term restructuring charges and approximately $166,000 in
long-term restructuring charges. These charges were made during fiscal 2002 and
fiscal 2003 and are comprised entirely of cash charges that are expected to be
paid over the next eight quarters against non-cancelable lease commitments.
Under terms of the settlement agreement, effective January 16, 2004, relating to
our San Jose, California lease litigation, we paid the landlord of our San Jose
facility approximately $1.65 million on January 26, 2004.
The following table summarizes our accrued restructuring costs at December 27,
2003:
Amounts Amounts
Balance Utilized Utilized Balance
June 30, Q1 Fiscal Q2 Fiscal December 27,
(in thousands) 2003 2004 2004 2003
------ ------ ------ ------
Cash Cash
------ ------
Employee severance costs 184 $ 45 $ 139 $ --
Lease commitments ...... 3,321 146 137 3,038
------ ------ ------ ------
Total ............... 3,505 $ 191 $ 276 $3,038
====== ====== ====== ======
Amortization of Goodwill and Other Intangibles. Other intangibles amortization
was approximately $178,000 for the three months ended December 27, 2003 compared
to approximately $199,000 for the three months ended December 28, 2002. Other
intangibles amortization was approximately $356,000 for the six months ended
December 27, 2003 compared to approximately $348,000 for the six months ended
December 28, 2002. Goodwill is no longer subject to amortization, but instead is
now subject to impairment testing at least on an annual basis.
Interest Income (Expense). Net interest expense for the three months ended
December 27, 2003 was approximately $131,000
19
compared to net interest income of approximately $30,000 for three months ended
December 28, 2002. Net interest expense for the six months ended December 27,
2003 was approximately $263,000 compared to net interest income of approximately
$209,000 for six months ended December 28, 2002. Interest expense for the three
and six months ended December 27, 2003 primarily reflects charges incurred on
advances received under the Silicon Valley Bank accounts receivable purchase
facility. Interest expense also reflects interest incurred on the $3.0 million
convertible note issued in connection with the Livermore lease restructuring and
interest accrued on our $1.0 million promissory note owed to JDSU, which was
paid in November 2003. Net interest income for the three and six months ended
December 28, 2002 reflects the combined effect of higher interest rates and
higher average cash balances compared to the three and six months ended December
27, 2003.
Provision for (Benefit) from Income Taxes. Our effective tax rate was less than
1% for the three and six months ended December 27, 2003 and less than 1% for the
three and six months ended December 28, 2002. We recorded a tax provision
related to our state franchise taxes and a provision related to our Singapore
subsidiary tax during the three and six months ended December 27, 2003,
resulting in a 1% overall tax rate. For the three and six months ended December
28, 2002, the effective tax rate was based on estimates of the annual effective
tax rate.
We also maintain a liability to cover the cost of additional tax exposure items
on the filing of federal and state income tax returns as well as filings in
foreign jurisdictions. Each of these filing jurisdictions may audit the tax
returns filed and propose adjustments. Adjustments arise from a variety of
factors, including different interpretations of statutes and regulations.
Derivative Financial Instruments. Our foreign currency hedging program is used
to hedge our exposure to foreign currency exchange risk on local international
operational assets and liabilities. Realized and unrealized gains and losses on
forward currency contracts that were effective as hedges of assets and
liabilities were recognized in income as a component of selling, general and
administrative expenses. We recognized losses of $35,000 and $129,000 for the
three and six months ended December 28, 2002. In March 2003, we determined that
our international activities held or conducted in foreign currency did not
warrant the cost associated with a hedging program due to our decreased
aggregate net exposure of foreign currency exchange risk on international
operations assets and liabilities. As a result, we suspended our foreign
currency hedging program in March 2003.
Impact of Inflation
The effect of inflation on our business and financial position has not been
significant to date.
Liquidity and Capital Resources.
We have experienced declining revenue in each of the last two fiscal years and
incurred operating losses in the first two quarters of fiscal 2004 and each of
the last four fiscal years. During this period, we have consumed significant
cash and other financial resources. In response to these conditions, we reduced
operating costs and employee headcount, and restructured certain operating lease
commitments in each of fiscal 2002, fiscal 2003 and the first half of fiscal
2004. These adjustments to our operations have significantly reduced our rate of
cash consumption. We also completed an equity financing with net proceeds of
approximately $9.4 million in November 2003.
On November 18, 2003, we completed a private placement of approximately 11.1
million shares of common stock to several accredited investors for a total
purchase price of $10.0 million, as described in "Overview" of Management's
Discussion and Analysis. Net proceeds from the financing after estimated costs
and expenses were approximately $9.4 million. The investors also received
warrants to purchase up to an aggregate of approximately 5.5 million shares at
an exercise price of $1.25 per share, with certain proportionate anti-dilution
protections.
Simultaneous with the completion of the 2003 financing, JDSU agreed to convert
its shares of preferred stock of Adept into 3,074,135 shares of Adept's common
stock, equal to approximately 19.9% of Adept's outstanding common stock prior to
the 2003 financing, and to surrender its remaining shares of preferred stock to
Adept. Pursuant to the terms of its $1.0 million promissory note with Adept,
JDSU was repaid in full all principal and interest accrued on the promissory
note with a portion of the proceeds of the 2003 financing.
As of December 27, 2003, after completion of the 2003 financing and repayment of
the JDSU promissory note, we had working capital of approximately $14.0 million,
including $8.0 million in cash, cash equivalents and short-term investments, and
a short-term receivables financing credit facility of $1.75 million net, of
which $1.0 million was outstanding and $0.7 million remained available under
this facility. We have limited cash resources, and because of certain regulatory
restrictions on our ability to move certain cash reserves from our foreign
operations to our U.S. operations, we may have limited access to a portion of
our existing cash balances. In addition to the proceeds of our 2003 financing,
we currently depend on funds generated from operating revenue and the funds
available through our accounts receivable financing arrangement, which we may
determine to increase or replace, to meet our operating requirements. As a
result, if any of our assumptions, some of which are described below, are
incorrect, we may have difficulty satisfying our obligations in a timely manner.
We expect our cash ending balance to be approximately $6.0 million at March 27,
2004. Our ability to effectively operate and grow our business is predicated
upon certain assumptions, including (i) that our restructuring efforts
effectively reduce operating costs as estimated by management and do not impair
our ability to generate
20
revenue, (ii) that we will not incur additional unplanned capital expenditures
in fiscal 2004, (iii) that we will continue to receive funds under our existing
accounts receivable financing arrangement or a new credit facility, (iv) that we
will receive continued timely receipt of payment of outstanding receivables, and
not otherwise experience severe cyclical swings in our receipts resulting in a
shortfall of cash available for our disbursements during any given quarter, and
(v) that we will not incur unexpected significant cash outlays during any
quarter.
On January 16, 2004, we settled ongoing litigation regarding lease obligations
for our San Jose facility. Under the terms of a settlement agreement effective
January 16, 2004, we paid the landlord of our San Jose facility approximately
$1.65 million on January 26, 2004 and the landlord agreed to dismiss the
complaint following a 93 day period after January 26, 2004, except in the event
that we (i) initiate any legal proceeding against the landlord or file any
voluntary petition or suffer the filing of an involuntary petition by our
creditors under bankruptcy, reorganization or other relief to debtors. We had
previously recorded restructuring charges during fiscal 2003 for the remaining
unpaid rent associated with the lease obligations of our San Jose facility.
Since the settlement amount including legal fees is less than the amount we
previously accrued for, we expect that the adjustment will result in a positive
income statement impact in the third quarter of fiscal 2004.
Cash and cash equivalents increased $6.1 million from June 30, 2003. The
increase in cash is attributable to the completion of the 2003 financing, which
provided Adept with net proceeds of approximately $9.4 million as discussed
above. Net cash used in operating activities of $5.4 million was primarily
attributable to the net loss and increases in accounts receivable and inventory
and a decrease in other long term liabilities reduced by non-cash charges
including depreciation and amortization and offset in part by an increase in
accounts payable. The increase in accounts receivable reflects increased revenue
from shipments made in the third month of the quarter ended December 27, 2003.
The increase in accounts payable primarily reflects increased inventory receipts
due to higher shipment volumes. The decrease in restructuring accruals is
attributable to payments on lease commitments for vacated facilities. Cash used
in investing activities during the six months was $2.0 million, which is
attributable to the purchase of short-term investments and property and
equipment. Cash provided by financing activities of $10.3 million is primarily
attributable to $9.4 million in net proceeds from the issuance of common stock
in connection with the 2003 financing and $0.9 million in purchased receivables
under our Accounts Receivable Purchase Agreement with Silicon Valley Bank
described below.
On March 21, 2003, we entered into an Accounts Receivable Purchase Agreement
(the "Purchase Agreement") with Silicon Valley Bank ("SVB"), pursuant to which
SVB may purchase certain of our receivables on a full recourse basis for an
advance amount equal to 70% (such percentage may change at SVB's discretion) of
the face amount of such purchased receivables with the aggregate face amount of
purchased receivables not to exceed $2.5 million. Upon collection of the
receivables and after deducting interest charges and allowed fees, SVB will
remit the balance of the remaining 30% of the invoice to Adept. In connection
with the Purchase Agreement, we granted to SVB a security interest in
substantially all of our assets. We also issued SVB a warrant to purchase an
aggregate of 100,000 shares of our common stock at a price of $1.00 per share.
The warrant may be exercised on or after September 21, 2003, expires March 21,
2008 and was valued at $20,000 on the date of grant, by Adept using the Black
Scholes model. As of December 27, 2003, the warrant had not been exercised. As
of December 27, 2003, approximately $1.0 million was outstanding under the
Purchase Agreement.
We are required to pay a monthly finance charge equal to 2% of the average daily
gross amount of unpaid purchased receivables. In January 2004, SVB lowered the
monthly finance charge to 1% of the average daily gross amount of unpaid
purchased receivables. The Purchase Agreement includes certain provisions with
which we must comply, including but not limited to the payment of our employee
payroll and state and federal tax obligations as and when due, the submittal of
certain financial and other specified information to SVB on a periodic basis,
and the maintenance of our deposit and investment accounts with SVB. In
addition, we cannot transfer or grant a security interest in our assets without
SVB's consent, except for certain ordinary course transactions, file a voluntary
petition for bankruptcy or have filed against us an involuntary petition for
relief, or make any transfers to any of our subsidiaries of money or other
assets with an aggregate value in excess of $0.24 million in any fiscal quarter,
net of any payments by such subsidiaries to us. Certain of our wholly-owned
subsidiaries were also required to execute a guaranty of all of our obligations
to SVB and all such guaranties have been executed. We will be deemed to be in
default under the Purchase Agreement if we fail to timely pay any amount owed to
SVB; in the event of our bankruptcy or an assignment for the benefit of
creditors; if we become insolvent or are generally not paying our debts as they
become due or we are left with unreasonably small capital; if any involuntary
lien or attachment is issued against our assets that is not discharged within
ten days; if we materially breach any of our representations or if we breach any
covenant or agreement under the agreement which is not cured within three
business days; if any event of default occurs under any agreement between us and
SVB, or any guaranty or subordination agreement executed in connection with the
Purchase Agreement; or if there is a material adverse change in our business,
operations or condition or a material impairment of our ability to pay our
obligations under the agreement or of the value of SVB's security interest in
our assets. In the event of a default under the Purchase Agreement, SVB may
cease buying our receivables, Adept must repurchase upon SVB's demand any
outstanding receivables and pay any obligations under the agreement, including
SVB's costs. As of December 27, 2003, Adept was in compliance with the
provisions in the purchase agreement.
Pursuant to the terms of the CHAD acquisition agreement, we paid $28,500 in cash
and released from escrow 94,000 shares totaling $12,000 to the shareholders of
CHAD on October 9, 2003. At December 27, 2003, $26,000 remains to be paid to the
employees of CHAD on October 9, 2004 contingent on the continued employment of
such employees.
21
On August 6, 2003, we completed a lease restructuring with Tri-Valley Campus
LLC, the landlord for our Livermore, California corporate headquarters and
facilities, which has significantly reduced our quarterly lease expenses. Under
the lease amendment, we were released of our lease obligations for two
unoccupied buildings in Livermore and received a rent reduction on the occupied
building from $1.55 to $1.10 per square foot for a lease term extending until
May 31, 2011. In addition, the lease amendment carries liquidated damages in the
event of default on the lease payments equivalent to one year of rent
obligations on the original lease. In the event of Adept's bankruptcy or a
failure to make payments to the landlord of our Livermore, California facilities
within three days after a written notice from the landlord, a default would be
triggered on the lease.
In connection with the lease restructuring, we issued a three-year, $3.0 million
convertible subordinated note due June 30, 2006 to the landlord bearing an
annual interest rate of 6.0%. Principal and interest are payable in cash, unless
the landlord elects to convert the principal amount of the note into our common
stock. Interest on the principal amount converted may be paid, at the election
of Adept, in cash, by converting such interest into principal amount or by
issuance of our common stock. The note is convertible at any time at the option
of the holder into the our common stock at a conversion price of $1.00 per share
and the resulting shares carry certain other rights, including piggyback
registration rights, participation rights and co-sale rights in equity sales by
Adept or our management. This liability is recorded as long-term Subordinated
Convertible Note in the accompanying consolidated balance sheet. Payment under
the note will be accelerated in the event of a default, including the insolvency
or bankruptcy of Adept, Adept's failure to pay our obligations under the note
when due, Adept's default on certain material agreements, including the
Livermore lease, the occurrence of a material adverse change with respect to
Adept's business or ability to pay our obligations under the note, or a change
of control of Adept without the landlord's consent. We were in compliance with
these provisions as of December 27, 2003.
A summary of our long-term debt and operating lease obligations as of December
27, 2003 follows:
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
------- ------- ------- ------- -------
Operating lease obligations .......... $10,791 $ 952 $ 4,799 $ 2,597 $ 2,443
Long-term debt* ...................... 3,000 -- 3,000 -- --
------- ------- ------- ------- -------
Total long-term debt and operating
lease obligations ............. $13,791 $ 952 $ 7,799 $ 2,597 $ 2,443
======= ======= ======= ======= =======
*excludes interest
During the six months ended December 27, 2003, we incurred $3.0 million
long-term debt in the form of a convertible subordinated note in connection with
the lease restructuring of our Livermore lease as discussed above.
New Accounting Pronouncements.
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133,"Accounting for Derivative Instruments and Hedging
Activities." In particular, SFAS 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
(2) clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45),
and (4) amends certain other existing pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material impact on our financial
position or results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Risks Related to Our Business
We have limited cash resources, and our recurring operating losses, negative
cash flow and debt obligations could impair our operations and
revenue-generating activities and adversely affect our results of operations.
22
We have experienced declining revenue in each of the last two fiscal years and
have incurred operating losses in the first two quarters of fiscal 2004 and in
each of the last four fiscal years. During these periods, we have also consumed
significant cash and other financial resources. In response to these conditions,
we reduced operating costs and employee headcount, and restructured certain
operating lease commitments in each of fiscal 2002, 2003 and the first half of
2004. These adjustments to our operations have significantly reduced our rate of
cash consumption. We also completed an equity financing with net proceeds of
approximately $9.4 million in November 2003.
As of December 27, 2003, after completion of our 2003 financing in November
2003, we had working capital of approximately $14.0 million, including $8.0
million in cash, cash equivalents and short-term investments, and a receivables
financing credit facility of $1.75 million net, of which $1.0 million was
outstanding and $0.7 million remained available under this facility. We have
limited cash resources, and because of certain regulatory restrictions on our
ability to move certain cash reserves from our foreign operations to our U.S.
operations, we may have limited access to a portion of our existing cash
balances. In addition to the proceeds of our 2003 financing, we currently depend
on funds generated from operations and the funds available through our accounts
receivable financing arrangements, which we may seek to increase or replace, to
meet our operating requirements. As a result, if any of our assumptions, some of
which are described below, are incorrect, we may have insufficient cash
resources to satisfy our obligations in a timely manner. We expect our cash
ending balance to be approximately $6.0 million at March 27, 2004. Our ability
to effectively operate and grow our business is predicated upon certain
assumptions, including (i) that our restructuring efforts do effectively reduce
operating costs as estimated by management and do not impair our ability to
generate revenue, (ii) that we will not incur additional unplanned capital
expenditures in fiscal 2004, (iii) that we will continue to receive funds under
our existing accounts receivable financing arrangement or a new credit facility,
(iv) that we will receive continued timely receipt of payment of outstanding
receivables, and not otherwise experience severe cyclical swings in our receipts
resulting in a shortfall of cash available for our disbursements during any
given quarter, and (v) that we will not incur unexpected significant cash
outlays during any quarter.
If our projected revenue or if operating expenses exceed current estimates
beyond our available cash resources, we may be forced to curtail our operations,
or, at a minimum, we may not be able to take advantage of market opportunities,
develop or enhance new products to an extent desirable to execute our strategic
growth plan, pursue acquisitions that would complement our existing product
offerings or enhance our technical capabilities to fully execute our business
plan or otherwise adequately respond to competitive pressures or unanticipated
requirements. These actions would adversely impact our business and results of
operations.
You should not rely on our past results to predict our future performance
because our operating results fluctuate due to factors, which are difficult to
forecast, are often out of our control and which can be extremely volatile.
Our past revenue and other operating results may not be accurate indicators of
our future performance. Our operating results have been subject to significant
fluctuations in the past, and we expect this to continue in the future. The
factors that may contribute to these fluctuations include:
o our cash resources;
o our ability to manage our working capital;
o fluctuations in aggregate capital spending, cyclicality and other
economic conditions domestically and internationally in one or more
industries in which we sell our products;
o reductions in demand due to customer concerns over our financial
situation, restructurings and management reorganization;
o changes or reductions in demand in the communications, semiconductor,
and electronics industries and other markets we serve;
o a change in market acceptance of our products or a shift in demand for
our products;
o new product introductions by us or by our competitors;
o changes in product mix and pricing by us, our suppliers or our
competitors;
o pricing and related availability of components and raw materials for
our products;
o our failure to manufacture a sufficient volume of products in a timely
and cost-effective manner;
o our failure to anticipate the changing product requirements of our
customers;
o changes in the mix of sales by distribution channels;
o exchange rate fluctuations;
o extraordinary events such as litigation or acquisitions;
o decline or slower than expected growth in those industries requiring
precision assembly automation; and
o slower than expected adoption of distributed controls architecture or
the adoption of alternative automated technologies.
Our gross margins may vary greatly depending on the mix of sales of lower margin
hardware products, particularly mechanical subsystems purchased from third party
vendors, volume variances driven by substantially lower production volumes, and
higher margin software products.
Our operating results are also affected by general economic and other conditions
affecting the timing of customer orders and capital spending. For example, our
operations during the first quarter of fiscal 2000 and each of the last three
fiscal years were adversely
23
affected by a continuing downturn, and in the first two quarters of fiscal 2004
we have not seen a significant increase in the purchasing activity in hardware
purchases by customers in the electronics industry, particularly disk-drive
manufacturers and to a lesser extent communication manufacturers. In addition,
we experienced significantly reduced demand during fiscal 2002 and 2003 in our
base industries, especially the electronics and semiconductor industries, as our
customers reduced inventories as they adjusted their businesses from a period of
high growth to lower rates of growth or downsizing. We expect this downturn to
adversely affect our business for an indefinite time and cannot estimate when or
if a sustained revival in these key hardware markets the electronics industry
will occur.
We generally recognize product revenue upon shipment or, for certain
international sales, upon receipt and acceptance by the customers. As a result,
our net revenue and results of operations for a fiscal period will be affected
by the timing of orders received and orders shipped during the period. A delay
in shipments near the end of a fiscal period, for example, due to product
development delays or delays in obtaining materials may cause sales to fall
below expectations and harm our operating results for the period.
In addition, our continued investments in research and development, capital
equipment and ongoing customer service and support capabilities result in
significant fixed costs that we cannot reduce rapidly. As a result, if our sales
for a particular fiscal period are below expected levels, our operating results
for the period could be materially adversely affected.
In the event that in some fiscal quarter our net revenue or operating results
fall below the expectations of public market analysts and investors, the price
of our common stock may fall. We may not be able to increase or sustain our
profitability on a quarterly or annual basis in the future.
The long sales cycles and implementation periods of our products may increase
costs of obtaining orders and reduce predictability of our earnings.
Our products are technologically complex. Prospective customers generally must
commit significant resources to test and evaluate our products and to install
and integrate them into larger systems. Orders expected in one quarter may shift
to another quarter or be cancelled with little advance notice as a result of the
customers' budgetary constraints, internal acceptance reviews, and other factors
affecting the timing of customers' purchase decisions. In addition, customers
often require a significant number of product presentations and demonstrations,
in some instances evaluating equipment on site, before reaching a sufficient
level of confidence in the product's performance and compatibility with the
customer's requirements to place an order. As a result, our sales process is
often subject to delays associated with lengthy approval processes that
typically accompany the design and testing of new products. The sales cycles of
our products often last for many months or even years. In addition, the time
required for our customers to incorporate our products into their systems can
vary significantly with the needs of our customers and generally exceeds several
months, which further complicates our planning processes and reduces the
predictability of our operating results. Longer sales cycles require us to
invest significant resources in attempting to make sales, which may not be
realized in the near term and therefore may delay or prevent the generation of
revenue. In addition, should our financial condition deteriorate, prospective
customers may be reluctant to purchase our products, which would have an adverse
effect on our revenue.
We may not be able to effectively implement our restructuring activities, may
need to implement further restructuring activities and our restructuring may
negatively impact our business.
The intelligent automation industry is highly competitive and currently
experiencing reduced demand. We have responded to increased competition and
changes in the industry in which we compete by restructuring our operations and
reducing the size of our workforce while attempting to maintain our market
presence in the face of increased competition. Despite our efforts to structure
Adept and our businesses to meet competitive pressures and customer needs, we
cannot assure you that we will be successful in implementing these restructuring
activities or that the reductions in workforce and other cost-cutting measures
will not harm our business operations and prospects. We recently hired a new
Chief Executive Officer to lead our further evolution to a more profitable
business model, but we cannot guarantee that his efforts will be successful. Our
inability to structure our operations based on current market conditions could
negatively impact our business. We also cannot assure you that we will not be
required to implement further restructuring activities, make additions or other
changes to our management or reductions in workforce based on other cost
reduction measures or changes in the markets and industry in which we compete.
We cannot assure you that any future restructuring efforts will be successful.
We recently initiated a management reorganization and intend to hire additional
critical management team personnel, and we may not successfully identify,
attract or retain management personnel or realize the expected benefits of these
changes.
We hired a new Chief Executive Officer, Mr. Robert Bucher, in November 2003. In
December 2003, our employment relationships with our former Chief Executive
Officer and Vice President, Research and Development, Adept's two founders, were
terminated. In connection with our restructuring activities and CEO change, we
have made and are continuing to make other changes in the management team,
including the elimination of some positions and the replacement of certain other
personnel. To achieve benefits from these personnel changes, we must retain the
services of Mr. Bucher and other key managerial personnel, and identify, recruit
and retain additional key management team members. In connection with this
effort, we must minimize any business interruption or
24
distraction of personnel as a result of these changes and our reorganization
efforts. We cannot guarantee that we will be successful in doing so, or that
such management and personnel changes will result in, or contribute to, improved
operating results.
Sales of our products depend on the capital spending patterns of our customers,
which tend to be cyclical; we are currently experiencing reduced demand in the
industries in which we operate, which may continue to adversely affect our
revenue.
Intelligent automation systems using our products can range in price from $8,500
to $500,000. Accordingly, our success is directly dependent upon the capital
expenditure budgets of our customers. Our future operations may be subject to
substantial fluctuations as a consequence of domestic and foreign economic
conditions, industry patterns and other factors affecting capital spending.
Although the majority of our international customers are not in the Asia-Pacific
region, we believe that any instability in the Asia-Pacific economies could also
have a material adverse effect on the results of our operations as a result of a
reduction in sales by our customers to those markets. Domestic or international
recessions or a downturn in one or more of our major markets, such as the food,
communications, automotive, electronic, appliance, semiconductor, and life
sciences industries, and resulting cutbacks in capital spending would have a
direct, negative impact on our business. Evidencing the weakness in the
industry, our supply and development agreement with JDSU was terminated largely
as a result of the termination of JDSU's Optical Process Automation operations.
We are currently experiencing reduced demand in most of the industries we serve,
including the electronics industry and expect this reduced demand to adversely
affect our revenue for an indefinite period. During fiscal 2001, 2002 and 2003,
we received significantly fewer orders than expected, experienced delivery
schedule postponements on several existing orders and had some order
cancellations. Such changes in orders may adversely affect revenue for future
quarters.
We sell some of our products to the semiconductor industry, which is subject to
sudden, extreme, cyclical variations in product supply and demand. The timing,
length and severity of these cycles are difficult to predict. In some cases,
these cycles have lasted more than a year. The industry is currently
experiencing a significant downturn due to decreased worldwide demand for
semiconductors. Semiconductor manufacturers may contribute to these cycles by
misinterpreting the conditions in the industry and over- or under-investing in
semiconductor manufacturing capacity and equipment. We may not be able to
respond effectively to these industry cycles.
Downturns in the semiconductor industry often occur in connection with, or
anticipation of, maturing product cycles for both semiconductor companies and
their customers and declines in general economic conditions. Industry downturns
have been characterized by reduced demand for semiconductor devices and
equipment, production over-capacity and accelerated decline in average selling
prices. During a period of declining demand, we must be able to quickly and
effectively reduce expenses and motivate and retain key employees. We
implemented a worldwide restructuring program in fiscal 2002 to realign our
businesses to the changes in our industry and our customers' decrease in capital
spending. We made further cost reductions in fiscal 2003 to further realign our
business. Despite this restructuring activity, our ability to reduce expenses in
response to any downturn in the semiconductor industry is limited by our need
for continued investment in engineering and research and development and
extensive ongoing customer service and support requirements. The long lead time
for production and delivery of some of our products creates a risk that we may
incur expenditures or purchase inventories for products that we cannot sell. We
believe our future performance will continue to be affected by the cyclical
nature of the semiconductor industry, and thus, any future downturn in the
semiconductor industry could therefore harm our revenue and gross margin if
demand drops or average selling prices decline.
Industry upturns have been characterized by abrupt increases in demand for
semiconductor devices and equipment and production under-capacity. During a
period of increasing demand and rapid growth, we must be able to quickly
increase manufacturing capacity to meet customer demand and hire and assimilate
a sufficient number of qualified personnel. Our inability to ramp-up in times of
increased demand could harm our reputation and cause some of our existing or
potential customers to place orders with our competitors.
Changes in delivery schedules and customer cancellations of orders constituting
our backlog may result in lower than expected revenue.
Backlog should not be relied on as a measure of anticipated demand for our
products or future revenue, because the orders constituting our backlog are
subject to changes in delivery schedules and in certain instances are subject to
cancellation without significant penalty to the customer. Increasingly, our
business is characterized by short-term order and shipment schedules. We have in
the past experienced changes in delivery schedules and customer cancellations
that resulted in our revenue in a given quarter being materially less than would
have been anticipated based on backlog at the beginning of the quarter. We
experienced greater customer delays and cancellations in fiscal 2002 and fiscal
2003, compared to prior periods, and this increase may continue in future
periods. Similar delivery schedule changes and order cancellations may adversely
affect our operating results in the future.
Because we do not have long-term contracts with our customers, our future sales
are not guaranteed.
We generally do not have long-term contracts with our customers and existing
contracts may be cancelled. As a result, our agreements with our customers do
not provide any assurance of future sales. Accordingly our customers are not
required to make minimum purchases and may cease purchasing our products at any
time without penalty. Because our customers are free to purchase
25
products from our competitors, we are exposed to competitive price pressure on
each order. Any reductions, cancellations or deferrals in customer orders could
have a negative impact on our financial condition and results of operations.
Our distributed controls architecture may not achieve customer acceptance.
We began to sell to customers our new distributed controls architecture based on
IEEE 1394 FireWire technology in fiscal 2002. IEEE 1394 is a standard defining a
high speed multimedia connection protocol that enables simple, low cost,
high-bandwidth, real-time data interfacing between computers and intelligent
devices. We are devoting, and expect to devote in the future significant
financial, engineering and management resources to expand our development,
marketing and sales of these products. Commercial success of these products
depends upon our ability to, among other things:
o accurately determine the features and functionality that our controls
customers require or prefer;
o successfully design and implement intelligent automation solutions
that include these features and functionality, including integrating
this architecture with a variety of robots manufactured by other
companies;
o enter into agreements with system integrators, manufacturers and
distributors; and
o achieve market acceptance for our design and approach.
Our distributed controls strategy may not achieve broad market acceptance
for a variety of reasons including:
o companies who use machine controls may continue to use their current
design and may not adopt our distributed architecture;
o companies may decide to adopt a different technology than IEEE 1394
FireWire for their distributed controls;
o companies may determine that the costs and resources required to
switch to our distributed architecture are unacceptable to them;
o system integrators, manufacturers, and OEMs may not enter into
agreements with us; and
o competition from traditional, well-established controls solutions.
If we do not achieve market acceptance of these products, our business and
operating results will suffer.
Some of our solution products require us to commit contractually to a firm price
which makes us vulnerable to cost overruns.
We contractually commit to a firm price over a number of units for certain of
our solutions products, including the products that we have added as a result of
our acquisitions. Our ability to achieve a reasonably accurate estimate of the
costs of these products will have a direct impact on the profit we obtain from
these products. If the costs we incur in completing a customer order for these
products exceed our expectations, we generally cannot pass those costs on to our
customer.
Our gross margins can vary significantly from quarter to quarter based on
factors which are not always in our control.
Our operating results fluctuate when our gross margins vary. Our gross margins
vary for a number of reasons, including:
o the mix of products we sell;
o the average selling prices of products we sell including changes in
the average discounts offered;
o the costs to manufacture, service and support our products and
enhancements;
o the costs to customize our systems;
o the volume of products produced;
o our efforts to enter new markets; and
o certain inventory-related costs including obsolescence of products and
components resulting in excess inventory.
Because we have significant fixed costs that are not easily reduced, we may be
unable to adequately reduce expenditures to offset decreases in revenue and
therefore avoid operating losses.
While we have reduced our absolute amount of expenses in all areas of our
operations in connection with our restructuring, we continue to invest in
research and development, capital equipment and extensive ongoing customer
service and support capability worldwide. These investments create significant
fixed costs that we may be unable to reduce rapidly if we do not meet our sales
goals. Moreover, if we fail to obtain a significant volume of customer orders
for an extended period of time, we may have difficulty planning our future
production and inventory levels, utilizing our relatively fixed capacity, which
could also cause fluctuations in our operating results.
We cannot control the procurement, sales or marketing efforts of the systems
integrators and OEMs who sell our products which may result in lower revenue if
they do not successfully market and sell our products or choose instead to
promote competing products.
26
We believe that our ability to sell products to system integrators and OEMs will
continue to be important to our success. Our relationships with system
integrators and OEMs are generally not exclusive, and some of our system
integrators and OEMs may expend a significant amount of effort or give higher
priority to selling products of our competitors. In the future, any of our
system integrators or our OEMs may discontinue their relationships with us or
form additional competing arrangements with our competitors. The loss of, or a
significant reduction in revenue from, system integrators or OEMs to which we
sell a significant amount of our product could negatively impact our business,
financial condition or results of operations.
As we enter new geographic and applications markets, we must locate and
establish relationships with system integrators and OEMs to assist us in
building sales in those markets. It can take an extended period of time and
significant resources to establish a profitable relationship with a system
integrator or OEM because of product integration expenses, training in product
and technologies and sales training. We may not be successful in obtaining
effective new system integrators or OEMs or in maintaining sales relationships
with them. In the event a number of our system integrators and/or OEMs
experience financial problems, terminate their relationships with us or
substantially reduce the amount of our products they sell, or in the event we
fail to build or maintain an effective systems integrator or OEM channel in any
existing or new markets, our business, financial condition and results of
operations could be adversely affected.
In addition, a substantial portion of our sales is to system integrators that
specialize in designing and building production lines for manufacturers. Many of
these companies are small operations with limited financial resources, and we
have from time to time experienced difficulty in collecting payments from
certain of these companies. As a result, we perform ongoing credit evaluations
of our customers. To the extent we are unable to mitigate this risk of
collections from system integrators, our results of operations may be harmed. In
addition, due to their limited financial resources, during extended market
downturns, the viability of some system integrators may be in question, which
would also result in a reduction in our revenue.
Our reliance on single source suppliers with lengthy lead procurement times or
limited supplies for our key components and materials may render us unable to
meet product demand and we may lose customers and suffer decreased revenue.
We obtain many key components and materials and some significant mechanical
subsystems from sole or single source suppliers with whom we have no guaranteed
supply arrangements. In addition, some of our sole or single sourced components
and mechanical subsystems incorporated into our products have long procurement
lead times. Our reliance on sole or single source suppliers involves certain
significant risks including:
o loss of control over the manufacturing process;
o potential absence of adequate supplier capacity;
o potential inability to obtain an adequate supply of required
components, materials or mechanical subsystems; and
o reduced control over manufacturing yields, costs, timely delivery,
reliability and quality of components, materials and mechanical
subsystems.
We depend on Flash Corporation for the supply of our circuit boards, Wilco
Corporation for the supply of our cables, NSK Corporation for the supply of our
linear modules, which are mechanical devices powered by an electric motor that
move in a straight line, and which can be combined as building blocks to form
simple robotic systems, Yaskawa Electric Corp. for the supply of our 6-axis
robots, Hirata Corporation for the supply of our Adept Cobra 600 robot mechanism
and Adept Cobra 800 robot mechanisms and Matrox Electronic Systems Ltd. for the
supply of our computer vision processors, which are used to digitize images from
a camera and perform measurements and analysis. We do not have contracts with
certain of these suppliers. If any one of these significant sole or single
source suppliers were unable or unwilling to manufacture the components,
materials or mechanical subsystems we need in the volumes we require, we would
have to identify and qualify acceptable replacements. The process of qualifying
suppliers may be lengthy, and additional sources may not be available to us on a
timely basis, on acceptable terms or at all. If sufficient quantities of these
items were not available from our existing suppliers and a relationship with an
alternative vendor could not be developed in a timely manner, shipments of our
products could be interrupted and reengineering of these products could be
required. In the past, we have experienced quality control or specification
problems with certain key components provided by sole source suppliers, and have
had to design around the particular flawed item. In addition, some of the
components that we use in our products are in short supply. We have also
experienced delays in filling customer orders due to the failure of certain
suppliers to meet our volume and schedule requirements. Some of our suppliers
have also ceased manufacturing components that we require for our products, and
we have been required to purchase sufficient supplies for the estimated life of
such product line. Problems of this nature with our suppliers may occur in the
future.
Disruption or termination of our supply sources could require us to seek
alternative sources of supply, could delay our product shipments and damage
relationships with current and prospective customers, or prevent us from taking
other business opportunities, any of which could have a material adverse effect
on our business. If we incorrectly forecast product mix for a particular period
and we are unable to obtain sufficient supplies of any components or mechanical
subsystems on a timely basis due to long procurement lead times, our business,
financial condition and results of operations could be substantially impaired.
Moreover, if demand for a product for which we have purchased a substantial
amount of components fails to meet our expectations, we would be required to
27
write off the excess inventory. A prolonged inability to obtain adequate timely
deliveries of key components could have a material adverse effect on our
business, financial condition and results of operations.
Because our product sales are seasonal, we may not be able to maintain a steady
revenue stream.
Our product sales are seasonal. We have historically had higher bookings for our
products during the June quarter of each fiscal year and lower bookings during
the September quarter of each fiscal year, due primarily to the slowdown in
sales to European markets and summer vacations. In the event bookings for our
products in the June fiscal quarter are lower than anticipated and our backlog
at the end of the June fiscal quarter is insufficient to compensate for lower
bookings in the September fiscal quarter, our results of operations for the
September fiscal quarter and future quarters will suffer.
A significant percentage of our product shipments occur in the last month of
each fiscal quarter. Historically, this has been due in part, at times, to our
inability to forecast the level of demand for our products or of the product mix
for a particular fiscal quarter. To address this problem we periodically stock
inventory levels of completed robots, machine controllers and certain strategic
components. If shipments of our products fail to meet forecasted levels, the
increased inventory levels and increased operating expenses in anticipation of
sales that do not materialize could adversely affect our business.
Any acquisition we have made or may make in the future could disrupt our
business, increase our expenses and adversely affect our financial condition or
operations.
During fiscal 2000, we acquired Pensar, NanoMotion and BYE/Oasis. In fiscal
2001, we acquired HexaVision and CHAD Industries and, in fiscal 2003, we
acquired control of Meta Control Technologies, Inc. These acquisitions
introduced us to industries and technologies in which we have limited previous
experience. In the future we may make acquisitions of, or investments in, other
businesses that offer products, services, and technologies that management
believes will further our strategic objectives. We cannot be certain that we
would successfully integrate any businesses, technologies or personnel that we
might acquire, and any acquisitions might divert our management's attention away
from our core business. Any future acquisitions or investments we might make
would present risks commonly associated with these types of transactions,
including:
o difficulty in combining the product offerings, operations, or work
force of an acquired business;
o potential loss of key personnel of an acquired business;
o adverse effects on existing relationships with suppliers and
customers;
o disruptions of our on-going businesses;
o difficulties in realizing our potential financial and strategic
objectives through the successful integration of the acquired
business;
o difficulty in maintaining uniform standards, controls, procedures and
policies;
o potential negative impact on results of operations due to amortization
of goodwill, other intangible assets acquired or assumption of
anticipated liabilities;
o risks associated with entering markets in which we have limited
previous experience;
o potential negative impact of unanticipated liabilities or litigation;
and
o the diversion of management attention.
The risks described above, either individually or in the aggregate, could
significantly harm our business, financial condition and results of operations.
We expect that future acquisitions, if any, could provide for consideration to
be paid in cash, shares of our common stock, or a combination of cash and common
stock. In addition, we may issue additional equity in connection with future
acquisitions, which could result in dilution of our shareholders' equity
interest. Fluctuations in our stock price may make acquisitions more expensive
or prevent us from being able to complete acquisitions on terms that are
acceptable to us.
Our international operations and sales subject us to divergent regulatory
requirements and other financial and operating risks outside of our control that
may harm our operating results.
International sales were $9.8 million for the six months ended December 27,
2003, $17.1 million for the fiscal year ended June 30, 2003, $31.8 million for
the fiscal year ended June 30, 2002, and $36.4 million for the fiscal year ended
June 30, 2001. This represented 41.9%, 38.2%, 55.7%, and 36.3% of net revenue
for the respective periods. We also purchase some critical components and
mechanical subsystems from foreign suppliers. As a result, our operating results
are subject to the risks inherent in international sales and purchases, which
include the following:
o unexpected changes in regulatory requirements;
o political, military and economic changes and disruptions, including
terrorist activity;
o transportation costs and delays;
o foreign currency fluctuations;
o export/import controls;
28
o tariff regulations and other trade barriers;
o higher freight rates;
o difficulties in staffing and managing foreign sales operations;
o greater difficulty in accounts receivable collection in foreign
jurisdictions; and
o potentially adverse tax consequences.
Foreign exchange fluctuations may render our products less competitive relative
to locally manufactured product offerings, or could result in foreign exchange
losses. To maintain a competitive price for our products in Europe, we may have
to provide discounts or otherwise effectively reduce our prices, resulting in a
lower margin on products sold in Europe. Continued change in the values of
European currencies or changes in the values of other foreign currencies could
have a negative impact on our business, financial condition and results of
operations.
We sell standard components for products to OEMs, who deliver products to Asian
markets, such as Japan, Malaysia, Korea and China.
Past turmoil in Asian financial markets and the deterioration of underlying
economic conditions in certain Asian countries may continue to impact our sales
to our OEM customers who deliver to, are located in, or whose projects are based
in, Asian countries due to the impact of restrictions on government spending
imposed by the International Monetary Fund on those countries receiving the
IMF's assistance. In addition, customers in those countries may face reduced
access to working capital to fund component purchases, such as our products, due
to higher interest rates, reduced bank lending due to contractions in the money
supply or the deterioration in the customer's or our bank's financial condition
or the inability to access local equity financing. In the past, as a result of
this lack of working capital and higher interest rates, we have experienced a
significant decline in sales to OEMs serving the Asian market.
Maintaining operations in different countries requires us to expend significant
resources to keep our operations coordinated and subjects us to differing laws
and regulatory regimes that may affect our offerings and revenue.
We may incur currency exchange-related losses in connection with our reliance on
our single or sole source foreign suppliers.
We make yen-denominated purchases of certain components and mechanical
subsystems from certain of our sole or single source Japanese suppliers. We
remain subject to the transaction exposures that arise from foreign exchange
movements between the dates foreign currency export sales or purchase
transactions are recorded and the dates cash is received or payments are made in
foreign currencies. We experienced losses on instruments that hedge our foreign
currency exposure in fiscal 2002 and the first three quarters of fiscal 2003. In
March 2003, we suspended our foreign currency hedging program because we
determined that our international activities held or conducted in foreign
currency did not warrant the cost associated with a hedging program due to
decreased exposure of foreign currency exchange risk on international
operational assets and liabilities. Our current or any future currency exchange
strategy may not be successful in avoiding exchange-related losses. Any
exchange-related losses or exposure may negatively affect our business,
financial condition or results of operations.
If our hardware products do not comply with standards set forth by the European
Union, we will not be able to sell them in Europe.
Our hardware products are required to comply with European Union Low Voltage,
Electro-Magnetic Compatibility, and Machinery Safety Directives. The European
Union mandates that our products carry the CE mark denoting that these products
are manufactured in strict accordance to design guidelines in support of these
directives. These guidelines are subject to change and to varying
interpretation. New guidelines impacting machinery design go into effect each
year. To date, we have retained TUV Rheinland to help certify that our
controller-based products, including some of our robots, meet applicable
European Union directives and guidelines. Although our existing certified
products meet the requirements of the applicable European Union directives, we
cannot provide any assurance that future products can be designed, within market
window constraints, to meet the future requirements. If any of our robot
products or any other major hardware products do not meet the requirements of
the European Union directives, we would be unable to legally sell these products
in Europe. Thus, our business, financial condition and results of operations
could be harmed. Such directives and guidelines could change in the future,
forcing us to redesign or withdraw from the market one or more of our existing
products that may have been originally approved for sale.
Our hardware and software products may contain defects that could increase our
expenses and exposure to liabilities and or harm our reputation and future
business prospects.
Our hardware and software products are complex and, despite extensive testing,
our new or existing products or enhancements may contain defects, errors or
performance problems when first introduced, when new versions or enhancements
are released or even after these products or enhancements have been used in the
marketplace for a period of time. We may discover product defects only after a
product has been installed and used by customers. We may discover defects,
errors or performance problems in future shipments of our products. These
problems could result in expensive and time consuming design modifications or
large warranty charges, expose us to liability for damages, damage customer
relationships and result in loss of market share, any of which could harm our
reputation
29
and future business prospects. In addition, increased development and warranty
costs could reduce our operating profits and could result in losses.
The existence of any defects, errors or failures in our products could also lead
to product liability claims or lawsuits against us, our channel partners or
against our customers. A successful product liability claim could result in
substantial cost and divert management's attention and resources, which could
have a negative impact on our business, financial condition and results of
operations. Although we are not aware of any product liability claims to date,
the sale and support of our products entail the risk of these claims.
If we become subject to unfair hiring claims, we could be prevented from hiring
needed personnel, incur liability for damages and incur substantial costs in
defending ourselves.
Companies in our industry whose employees accept positions with competitors
frequently claim that these competitors have engaged in unfair hiring practices
or that the employment of these persons would involve the disclosure or use of
trade secrets. These claims could prevent us from hiring personnel or cause us
to incur liability for damages. We could also incur substantial costs in
defending ourselves or our employees against these claims, regardless of their
merits. Although to date we have not experienced any material claims, defending
ourselves from these claims could divert the attention of our management away
from our operations.
Our failure to protect our intellectual property and proprietary technology may
significantly impair our competitive advantage.
Our success and ability to compete depend in large part upon protecting our
proprietary technology. We rely on a combination of patent, trademark and trade
secret protection and nondisclosure agreements to protect our proprietary
rights. The steps we have taken may not be sufficient to prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. The patent and trademark law and trade secret protection may not be
adequate to deter third party infringement or misappropriation of our patents,
trademarks and similar proprietary rights. In addition, patents issued to Adept
may be challenged, invalidated or circumvented. Our rights granted under those
patents may not provide competitive advantages to us, and the claims under our
patent applications may not be allowed. We may be subject to or may initiate
interference proceedings in the United States Patent and Trademark Office, which
can demand significant financial and management resources. The process of
seeking patent protection can be time consuming and expensive and patents may
not be issued from currently pending or future applications. Moreover, our
existing patents or any new patents that may be issued may not be sufficient in
scope or strength to provide meaningful protection or any commercial advantage
to us.
We may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
If we cannot identify and make acquisitions, our ability to expand our
operations and increase our revenue may be impaired.
In the latter half of fiscal 2000, a significant portion of our growth was
attributable to acquisitions of other businesses and technologies. In fiscal
2001, we acquired CHAD Industries, Inc., and in fiscal 2003, we acquired control
of Meta Control Technologies, Inc. We expect that acquisitions of complementary
companies, businesses, products and technologies in the future may play an
important role in our ability to expand our operations and increase our revenue.
We continue to review acquisition candidates as part of our strategy to market
intelligent automation solutions targeted at the precision assembly industry.
Our ability to make acquisitions is rendered more difficult due to our cash
constraints and the decline of our common stock price, making equity
consideration more expensive. If we are unable to identify suitable targets for
acquisition or complete acquisitions on acceptable terms, our ability to expand
our product and/or service offerings and increase our revenue may be impaired.
Even if we are able to identify and acquire acquisition candidates, we may be
unable to realize the benefits anticipated as a result of these acquisitions.
We may face costly intellectual property infringement claims.
We have from time to time received communications from third parties asserting
that we are infringing certain patents and other intellectual property rights of
others or seeking indemnification against such alleged infringement. For
example, some end users of our products have notified us that they have received
a claim of patent infringement from the Jerome H. Lemelson Foundation, alleging
that their use of our machine vision products infringes certain patents issued
to Mr. Lemelson. In addition, we have been notified that other end users of our
AdeptVision VME line and the predecessor line of Multibus machine vision
products have received letters from the Lemelson Foundation which refer to Mr.
Lemelson's patent portfolio and offer the end user a license to the particular
patents. As claims arise, we evaluate their merits. Any claims of infringement
brought by third parties could result in protracted and costly litigation,
damages for infringement, and the necessity of obtaining a license relating to
one or more of our products or current or future technologies, which may not be
available on commercially reasonable terms or at all. Litigation, which could
result in substantial cost to us and diversion of our resources, may be
necessary to enforce our patents or other intellectual property rights or to
defend us against claimed infringement of the rights of others. Any intellectual
property litigation and the failure
30
to obtain necessary licenses or other rights could have a material adverse
effect on our business, financial condition and results of operations. Some of
our end users have notified us that they may seek indemnification from us for
damages or expenses resulting from any claims made by the Jerome H. Lemelson
Foundation. In January 2004, in a litigation matter not involving Adept, the
U.S. District Court of Las Vegas held that the claims of 14 Lemelson patents are
invalid and unenforceable regarding machine vision systems and bar code readers.
We are not aware of any appeal of this decision; however, we cannot predict the
ultimate outcome of this or any similar litigation which may arise in the
future. Litigation of this kind may have a material adverse effect on our
business, financial condition or results of operations.
Our future success depends on our continuing ability to attract, integrate,
retain and motivate highly-qualified managerial and technical personnel.
Competition for qualified personnel in the intelligent automation industry is
intense. Our inability to recruit, train and motivate qualified management and
technical personnel on a timely basis would adversely affect our ability to
manage our operations, and design, manufacture, market and support our products.
We recently hired a new Chief Executive Officer to lead our further evolution to
a more profitable business model. We cannot guarantee that we will be able to
timely or affectively integrate him into our operations or will be successful in
retaining him. We have also reduced headcount in connection with our
restructurings and recently made changes in other senior personnel, which
changes may lead to employee questions regarding future actions by Adept leading
to additional retention difficulties. Other than Mr. Bucher's offer letter, we
have no employment agreements with our senior management.
Risks Related to Our Industry
Intense competition in the market for intelligent automation products will cause
our revenue and business to suffer if our products are not seen as more
attractive by customers than other products in the marketplace.
The market for intelligent automation products is highly competitive. We believe
that the principal competitive factors affecting the market for our products
are:
o product functionality and reliability;
o price;
o customer service;
o delivery, including timeliness, predictability and reliability of
delivery commitment dates; and
o product features such as flexibility, programmability and ease of use.
We compete with a number of robot companies, motion control companies, machine
vision companies and simulation software companies. Many of our competitors have
substantially greater financial, technical and marketing resources than us. In
addition, we may in the future face competition from new entrants in one or more
of our markets.
Many of our competitors in the robot market are integrated manufacturers of
products that produce robotics equipment internally for their own use and may
also compete with our products for sales to other customers. Some of these large
manufacturing companies have greater flexibility in pricing because they
generate substantial unit volumes of robots for internal demand and may have
access through their parent companies to large amounts of capital. Any of our
competitors may seek to expand their presence in other markets in which we
compete.
Our current or potential competitors may develop products comparable or superior
in terms of price and performance features to those developed by us or adapt
more quickly than we can to new or emerging technologies and changes in customer
requirements. We may be required to make substantial additional investments in
connection with our research, development, engineering, marketing and customer
service efforts in order to meet any competitive threat, so that we will be able
to compete successfully in the future. We expect that in the event the
intelligent automation market expands, competition in the industry will
intensify, as additional competitors enter our markets and current competitors
expand their product lines. Increased competitive pressure could result in a
loss of sales or market share, or cause us to lower prices for our products, any
of which could harm our business.
If we are unable to effectively support the distinct needs of the multiple
industries of our customers, the demand for our products may decrease and our
revenue will decline.
We market products for the food, communications, electronics, automotive,
appliance, semiconductor, and life sciences industries. Because we operate in
multiple industries, we must work constantly to understand the needs, standards
and technical requirements of numerous different industries and must devote
significant resources to developing different products for these industries. Our
results of operations are also subject to the cyclicality and downturns in these
markets. Product development is costly and time consuming. Many of our products
are used by our customers to develop, manufacture and test their own products.
As a result, we must anticipate trends in our customers' industries and develop
products before our customers' products are commercialized. If we do not
accurately predict our customers' needs and future activities, we may invest
substantial resources in developing products that do not achieve
31
broadmarket acceptance. Our decision to continue to offer products to a given
market or to penetrate new markets is based in part on our judgment of the size,
growth rate and other factors that contribute to the attractiveness of a
particular market. If our product offerings in any particular market are not
competitive or our analyses of a market are incorrect, our business and results
of operations could be harmed.
Our business will decline if we cannot keep up with the rapid pace of
technological change and new product development that characterize the
intelligent automation industry.
The intelligent automation industry is characterized by rapid technological
change and new product introductions and enhancements. Our ability to remain
competitive depends greatly upon the technological quality of our products and
processes compared to those of our competitors and our ability both to continue
to develop new and enhanced products and to introduce those products at
competitive prices and on a timely and cost-effective basis. We may not be
successful in selecting, developing and manufacturing new products or in
enhancing our existing products on a timely basis or at all. Our new or enhanced
products may not achieve market acceptance. Our failure to successfully select,
develop and manufacture new products, or to timely enhance existing technologies
and meet customers' technical specifications for any new products or
enhancements on a timely basis, or to successfully market new products, could
harm our business. If we cannot successfully develop and manufacture new
products or meet specifications, our products could lose market share, our
revenue and profits could decline, or we could experience operating losses. New
technology or product introductions by our competitors could also cause a
decline in sales or loss of market acceptance for our existing products or force
us to significantly reduce the prices of our existing products.
From time to time we have experienced delays in the introduction of, and certain
technical and manufacturing difficulties with, some of our products, and we may
experience technical and manufacturing difficulties and delays in future
introductions of new products and enhancements. Our failure to develop,
manufacture and sell new products in quantities sufficient to offset a decline
in revenue from existing products or to successfully manage product and related
inventory transitions could harm our business.
Our success in developing, introducing, selling and supporting new and enhanced
products depends upon a variety of factors, including timely and efficient
completion of hardware and software design and development, implementation of
manufacturing processes and effective sales, marketing and customer service.
Because of the complexity of our products, significant delays may occur between
a product's initial introduction and commencement of volume production.
The development and commercialization of new products involve many difficulties,
including:
o the identification of new product opportunities;
o the retention and hiring of appropriate research and development
personnel;
o the determination of the product's technical specifications;
o the successful completion of the development process;
o the successful marketing of the product and the risk of having
customers embrace new technological advances; and
o additional customer service costs associated with supporting new
product introductions and/or effecting subsequent potential field
upgrades.
The development of new products may not be completed in a timely manner, and
these products may not achieve acceptance in the market. The development of new
products has required, and will require, that we expend significant financial
and management resources. If we are unable to continue to successfully develop
new products in response to customer requirements or technological changes, our
business may be harmed.
If we fail to adequately invest in research and development, we may be unable to
compete effectively and sales of our products will decline.
Over the past year, our total expenditures for research and development have
declined significantly. We have limited resources to allocate to research and
development and must allocate our resources among a wide variety of projects.
Because of intense competition in our industry, the cost of failing to invest in
strategic products is high. If we fail to adequately invest in research and
development, we may be unable to compete effectively in the intelligent
automation markets in which we operate.
We may not receive significant revenue from our current research and development
efforts for several years, if at all.
Internally developing intelligent automation products is expensive, and these
investments often require a long time to generate returns. Our strategy involves
significant investments in research and development and related product
opportunities. Although our total expenditures for research and development have
declined, we continue to believe that we must continue to dedicate a significant
amount of resources to our research and development efforts to maintain our
competitive position. However, we cannot predict that we will receive
significant revenue from these investments, if at all.
If we do not comply with environmental regulations, we may incur significant
costs causing our overall business to suffer.
32
We are subject to a variety of environmental regulations relating to the use,
storage, handling, and disposal of certain hazardous substances used in the
manufacturing and assembly of our products. We believe that we are currently in
compliance with all material environmental regulations in connection with our
manufacturing operations, and that we have obtained all necessary environmental
permits to conduct our business. However, our failure to comply with present or
future regulations could subject us to a variety of consequences that could harm
our business, including:
o the imposition of substantial fines;
o suspension of production; and
o alteration of manufacturing processes or cessation of operations.
Compliance with environmental regulations could require us to acquire expensive
remediation equipment or to incur substantial expenses. Our failure to control
the use, disposal, removal, storage, or to adequately restrict the discharge of,
or assist in the cleanup of, hazardous or toxic substances, could subject us to
significant liabilities, including joint and several liability under certain
statutes. The imposition of liabilities of this kind could harm our financial
condition.
If we fail to obtain export licenses, we would be unable to sell any of our
software products overseas and our revenue would decline.
We must comply with U.S. Department of Commerce regulations in shipping our
software products and other technologies outside the United States. Any
significant future difficulty in complying could harm our business, financial
condition and results of operations.
Proposed regulations related to equity compensation could adversely affect our
results of operation
The Financial Accounting Standards Board (FASB), among other agencies and
entities, is currently considering changes to generally accepted accounting
principles in the United States that, if implemented, would require us to record
a charge to compensation expense for all option grants. As currently permitted
by SFAS No. 123, we apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", (APB 25) and related interpretations
in accounting for our stock option plans and stock purchase plan. Accordingly,
we do not recognize compensation cost for stock options granted at fair market
value. We cannot predict whether the proposed regulations will be adopted, but
if adopted these regulations would have an adverse affect on our results of
operations.
Our business is subject to the risk of earthquakes and other natural
catastrophic events.
Our corporate headquarters and principal offices, including certain of our
research and development operations and distribution facilities, are located in
the San Francisco Bay area of Northern California, which is a region known to
experience seismic activity, flood plains and other natural phenomenon not
within our control. If significant seismic activity or other natural
catastrophes affecting this region were to occur, our operations may be
interrupted, which would adversely impact our business and results of
operations.
Acts of war or terrorism could adversely and materially affect our business.
Terrorist acts or military engagement anywhere in the world could cause damage
or disruption to us, our customers, OEMs, distributors or suppliers, or could
create political or economic instability, any of which could adversely effect
our business, financial condition or results of operations. Furthermore, we are
uninsured for losses or interruptions caused by acts of war or terrorism.
Risks Related to our Stock
Our common stock has been delisted from the Nasdaq Stock Market and trades on
the OTC Bulletin Board, which. may negatively impact the trading activity and
price of our common stock.
In April 2003, our common stock was delisted from the Nasdaq National Market as
a result of our failure to comply with certain quantitative requirements for
continued listing. Our common stock trades on the OTC Bulletin Board. The OTC
Bulletin Board is generally considered less liquid and efficient than Nasdaq,
and although trading in our stock was relatively thin and sporadic before the
delisting, the liquidity of our common stock has declined and price volatility
increased because smaller quantities of shares are bought and sold, transactions
may be delayed and securities analysts' and news media coverage of Adept will
likely diminish. These factors could result in lower prices and larger spreads
in the bid and ask prices for our common stock. Reduced liquidity may reduce the
value of our common stock and our ability to generate to use our equity as
consideration for an acquisition or other corporate opportunity. The delisting
and OTC trading could result in a number of other negative implications,
including the potential loss of confidence by suppliers, customers and
employees, the loss of institutional investor interest and the availability of
fewer business development, other strategic opportunities and additional cost of
compensating our employees using cash and equity compensation.
The sale of a substantial amount of our common stock, including shares issued
upon exercise of outstanding options, warrants or our convertible note, in the
public market could adversely affect the prevailing market price of our common
stock.
33
We had an aggregate of 29,662,519 shares of common stock outstanding as of
January 23, 2004. In November 2003, we completed a private placement of an
aggregate of approximately 11,111,121 shares of common stock to several
accredited investors. Investors in the 2003 financing also received warrants to
purchase an aggregate of approximately 5,560,000 shares of common stock at an
exercise price of $1.25 per share, with certain proportionate anti-dilution
protections. We also entered into registration rights agreements with the
investors in the 2003 financing under which we agreed to register for resale by
the investors the shares of common stock issued and issuable upon exercise of
the warrants issued in the 2003 financing, with such number of shares subject to
adjustment as described above.
Simultaneous with the completion of the 2003 financing, pursuant to the JDSU
Agreement, JDSU converted its shares of preferred stock of Adept to acquire
3,074,135 shares of Adept's common stock, equal to approximately 19.9% of
Adept's outstanding common stock prior to the 2003 financing, and to surrender
its remaining shares of preferred stock to Adept. The JDSU Agreement also
provides that JDSU is entitled to certain rights with respect to us, including
piggyback registration rights. In August 2003, we also issued a three-year, $3.0
million subordinated note due June 30, 2006 in favor of our landlord,
convertible at any time at the option of the holder into our common stock at a
conversion price of $1.00 per share. The resulting shares carry certain other
rights, including piggyback registration rights, participation rights and
co-sale rights in certain equity sales by us or our management.
Adept has filed a registration statement with the Securities and Exchange
Commission for the registration of the shares of common stock sold and the
shares of common stock underlying the warrants granted in the 2003 financing,
issued to JDSU and underlying the Tri-Valley convertible note for resale to the
public under the Securities Act of 1933, as amended. Selling securityholders
included in the registration statement are offering an aggregate of 22,740,816
shares of our common stock, 8,555,560 shares of which are not currently
outstanding and are subject to warrants or our convertible note.
Additionally, at January 23, 2004, options to purchase approximately 3,710,262
shares of our common stock were outstanding under our stock option plans, and an
aggregate of 6,433,040 shares of common stock were issued or reserved for
issuance under our stock option plans and employee stock purchase plan,
including 500,000 shares of common stock reserved for issuance under our 2003
Stock Option Plan, approved by our shareholders at our annual meeting on January
23, 2004. Shares of common stock issued under these plans will be freely
tradable in the public market, subject to the Rule 144 limitations applicable to
our affiliates. Our lender, Silicon Valley Bank, also holds a warrant to
purchase 100,000 shares of our common stock, with an exercise price of $1.00 per
share. The sale of a substantial amount of our common stock, including shares
issued upon exercise of these outstanding options or issuable upon exercise of
our warrants, convertible notes or future options, in the public market could
adversely affect the prevailing market price of our common stock.
The ability of our Board of Directors to issue additional preferred stock could
delay or impede a change of control of our company and may adversely affect the
price an acquirer is willing to pay for our common stock.
The Board of Directors has the authority to issue, without further action by the
shareholders, up to 5,000,000 shares of preferred stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by Adept's shareholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions,
financings and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of Adept without further action by
the shareholders and may adversely affect the market price of, and the voting
and other rights of, the holders of common stock. Additionally, the conversion
of preferred stock into common stock may have a dilutive effect on the holders
of common stock.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price of our common stock has fluctuated substantially in the past.
The market price of our common stock will continue to be subject to significant
fluctuations in the future in response to a variety of factors, including:
o the business environment, including the operating results and stock
prices of companies in the industries we serve;
o our liquidity needs and constraints;
o our restructuring activities and changes in management and other
personnel;
o the delisting of our common stock from the Nasdaq Stock Market and
trading on the OTC Bulletin Board;
o fluctuations in operating results;
o future announcements concerning our business or that of our
competitors or customers;
o the introduction of new products or changes in product pricing
policies by us or our competitors;
o litigation regarding proprietary rights or other matters;
o change in analysts' earnings estimates;
o developments in the financial markets;
o general conditions in the intelligent automation industry; and
34
o perceived dilution from stock issuances for acquisitions, our 2003
equity financing and convertible note and other transactions.
Furthermore, stock prices for many companies, and high technology companies in
particular, fluctuate widely for reasons that may be unrelated to their
operating results. Those fluctuations and general economic, political and market
conditions, such as recessions, terrorist or other military actions, or
international currency fluctuations, as well as public perception of equity
values of publicly-traded companies may adversely affect the market price of our
common stock.
We may be subject to securities class action litigation if our stock price
remains volatile or operating results suffer, which could result in substantial
costs, distract management and damage our reputation.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities or where operating results suffer. Companies, like us, that are
involved in rapidly changing technology markets are particularly subject to this
risk. In addition, we have incurred net operating losses for the last few fiscal
years. We may be the target of litigation of this kind in the future. Any
securities litigation could result in substantial costs, divert management's
attention and resources from our operations and negatively affect our public
image and reputation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We incur fixed interest rates on our short-term debt in connection with our
Accounts Receivable Purchase Agreement with SVB and our convertible subordinated
note in connection with our Livermore lease restructuring, therefore we believe
our exposure to market risk for changes in interest rates on these obligations
are immaterial. Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. We maintain an investment policy,
which seeks to ensure the safety and preservation of our invested funds by
limiting default risk, market risk and reinvestment risk. The table below
presents principal cash flow amounts and related weighted-average interest rates
by year of maturity for our investment portfolio.
December 27, Fair Fiscal Fair
(in thousands except average rate) 2003 Value 2003 Value
--------- ------ --------- ------
Cash equivalents
Fixed rate .................... $ 6,111 $6,111 $ 3,234 $3,234
Average rate .................. 0.89% 0.03%
Short-term marketable securities
Fixed rate .................... $ 1,900 $1,900 $ -- $ --
Average rate .................. 1.19% -- --
Total Investment Securities $ 8,011 $8,011 $ 3,234 $3,234
--------- ------ --------- ------
Average rate .................. 0.96% -- 0.03% --
A portion of the approximately $9.4 million proceeds from the 2003 financing was
invested in short-term marketable securities at December 27, 2003.
We mitigate default risk by investing in high credit quality securities and by
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer of guarantor. Our portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity and contains a prudent amount of diversification. We conduct
business on a global basis. Consequently, we are exposed to adverse or
beneficial movements in foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the fiscal quarter ended December 27, 2003, Adept carried out
an evaluation, under the supervision and with the participation of members of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange
Act of 1934. Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that Adept's disclosure controls and
procedures are effective in timely alerting them to material information
relating to Adept (including our consolidated subsidiaries) required to be
included in our periodic SEC filings as of the end of the period covered by this
report. It should be noted that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving our stated goals
under all potential future conditions, regardless of how remote.
During the most recent fiscal quarter, there has not occurred any change in
Adept's internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, Adept's internal control over
financial reporting.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2003, DL Rose Orchard, L.P., owner of the property leased by Adept at 150
Rose Orchard Way and 180 Rose Orchard Way in San Jose, California, filed an
action against Adept in Santa Clara Superior Court (NO. CV817195) alleging that
Adept breached the leases for the Rose Orchard Way properties by ceasing rent
payments and vacating the property. The complaint claimed unspecified damages
for unpaid rent through April 2003, plus the award of rent through the balance
of the leases, all costs necessary to ready the premises to be re-leased and
payment of plaintiff costs and attorney's fees. In fiscal 2003, we recorded
expenses in the amount of $2.3 million for the remaining unpaid rent associated
with this lease; however, we did not reserve the cash associated with such
unpaid rent expenses. On November 17, 2003, we and the landlord reached an
agreement in principle to resolve all outstanding claims between us. On January
16, 2004, we entered into a settlement agreement and mutual general release,
pursuant to which we paid the landlord of our San Jose facility approximately
$1.65 million on January 26, 2004 and the landlord agreed to dismiss the action
brought against us in Santa Clara Superior Court (NO. CV817195). The landlord's
full release will take effect 93 days after January 26, 2004, except in the
event that we initiate any legal proceeding against the landlord or file any
voluntary petition or suffer the filing of an involuntary petition by our
creditors under bankruptcy, reorganization or other relief to debtors. We and
the landlord also acknowledged the termination of the lease agreements that were
the subject of the litigation. Dismissal of the litigation was entered by the
court on February 4, 2004. We had previously recorded restructuring charges,
during fiscal 2003, for the remaining unpaid rent associated with the lease
obligations of our San Jose facility. Since the settlement amount including
legal fees is less than the amount we previously accrued for, we expect that the
adjustment will result in a positive income statement impact in the third
quarter of fiscal 2004.
From time to time, we are party to various legal proceedings or claims, either
asserted or unasserted, which arise in the ordinary course of our business. We
have reviewed pending legal matters and believe that the resolution of these
matters, other than the above noted legal action, will not have a material
adverse effect on our business, financial condition or results of operations.
Adept has in the past received communications from third parties asserting that
we have infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement.
Some end users of our products have notified us that they have received a claim
of patent infringement from the Jerome H. Lemelson Foundation, alleging that
their use of our machine vision products infringes certain patents issued to Mr.
Lemelson. In addition, we have been notified that other end users of our
AdeptVision VME line and the predecessor line of Multibus machine vision
products have received letters from Mr. Lemelson which refer to Mr. Lemelson's
patent portfolio and offer the end user a license to the particular patents.
Some of these end users have notified us that they may seek indemnification from
us for any damages or expenses resulting from this matter. In January 2004, in a
litigation matter not involving Adept, the U.S. District Court of Las Vegas held
that the claims of 14 Lemelson patents are invalid and unenforceable regarding
machine vision systems and bar code readers. We are not aware of any appeal of
this decision, however we cannot predict the ultimate outcome of this or any
similar litigation which may arise in the future.
While it is not feasible to predict or determine the likelihood or outcome of
any actions against us, we believe the ultimate resolution of these matters
relating to alleged infringement will not have a material adverse effect on our
financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On November 18, 2003, the Company completed a private placement of an aggregate
of 11,111,121 shares of common stock to several accredited investors for a total
purchase price of $10.0 million, referred to as the 2003 financing. Net proceeds
from the 2003 financing after estimated costs and expenses were approximately
$9.4 million. The investors also received warrants to purchase an aggregate of
approximately 5,560,000 shares of common stock at an exercise price of $1.25 per
share. The number of shares issuable upon exercise and the per share exercise
price of the warrants is subject to adjustment in the case of any stock
dividend, stock split, combination, capital reorganization, reclassification or
merger or consolidation. Subject to certain exceptions, the per share exercise
price of the warrants and the number of shares for which the warrants are
exercisable are also subject to weighted average anti-dilution adjustment in the
case of an issuance of shares of common stock or securities exercisable for or
convertible into common stock, at a per share price less than the per share
exercise price of the warrants then in effect. The warrants have a term of
exercise beginning on May 18, 2004 and expiring on November 18, 2008. The
warrants are exercisable at any time commencing May 18, 2004 and prior to their
expiration date by delivering the warrant certificates to Adept, together with a
completed election to purchase and the full payment of the exercise price or by
means of a "net exercise" feature under which Adept does not receive any cash,
but rather, the number of shares issued upon exercise is net of the number of
shares withheld by Adept in lieu of payment of the exercise price. Under the
terms of these warrants, the Company may call the warrants, thereby forcing a
cash exercise, in certain circumstances after the common stock has closed at or
above $2.50 per share, subject to any adjustment for stock splits and similar
events, for 20 consecutive trading days during which a registration statement
covering the warrant shares is effective for at least 15 trading days.
36
The call right is subject to a 30 day advance notice by Adept, which notice
period must be extended for a number of days equal to the number of days for
which the registration statement covering the warrant shares is not effective.
The 2003 financing transactions occurred pursuant to two purchase agreements
entered into by the Company with two different groups of accredited investors on
November 14, 2003, each with substantially similar terms. Adept also entered
into registration rights agreements with the investors in the 2003 financing
under which the Company agreed to register for resale by the investors the
shares of common stock issued and issuable upon exercise of the warrants issued
in the 2003 financing, with such number of shares subject to adjustment as
described above. The private placement was conducted without registration under
the Securities Act of 1933, as amended, in reliance upon the exemption provided
by Section 4(2) of such Act and Rule 506 promulgated under such Section.
Simultaneous with the completion of the 2003 financing, pursuant to an agreement
dated November 14, 2003 between JDS Uniphase Corporation (referred to as JDSU),
and Adept, referred to as the JDSU Agreement, JDSU agreed to convert its shares
of preferred stock of Adept to acquire 3,074,135 shares of Adept's common stock,
equal to approximately 19.9% of Adept's outstanding common stock prior to the
2003 financing, and to surrender its remaining shares of preferred stock to
Adept. The JDSU Agreement provides that JDSU is entitled to certain information
rights with respect to Adept, including its annual and quarterly reports and SEC
filings, piggyback registration rights where Adept is filing a registration
statement for a public offering of securities to be issued by Adept or sold by
any of its stockholders (excluding registration statements relating to any
employee benefit plan or any merger or other corporate reorganization),
indemnification rights in connection with any registration of JDSU shares
completed by Adept and indemnification rights of up to $3.0 million in
connection with the transactions contemplated by the JDSU Agreement. The
original issuance of Adept's preferred stock under the Securities Purchase and
Investor Rights Agreement in 2001, and the issuance of the common stock under
the JDSU Agreement upon conversion of such preferred stock was conducted without
registration under the Federal Securities Act of 1933, as amended, in reliance
upon the exemption provided by Section 4(2) of such Act and Rule 506 promulgated
under such Section.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS
At Adept's Annual Meeting of Shareholders, held on January 23, 2004, the
shareholders of Adept approved the following actions:
a) Election of six (5) directors to serve until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified:
Robert H. Bucher: For: 25,537,404 Withheld: 932,876
Ronald E.F. Codd: For: 21,632,423 Withheld: 2,837,857
Michael P. Kelly: For: 21,632,348 Withheld: 2,837,932
Robert J. Majteles: For: 23,523,176 Withheld: 947,104
Cary R. Mock: For: 21,629,183 Withheld: 2,841,097
b) Approval of 2003 Stock Option Plan
For: 16,043,393 Against: 1,014,215 Abstain: 20,472 Broker Non-Vote: 12,574,430
c) Ratification of the appointment of Ernst & Young LLP as independent auditors
for the Company for the fiscal year ending June 30, 2004.
For: 24,310,715 Against: 151,455 Abstain: 8,110 Broker Non-Vote: 5,182,230
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report.
3.1 Bylaws of the Registrant, as amended to date.
4.1 Form of Registration Rights Agreement, dated as of November 18, 2003 by
and among the Registrant and the investors party thereto (incorporated by
reference to Exhibit 4.5 to the Registrant's Registration Statement on
Form S-2 (No. 333-112360) filed on January 30, 2004 (the "2004 Form
S-2").
4.2 Form of Warrant, dated November 18, 2003 to purchase Common Stock of the
Registrant issued to investors (incorporated by reference to Exhibit 4.6
to the 2004 Form S-2).
10.1* Robert H. Bucher Offer Letter dated November 3, 2003 (incorporated by
reference to Exhibit 10.27 to the Registrant's Amendment to its Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission
on November 12, 2003).
37
10.2 Purchase Agreement, dated as of November 14, 2003 by and among the
Registrant and the investors named therein (incorporated by reference to
Exhibit 10.28 to the 2004 Form S-2).
10.3 Purchase Agreement, dated as of November 14, 2003 by and among the
Registrant and the investors named therein (incorporated by reference to
Exhibit 10.29 to the 2004 Form S-2).
10.4 Agreement by and between the Registrant and JDS Uniphase dated November
14, 2003 (incorporated by reference to Exhibit 10.30 to the 2004 Form
S-2).
31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
b) Reports on Form 8-K.
On December 3, 2003, a Form 8-K was filed by Adept announcing that it has
reorganized its management team. In connection therewith, Brian Carlisle,
President, and Bruce Shimano, Vice President of Research and Development and
Secretary, have resigned from Adept effective December 5, 2003. Additionally,
Mr. Shimano has resigned as member of Adept's Board of Directors effective
December 2, 2003.
On November 19, 2003, a Form 8-K was filed by Adept announcing that it had
completed a $10.0 million private placement which was accompanied by the
simultaneous conversion of Adept's preferred stock into common stock. Adept also
announced reaching settlement of its San Jose lease litigation.
On November 18, 2003, a Form 8-K was filed by Adept announcing that it has
signed definitive agreements to issue and sell an aggregate of approximately
11.1 million shares of its newly issued common stock accompanied by the
simultaneous conversion of its preferred stock into approximately 3.1 million
shares of its common stock and the surrender of the remaining shares of
preferred stock to Adept.
On November 5, 2003, a Form 8-K was filed by Adept announcing its new Chief
Executive Officer and Chairman of the Board of Directors, Robert H. Bucher.
On October 22, 2003, a Form 8-K was filed by Adept announcing its financial
results for its first quarter ended September 27, 2003.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADEPT TECHNOLOGY, INC.
By: /s/ Michael W. Overby
--------------------------------------
Michael W. Overby
Vice President, Finance and
Chief Financial Officer
By: /s/ Robert H. Bucher
--------------------------------------
Robert H. Bucher
Chairman of the Board of Directors and
Chief Executive Officer
Date: February 10, 2004
39
INDEX TO EXHIBITS
3.1 Bylaws of the Registrant, as amended to date.
4.1 Form of Registration Rights Agreement, dated as of November 18, 2003 by
and among the Registrant and the investors party thereto (incorporated by
reference to Exhibit 4.5 to the Registrant's Registration Statement on
Form S-2 (No. 333-112360) filed on January 30, 2004 (the "2004 Form
S-2").
4.2 Form of Warrant, dated November 18, 2003 to purchase Common Stock of the
Registrant issued to investors (incorporated by reference to Exhibit 4.6
to the 2004 Form S-2).
10.1* Robert H. Bucher Offer Letter dated November 3, 2003 (incorporated by
reference to Exhibit 10.27 to the Registrant's Amendment to its Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission
on November 12, 2003).
10.2 Purchase Agreement, dated as of November 14, 2003 by and among the
Registrant and the investors named therein (incorporated by reference to
Exhibit 10.28 to the 2004 Form S-2).
10.3 Purchase Agreement, dated as of November 14, 2003 by and among the
Registrant and the investors named therein (incorporated by reference to
Exhibit 10.29 to the 2004 Form S-2).
10.4 Agreement by and between the Registrant and JDS Uniphase dated November
14, 2003 (incorporated by reference to Exhibit 10.30 to the 2004 Form
S-2).
31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
40