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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 March 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-27122
ADEPT TECHNOLOGY, INC.
(Exact name of Registrant as Specified in its Charter)
California 94-2900635
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3011 Triad Drive, Livermore, California 94550
(Address of Principal Executive Offices) (Zip Code)
(925) 245-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES [ ] NO [X ]
The number of shares of the Registrant's common stock outstanding as of May 6,
2004 was 29,902,143.
ADEPT TECHNOLOGY, INC
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 27, 2004 and June 30, 2003 .................................................... 3
Condensed Consolidated Statements of Operations
Three and nine months ended March 27, 2004 and March 29, 2003 ....................... 4
Condensed Consolidated Statements of Cash Flows
Three and nine months ended March 27, 2004 and March 29, 2003 ....................... 5
Notes to Condensed Consolidated Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................. 36
Item 4. Controls and Procedures ..................................................... 37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 38
Item 2. Changes in Securities and Use of Proceeds .................................. 38
Item 3. Defaults upon Senior Securities ............................................ 38
Item 4. Submission of Matters to a Vote of Security Holders ........................ 38
Item 5. Other Information .......................................................... 38
Item 6. Exhibits and Reports on Form 8-K ............................................ 39
Signatures .......................................................................... 40
Index to Exhibits ................................................................... 41
2
ADEPT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 27, June 30,
2004 2003
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 3,858 $ 3,234
Short-term investments .................................................................... 1,850 --
Accounts receivable, less allowance for doubtful accounts of $1,347 at
March 27, 2004 and $1,124 at June 30, 2003 ........................................... 12,405 10,948
Inventories ............................................................................... 6,628 7,122
Prepaid assets and other current assets ................................................... 758 717
--------- ---------
Total current assets .................................................................. 25,499 22,021
Property and equipment at cost ................................................................. 9,731 11,751
Less accumulated depreciation and amortization ................................................. 7,992 8,591
--------- ---------
Property and equipment, net .................................................................... 1,739 3,160
Goodwill ....................................................................................... 3,176 7,671
Other intangibles, net ......................................................................... 534 1,176
Other assets ................................................................................... 1,366 1,753
--------- ---------
Total assets .......................................................................... $ 32,314 $ 35,781
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable .......................................................................... $ 6,544 $ 6,094
Accrued payroll and related expenses ...................................................... 1,383 1,535
Accrued warranty .......................................................................... 2,151 1,833
Deferred revenue .......................................................................... 1,292 1,145
Accrued restructuring charges ............................................................. 364 3,122
Other accrued liabilities ................................................................. 599 1,014
Short term debt ........................................................................... 484 97
--------- ---------
Total current liabilities ............................................................. 12,817 14,840
Long term liabilities:
Restructuring charges ..................................................................... 35 383
Subordinated convertible note ............................................................. 3,000 3,000
Income tax payable ........................................................................ 163 1,988
Other long term liabilities ............................................................... 1,215 2,153
Commitments and contingencies
Redeemable convertible preferred stock, no par value: 5,000 shares authorized,
no shares issued and outstanding at March 27, 2004 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, 29,823 and 15,392 shares issued and outstanding
at March 27, 2004 and June 30, 2003, respectively ........................................ 143,428 108,868
Accumulated deficit ........................................................................... (128,344) (120,451)
--------- ---------
Total shareholders' equity (deficit) ..................................................... 15,084 (11,583)
--------- ---------
Total liabilities, redeemable convertible preferred stock and shareholders'
equity (deficit) ....................................................................... $ 32,314 $ 35,781
========= =========
See accompanying notes
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Nine months ended
-------------------------- --------------------------
March 27, March 29, March 27, March 29,
2004 2003 2004 2003
-------- -------- -------- --------
(unaudited) (unaudited)
Net revenues $ 13,334 $ 9,523 $ 34,619 $ 28,240
Cost of revenues 7,822 6,315 21,122 19,218
-------- -------- -------- --------
Gross margin 5,512 3,208 13,497 9,022
Operating expenses:
Research, development and engineering 1,696 2,675 5,215 8,511
Selling, general and administrative 3,790 4,746 10,439 17,148
Restructuring expenses (697) 2,020 (697) 3,156
Amortization of other intangibles 142 150 427 426
-------- -------- -------- --------
Total operating expenses 4,931 9,591 15,384 29,241
-------- -------- -------- --------
Operating income (loss) 581 (6,383) (1,887) (20,219)
Interest income (expense), net (71) (16) (334) 193
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes 510 (6,399) (2,221) (20,026)
Provision for (benefit from) income taxes (1,433) -- (1,415) 31
-------- -------- -------- --------
Income (loss) from continuing operations 1,943 (6,399) (806) (20,057)
Loss from discontinued operations (7,000) (353) (7,087) (2,523)
-------- -------- -------- --------
Net loss $ (5,057) $ (6,752) $ (7,893) $(22,580)
======== ======== ======== ========
Basic income (loss) per share from:
continuing operations $ 0.07 $ (0.42) $ (0.04) $ (1.36)
======== ======== ======== ========
discontinued operations $ (0.24) $ (0.02) $ (0.32) $ (0.17)
======== ======== ======== ========
Basic net loss per share $ (0.17) $ (0.44) $ (0.35) $ (1.53)
======== ======== ======== ========
Diluted income (loss) per share from:
continuing operations $ 0.06 $ (0.42) $ (0.04) $ (1.36)
======== ======== ======== ========
discontinued operations $ (0.23) $ (0.02) $ (0.32) $ (0.17)
======== ======== ======== ========
Diluted net loss per share $ (0.17) $ (0.44) $ (0.35) $ (1.53)
======== ======== ======== ========
Basic number of shares used in computing
per share amounts from:
continuing operations 29,721 15,225 22,303 14,765
======== ======== ======== ========
discontinued operations 29,721 15,225 22,303 14,765
======== ======== ======== ========
Diluted number of shares used in computing
per share amounts from:
continuing operations 30,283 15,225 22,303 14,765
======== ======== ======== ========
discontinued operations 30,283 15,225 22,303 14,765
======== ======== ======== ========
(Note: Amounts for prior periods have been reclassified to reflect the results of the Solutions segment as a discontinued operation)
See accompanying notes
4
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended
--------------------------------
March 27, 2004 March 29, 2003
-------------- --------------
Operating activities
Loss from continuing operations (806) (20,057)
Non-cash adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,419 2,146
Amortization of intangibles 534 533
Amortization of common stock warrants to interest expense -- 21
Reversal of accrued lease obligations in excess of settlement (1,146)
Reversal of previously accrued income taxes (1,285)
Asset impairment charges -- 268
Loss on disposal of property and equipment 66 9
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (1,798) (559)
Inventories (1,081) 1,408
Prepaid expenses and other current assets (41) (908)
Other assets 387 381
Accounts payable 286 2,282
Other accrued liabilities 312 (3,651)
Accrued restructuring charges (1,876) 142
Other long-term liabilities (1,019) 858
-------- --------
Net cash used in operating activities from continuing operations (6,048) (17,127)
Investing activities
Business acquisitions, net of cash acquired -- (198)
Purchase of property and equipment, net (245) (247)
Purchases of short-term available-for-sale investments (8,550) (9,275)
Sales of short-term available-for-sale investments 6,700 13,581
-------- --------
Net cash (used in) provided by investing activities (2,095) 3,861
-------- --------
Financing activities
Net proceeds from issuance of common stock 9,355 --
Net borrowings under short-term debt 387 --
Proceeds from employee stock incentive program and employee
stock purchase plan, net of repurchases and cancellations 121 153
-------- --------
Net cash provided by financing activities 9,863 153
-------- --------
Cash provided by (used in) continuing operations 1,720 (13,113)
Cash used in discontinued operations (1,096) (2,523)
Increase (decrease) in cash and cash equivalents 624 (15,636)
Cash and cash equivalents, beginning of period 3,234 17,375
-------- --------
Cash and cash equivalents, end of period $ 3,858 $ 1,739
======== ========
Supplemental disclosure on cash flow activity
Cash paid for interest $ 213 $ 43
Cash paid for income taxes $ 37 $ --
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 pursuant to terms of Chad acquisition agreement $ -- $ 425
Note: Amounts for prior periods have been reclassified to reflect the results of the Solutions segment as a discontinued operation.)
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 12, 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.
During fiscal 2002, 2003 and 2004, the Company reduced operating costs and
employee headcount, and restructured certain operating lease commitments in
order to size the Company for current business levels. 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 11. Additionally, during the third quarter of fiscal
2004, the Company disposed of its Solutions business segment as part of the
Company's strategy to focus on intelligent flexible automation products and
services for assembly and material handling ("AMH") applications. The Company's
third quarter results reflect the impact of these actions on the Company's
operations.
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.
Income (loss) per Share
Basic income (loss) per share is based on the weighted average number of shares
of common stock outstanding during the period, excluding restricted stock, while
diluted income (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.
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 $142,000 and $271,000 for the three and
nine months ended March 29, 2003, 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
6
purchase. At March 27, 2004, short-term investments are carried at cost, which
approximates fair value.
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:
March 27, June 30,
(in thousands) 2004 2003
-------- --------
Raw materials....................... $ 1,812 $ 2,422
Work-in-process..................... 2,352 1,858
Finished goods...................... 2,464 2,842
-------- --------
$ 6,628 $ 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:
Nine months ended
-------------------------
(in thousands) March 27, March 29,
2004 2003
-------- --------
Balance at beginning of fiscal year $ 1,833 $ 1,566
Warranties issued 1,133 1,075
Change in warranty provision (200) 97
Warranty claims (780) (1,209)
Changes in liability for pre-existing warranties
including expirations 165 351
------- -------
Balance at end of period $ 2,151 $ 1,880
======= =======
5. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
March 27, June 30,
(in thousands) 2004 2003
------- -------
Cost:
Machinery and equipment ................. $ 2,240 $ 3,023
Computer equipment ...................... 5,451 5,865
Office furniture and equipment .......... 2,040 2,863
------- -------
9,731 11,751
Accumulated depreciation and amortization 7,992 8,591
------- -------
Net property and equipment .............. $ 1,739 $ 3,160
======= =======
6. Financing Arrangements
On March 20, 2003, the Company and Silicon Valley Bank ("SVB") entered into an
Accounts Receivable Purchase Agreement (the "Purchase Agreement"), amended in
April 2004 as discussed in Note 19. 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
7
the date of grant by the Company using the Black Scholes model. As of March 27,
2004, the warrant has not been exercised and there was $484,000 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 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 March 27, 2004. 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. This agreement was amended and
restated on April 22, 2004 (see Note 19).
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 March 27, 2004. 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. Pursuant to the registration
rights provided in the note, the Company registered the shares issuable upon
exercise of the note for resale to the public under the Securities Act of 1933,
as amended, in connection with its filing of an S-2 registration statement
declared effective by the Securities and Exchange Commission ("SEC") on February
24, 2004 (the "February 2004 Registration").
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.
8
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. The 2003 financing transaction
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. As required under the registration rights
agreements entered into at the time of the sales of the shares and warrants, the
Company registered the shares it sold and the shares underlying the warrants it
granted for resale to the public in the February 2004 Registration.
Simultaneous with the completion of the financing, pursuant to an agreement
dated November 14, 2003, (the "JDSU" Agreement") 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 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. The Company registered the resale of the
shares issued upon conversion of the preferred stock under the JDSU Agreement
with the SEC in the February 2004 Registration.
7. Transactions With Related and Certain Other Parties
On January 31, 2004, Adept entered into a Severance Agreement and Release of All
Claims with each of Mr. Carlisle and Mr. Shimano (the "Severance Agreements") on
substantially the same terms. Under the terms of the Severance Agreements, among
other agreements, Adept agreed to pay each of Mr. Carlisle and Mr. Shimano
severance payments equivalent to six months' base salary, less appropriate
withholdings, plus medical, dental and vision benefits through February 2004 and
agreed to maintain coverage for the former executives under its Directors and
Officers Liability policy for three years. In addition, all of Mr. Carlisle's
and Mr. Shimano's respective stock options scheduled to vest through November 4,
2004 fully vested immediately upon entry into the agreement and remain
exercisable through November 4, 2004. In return for these payments and benefits,
each of Mr. Carlisle and Mr. Shimano agreed to release Adept from any and all
potential claims and the parties affirmed certain confidentiality and
non-solicitation agreements between Adept and the former executives.
8. Discontinued Operations
During the quarter ended March 27, 2004, Adept adopted a formal plan to dispose
of and completed the disposition of its Solutions business segment for zero cash
consideration. As part of the disposition, Adept transferred certain
intellectual property and related assets valued at $0.1 million not related to
Adept's components and services businesses, to a corporation formed by former
employees of Adept's Orange County division, which was disposed of as part of
discontinued operations, in exchange for the assumption of certain of Adept's
liabilities and obligations associated with the Solutions business segment. The
loss from discontinued operations for the quarter ended March 27, 2004 of $7.0
million includes a non-cash loss on asset disposal of $6.0 million, which
consists primarily of $4.6 million for the impairment of goodwill and other
intangibles and $1.8 million in write-offs of inventory and fixed assets,
partially offset by $0.4 million in other liabilities eliminated with the
disposal of the solutions business segment. The disposition of the solutions
business segment included the closure of the Company's Orange County, California
division. Accordingly, the Solutions business segment was accounted for as a
discontinued operation and the results of operations of the Solutions business
segment have been removed from Adept's continuing operations for all periods
presented.
The results of discontinued operations are summarized as follows:
Three months ended, Nine months ended
------------------------------ ---------------------------
March 27, March 29, March 27, March 29,
(in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Revenue from discontinued operations ................... $ 539 $ 2,954 $ 2,551 $ 5,260
Loss on disposal of assets ............................. $(5,991) $ -- $(5,991) $ --
Loss from discontinued operations ...................... $(1,009) $ (353) $(1,096) $(2,523)
Net loss from discontinued operations .................. $(7,000) $ (353) $(7,087) $(2,523)
9
9. Accrued Restructuring Charges
The following table summarizes the Company's accrued restructuring costs at
March 27, 2004:
Additional Amounts Amounts Amounts Amounts
Balance Charges/ Utilized Utilized Utilized Utilized Balance
June 30, (Reversals) Q1 Fiscal Q2 Fiscal Q3 Fiscal Q3 Fiscal March 27,
(in thousands) 2003 Q3 Fiscal 2004 2004 2004 2004 2004 2004
---- -------------- ---- ---- ---- ---- ----
Cash Cash Cash Non-Cash
Employee severance costs.. $ 184 $ 448 $ 45 $ 139 $ 120 $ 84 $ 244
Lease commitments ........ 3,321 (1,146) 146 137 1,736 -- 156
Asset impairment charges.. -- 1 -- -- -- 1 --
------- ------- ------- ------- ------- ------- -------
Total .................. $ 3,505 $ (697) $ 191 $ 276 $ 1,856 $ 85 $ 400
During the quarter ended March 27, 2004, the Company incurred a net reversal of
$0.7 million of previously accrued restructuring charges. The $0.7 million
consists of $1.1 million in reversals of previously accrued lease termination
costs offset by $0.4 million in severance charges primarily attributable to the
departure of Adept's co-founders, Brian R. Carlisle and Bruce E. Shimano,
pursuant to the Severance Agreements between the Company and each of them. The
reversal of previously accrued lease termination costs was the result of the
execution during the quarter of an agreement with a former landlord to favorably
settle litigation relating to an outstanding lease obligation. The restructuring
balance consists of charges made during fiscal years 2002, 2003 and 2004 and are
comprised entirely of cash charges that are expected to be paid over the next
five quarters, against employee severance costs and non-cancelable lease
commitments.
10. 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. 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, but 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 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 the San Jose facility approximately $1.65 million on January 26,
2004 and the landlord dismissed the action brought against Adept in Santa Clara
Superior Court (NO. CV817195). The landlord's full release took effect on April
28, 2004. 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, the restructuring adjustment resulted in a positive
income statement impact of $0.7 million in the third quarter of fiscal 2004.
From time to time, the Company is party to various legal proceedings or claims,
either asserted or unasserted, which arise in the ordinary course of its
business. The Company has reviewed pending legal matters and believes that the
resolution of these matters will not have a material adverse effect on its
business, financial condition or results of operations.
Adept has in the past received communications from third parties asserting that
it has infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement.
While it is not feasible to predict or determine the likelihood or outcome of
any actual or potential actions against the Company, it believes the ultimate
resolution of these matters will not have a material adverse effect on its
financial position, results of operations or cash flows.
11. 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.
10
In December 2002, Adept and JDSU agreed to terminate the supply, development and
license agreement entered into by them in October 2001. 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 JDSU's internal automation organization
serviced by the arrangements with Adept, 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,
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. Pursuant to
the registration rights in the JDSU Agreement, the Company registered the resale
of the shares issued upon conversion of the preferred stock under the JDSU
Agreement with the SEC pursuant to the February 2004 Registration.
12. 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 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. For the three
and nine months ended March 27, 2004, the Company recorded a benefit from income
taxes from continuing operations of $1.4 million, which reflects a one-time
benefit for the reversal of previously accrued taxes. This reversal reflects
management's reassessment of the appropriate level of tax liabilities for the
Company based upon the Company's current level of operating activities and
recent filing of its federal, state and certain international tax returns.
13. Goodwill and Intangible Assets
During the quarter ended March 27, 2004, the Company adopted a formal plan to
dispose of and completed the disposition of, its Solutions business segment. The
goodwill associated with the Solutions business segment was included as part of
the loss from discontinued operation (See Note 8).
(in thousands) Components Solutions Total
-------------- ---------- --------- -----
Balance at June 30, 2003 $ 3,176 $ 4,495 $ 7,671
Changes to goodwill -- (4,495) (4,495)
------- ------- -------
Balance at March 27, 2004 $ 3,176 $ -- $ 3,176
======= ======= =======
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.
Gross Carrying Accumulated Net Carrying
Amortized intangible assets Amount Amortization Amount
------- ------- -------
Developed technology $ 2,102 $(1,584) $ 518
Non-compete agreements 380 (364) 16
------- ------- -------
Total $ 2,482 $(1,948) $ 534
======= ======= =======
In connection with the disposition of the Solutions business segment,
intangibles with a gross carrying amount of $430,000 and accumulated
depreciation of $287,000 were included as part of the loss from discontinued
operations (See Note 8).
11
The aggregate amortization expense for nine months ended March 27, 2004 totaled
$427,000 and the estimated amortization expense for the next five years is as
follows:
(in thousands) Amount
------
Remaining for fiscal year 2004 111
For fiscal year 2005 195
For fiscal year 2006 195
For fiscal year 2007 33
----
$534
====
14. Income (loss) per Share
Basic income (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 income (loss) per share gives effect to
equity instruments considered to be potential common shares, if dilutive,
computed using the treasury stock method of accounting. During the three and
nine months ended March 29, 2003 and the nine months ended March 27, 2004,
dilutive net loss per share was computed without the effect of equity
instruments considered to be potential common shares as the impact would be
anti-dilutive to the net loss.
Three months ended, Nine months ended
----------------- ------------- ----------------- ------------
March 27, March 29, March 27, March 29,
(in thousands) 2004 2003 2004 2003
------------ ------------ ------------ ----------
Income (loss) from continuing operations ................ $ 1,943 $ (6,399) $ (806) $ (20,057)
Loss from discontinued operations ....................... $ (7,000) $ (353) $ (7,087) $ (2,523)
Net loss ................................................ $ (5,057) $ (6,752) $ (7,893) $ (22,580)
Basic:
Number of shares used in computing per share amounts
from continuing and discontinued operations: ........ 29,721 15,225 22,303 14,765
============ ============ ============ ==========
Income (loss) per share from
continuing operations ........................... $ 0.07 $ (0.42) $ (0.04) $ (1.36)
============ ============ ============ ==========
discontinued operations ......................... $ (0.24) $ (0.02) $ (0.32) $ (0.17)
============ ============ ============ ==========
Basic net loss per share ............................... $ (0.17) $ (0.44) $ (0.35) $ (1.53)
============ ============ ============ ==========
Diluted:
Weighted average common shares used in computing
basic net income (loss) per
share from continuing
and discontinued operations: ...................... 29,721 15,225 22,303 14,765
============ ============ ============ ==========
Add: Weighted average dilutive potential common
stock ...................................... 562 -- -- --
============ ============ ============ ==========
Weighted average common shares used in computing
diluted net loss per share from continuing and
discontinued operations: ...................... 30,283 15,225 22,303 14,765
============ ============ ============ ==========
Income (loss) per share from
continuing operations ............................... $ 0.06 $ (0.42) $ (0.04) $ (1.36)
============ ============ ============ ==========
discontinued operations ............................. $ (0.23) $ (0.02) $ (0.32) $ (0.17)
============ ============ ============ ==========
Diluted net loss per share ............................. $ (0.17) $ (0.44) $ (0.35) $ (1.53)
============ ============ ============ ==========
15. 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
12
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.
16. 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 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, Nine months ended,
-------------------------- --------------------------
March 27, March 29, March 27, March 29,
(in thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Net loss, as reported ...................................... $ (5,057) $ (6,752) $ (7,893) $(22,580)
Add: Stock-based employee compensation expense
included in the determination of net loss, as
reported ................................................ 84 -- 84 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects .............. (130) (108) (1,276) (1,950)
-------- -------- -------- --------
Pro forma net loss ......................................... $ (5,103) $ (6,860) $ (9,085) $(24,530)
======== ======== ======== ========
Basic and diluted loss per common share:
As reported ............................................. $ (0.17) $ (0.44) $ (0.35) $ (1.53)
======== ======== ======== ========
Pro forma ............................................... $ (0.17) $ (0.45) $ (0.41) $ (1.66)
======== ======== ======== ========
17. Segment Information
Adept's chief operating decision maker is its Chief Executive Officer, or CEO.
Over the past several quarters, the Company began an evaluation of all of its
business segments as part of the Company's plan to focus on core competencies.
During the third quarter, as a result of its evaluations, the Company adopted a
formal plan to dispose of and completed the disposition of, the Solutions
business segment. As such, results of the disposed Solutions business segment
have been recorded as discontinued operations (See Note 8).
After disposition of the Solutions business segment, Adept's current business is
focused towards delivering intelligent flexible automation components for
assembly and material handling ("AMH") applications under two categories: (1)
Components and (2) Services and Support.
The Components segment provides intelligent automation software and hardware
component products externally to customers and internally to the other business
segment for support.
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 income (loss). Segment operating income (loss) 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.
13
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 Nine months ended
----------------------- -----------------------
March 27, March 29, March 27, March 29,
(in thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Revenue:
Components ............................ $ 9,110 $ 6,475 $ 21,918 $ 18,358
Services and Support .................. 4,224 3,048 12,701 9,882
-------- -------- -------- --------
Total revenue ......................... $ 13,334 $ 9,523 $ 34,619 $ 28,240
======== ======== ======== ========
Operating income (loss):
Components ............................ $ 1,358 $ (1,432) $ 1,312 $ (5,681)
Services and Support .................. 1,531 852 4,116 2,241
-------- -------- -------- --------
Segment profit (loss) ................. 2,889 (580) 5,713 (3,440)
Unallocated research, development
and engineering and selling, ....... (3,005)
general and administrative ......... (3,783) (8,012) (13,623)
Restructuring charges, net ............ 697 (2,020) 697 (3,156)
Interest income ....................... 28 13 72 236
Interest expense ...................... (99) (29) (406) (43)
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes ................. $ 510 $ (6,399) $ (2,221) $(20,026)
======== ======== ======== ========
18. Comprehensive Income
For the three and nine months ended March 27, 2004 and March 29, 2003, there
were no significant differences between the Company's comprehensive loss and its
net loss.
19. Subsequent Event
On April 22, 2004, Adept and SVB entered into an Amendment to Loan Documents,
pursuant to which Adept and SVB entered into a loan and security agreement (the
"Loan and Security Agreement") that amends and restates the Accounts Receivable
Purchase Agreement, described in Note 6, in its entirety. Under the terms of the
Loan and Security Agreement, Adept may borrow amounts under the credit facility
not to exceed the lesser of $4.0 million or the sum of 80% of Adept's eligible
accounts receivable plus any overadvance loans that may be granted by SVB from
time to time in its sole and absolute discretion. The aggregate of overadvance
loans may not exceed the lesser of $0.5 million or 30% of the amount of Adept's
eligible accounts receivable. In connection with the Loan and Security
Agreement, Adept granted to SVB a security interest in substantially all of its
assets. Interest is payable on loans at a rate equal to the prime rate announced
from time to time by SVB ("Prime Rate"), plus 1.75% per annum, and adjusts on
each date there is a change in the Prime Rate, provided that the rate in effect
on any given date will not be less than 5.75% per annum. Adept paid a one-time
loan fee of $30,000 upon entering the Loan and Security Agreement, and must make
quarterly payments for any unused available loan amounts at a rate of 0.25% per
annum. Amounts outstanding under the Purchase Agreement became the opening
balance of the Loan and Security Agreement. In addition, under the terms of the
Amendment to Loan Documents, certain agreements, instruments and other related
documents initially entered into between Adept and SVB in connection with the
Purchase Agreement remain in effect, including the security interest in
substantially all of Adept's assets granted to SVB by Adept in connection with
the Purchase Agreement, the guaranty executed by certain of the Company's
wholly-owned subsidiaries in connection with the Purchase Agreement and the
warrant Adept issued SVB to purchase 100,000 shares of Adept's common stock at a
price of $1.00 per share.
The Loan and Security Agreement includes certain financial and other covenants
with which the Company must comply. Financial covenants specify that Adept must
maintain a tangible net worth of at least $9.5 million, plus 50% of all
consideration received by the Company for any equity securities and subordinated
debt of Adept, plus 50% of Adept's net income in each fiscal quarter ending
after the date of the agreement. Once an increase in the minimum tangible net
worth of the Company takes effect, it remains in effect thereafter, and does not
decrease. Other covenants with which the Company must comply, include, but are
not limited to, the payment of the Company's tax obligations as and when due,
the periodic submission of certain financial and other specified information to
SVB and the maintenance of the Company's primary deposit and investment accounts
with SVB. In addition, the Company cannot 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
14
$300,000 million in any fiscal quarter. The Company would be deemed to be in
default under the Loan and Security Agreement if the Company failed to timely
pay any amount owed to SVB; if amounts owed to SVB exceed the credit limit; if
the Company failed to comply with its financial and other covenants, including
those listed above; if the Company becomes insolvent or is generally not paying
its debts as they become due; 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 without cure any non-monetary provision under the agreement; if any
payment is made on account of subordinate obligations except as permitted in the
applicable subordination agreement; if there is a change in the ownership of
more than 20% of the outstanding shares of the Company without SVB's prior
written consent; if any event of default occurs under any obligation secured by
a permitted lien which is not waived or cured within any applicable period
allowed by the lien holder; any revocation of any guaranty of the Company's
obligations or any revocation of any pledge of assets to secure the Company's
obligations; or if the Company breached any material contract or obligation that
may be expected to lead to, or there otherwise occurred 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 Loan and Security Agreement, SVB may, among other things,
cease making loans to the Company; accelerate and declare all or any part of the
Company's obligations to be immediately due and payable, and enforce its
security against the collateral. The Loan and Security Agreement will expire on
April 22, 2005.
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 our ability to establish relationships with suppliers, systems
integrators and OEMs for the supply and distribution of our products;
o sources of revenue and anticipated revenue, including the contribution
from the growth of new products and markets;
o the current economic environment affecting us and the markets we
serve;
o our anticipated benefits from restructuring activities;
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 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-looking statements represent our estimates and assumptions only as
of the date of this report.
OVERVIEW
We provide intelligent flexible automation products and services for assembly
and material handling ("AMH") applications to our customers in many industries.
This customer industry mix varies considerably from period to period due to a
variety of market and economic factors. Our customers integrate our
comprehensive product portfolio of high performance automation components and
application development software to deliver production solutions that meet
increasingly complex and demanding manufacturing requirements. Our broad range
of standard high-performance high-reliability automation products reduces the
time and cost for our customers' to design, engineer and launch new products
into high-volume production. Adept's commitment to long-term product service and
15
support reduces the total cost of ownership of our products. We make available
regular product upgrades that incorporate the latest technology advances,
providing our customers with maximum manufacturing flexibility and ease of
automation redeployment as they reconfigure their factories to produce new
products. Our product range currently includes integrated real-time vision and
multi-axis motion controls, machine vision systems and software, application
development software, industrial robots, linear modules, and other flexible
automation equipment. In recent years, we have expanded our robot product lines
and developed advanced software and sensing technologies that enable robots to
perform a wider range of functions. In fiscal 2003, we introduced our
Amp-in-Base (AIB) technology with our new line of Cobra s-Series SCARA robots.
The AIB technology incorporates the power amplifiers and servo controls directly
inside the robot arm, providing significant factory floor space-savings and
performance and reliability gains. These resulting low-cost SCARA robots have
had a positive impact on our gross margins during the first three quarters of
fiscal 2004. We expect to maintain or improve our current levels of gross
margins as we integrate the AIB technology across our entire product line.
International sales generally comprise between 30% and 45% 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 March 27, 2004. 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 March 27, 2004. 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.
During the quarter ended March 27, 2004, Adept adopted a formal plan to dispose
of and completed the disposition of our Solutions business segment for zero cash
consideration. As part of the disposition, we transferred certain of our
intellectual property and related assets, valued at $0.1 million not related to
our components and services businesses, to a corporation formed by former
employees of Adept's Orange County division, which was disposed of as part of
discontinued operations, in exchange for their assumption of certain of our
liabilities and obligations associated with the Solutions business segment. The
loss from discontinued operations for the quarter ended March 27, 2004 of $7.0
million includes a non-cash loss on asset disposal of $6.0 million, which
consists primarily of $4.6 million for the impairment of goodwill and other
intangibles and $1.8 million in write-offs of inventory and fixed assets,
partially offset by $0.4 million in other liabilities eliminated upon the
disposal of the solutions business segment. The disposition of the Solutions
business segment included the closure of our Orange County, California division.
Accordingly, the Solutions business segment was accounted for as a discontinued
operation and the results of operations of the Solutions business segment have
been removed from Adept's continuing operations for all periods presented.
On April 22, 2004, we entered into an Amendment to Loan Documents with Silicon
Valley Bank, or SVB, pursuant to which Adept and SVB entered into a loan and
security agreement, referred to as the Loan and Security Agreement that amends
and restates the Accounts Receivable Purchase Agreement dated March 20, 2003
between Adept and SVB or the Purchase Agreement. Terms of the amended and
restated credit facility are described below in the discussion of Liquidity and
Capital Resources.
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, 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. The 2003 financing transaction
occurred pursuant to two purchase agreements entered into by Adept with two
different groups of accredited investors on November 14, 2003, each with
substantially similar terms. As required under the registration rights
agreements entered into at the time of the sales of the shares and warrants, we
registered the shares we sold and the shares underlying the warrants we granted
for resale to the public. Pursuant to the registration rights provided in the
note, we registered the shares issuable upon exercise of the note for resale to
the public under the Securities Act of 1933, as amended, in connection with its
filing of an S-2 registration statement declared effective by the SEC on
February 24, 2004, referred to as the February 2004 Registration.
Simultaneous with the completion of the financing, pursuant to an agreement
dated November 14, 2003, referred to as the JDSU Agreement, JDS Uniphase
Corporation, or JDSU, converted its preferred stock into approximately 3.1
million shares of Adept common stock and surrendered its remaining shares of
preferred stock to Adept. Per the terms of our promissory note with JDSU, we
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
16
JDSU and Adept pursuant to which JDSU acquired its shares of preferred stock
from Adept which were converted and surrendered under the JDSU Agreement, as
well as the $1.0 million promissory note in favor of JDSU. We registered the
resale of the shares issued under the JDSU Agreement with the SEC in the
February 2004 Registration.
During the quarter ended March 27, 2004, we incurred $0.4 million in severance
charges in connection with the departures of Brian R. Carlisle and Bruce E.
Shimano in December 2003, pursuant to severance agreements entered into between
us and each of them. On January 31, 2004, we entered into a Severance Agreement
and Release of All Claims with each of Mr. Carlisle and Mr. Shimano, referred to
as the Severance Agreements, on substantially the same terms. Under the terms of
the Severance Agreements, among other agreements, we agreed to pay each of Mr.
Carlisle and Mr. Shimano severance payments equivalent to six months' base
salary, less appropriate withholdings, plus medical, dental and vision benefits
through February 2004 and agreed to maintain coverage for the former executives
under its Directors and Officers Liability policy for three years. In addition,
all of Mr. Carlisle's and Mr. Shimano's respective stock options scheduled to
vest through November 4, 2004 fully vested immediately upon entry into the
agreement and remain exercisable through November 4, 2004. In return for these
payments and benefits, each of Mr. Carlisle and Mr. Shimano agreed to release us
from any and all potential claims and the parties reaffirmed certain
confidentiality and non-solicitation agreements between us and the former
executives.
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. 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 March 27,
2004. 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. Pursuant to the registration
rights provided in the note, we registered the shares issuable upon exercise of
the note for resale to the public with the SEC in the February 2004
Registration.
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, but 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 the 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 took effect on April 28, 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, the restructuring adjustment resulted in a positive income
statement impact of $0.7 million 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 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.
17
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 104, ("SAB 104"), 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 Control and 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 the reseller receives 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 are payments received from customers in advance of the delivery
of products and/or services.
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.
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.
18
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.
Results of Operations
Three and Nine Months Ended March 27, 2004 and March 29, 2003
Net revenue from continuing operations. Net revenue from continuing operations
for the three months ended March 27, 2004 was $13.3 million, an increase of 40%
from net revenue from continuing operations of $9.5 million for the three months
ended March 29, 2003. Net revenue from continuing operations for the nine months
ended March 27, 2004 was $34.6 million, an increase of 23% from net revenue from
continuing operations of $28.2 million for the nine months ended March 29, 2003.
Components revenue increased 41% to $9.1 million for the three months ended
March 27, 2004 from $6.5 million for the three months ended March 29, 2003.
Components revenue increased 19% to $21.9 million for the nine months ended
March 27, 2004 compared to $18.4 million for the nine months ended March 29,
2003. The increase reflects increased demand for our new Smart Cobra robot as
19
well as an improvement in general market conditions for capital equipment
manufacturers. Services and Support revenue increased 39% to $4.2 million for
the three months ended March 27, 2004 from $3.0 million for the three months
ended March 29, 2003. Services and Support revenue increased 28% to $12.7
million for the nine months ended March 27, 2004 from $9.9 million for the nine
months ended March 29, 2003. The increase is primarily due to increased sales
and servicing of refurbished products.
Domestic and international revenue between segments for the three and nine
months ended March 27, 2004 and March 29, 2003 are as follows:
Three months ended Nine months ended
----------------------------------- -----------------------------------
March 27, 2004 March 29, 2003 March 27, 2004 March 29, 2003
-------------- -------------- -------------- --------------
Domestic revenue:
Components $ 6,580 $ 3,293 $ 13,575 $ 10,604
Services 2,823 1,752 7,520 6,188
----------- ----------- ------------ ----------
Total $ 9,403 $ 5,045 $ 21,095 $ 16,792
=========== =========== =========== ===========
International revenue:
Components $ 2,531 $ 3,182 $ 8,343 $ 7,753
Services 1,400 1,296 5,181 3,695
----------- ----------- ------------ -----------
Total $ 3,931 $ 4,478 $ 13,524 $ 11,448
=========== =========== =========== ===========
Our domestic sales totaled $9.4 million for the three months ended March 27,
2004, compared with $5.0 million for the three months ended March 29, 2003, an
increase of 86%. Our domestic sales totaled $21.1 million for the nine months
ended March 27, 2004, compared with $16.8 million for the nine months ended
March 29, 2003, an increase of 26%. Our international sales totaled $3.9 million
for the three months ended March 27, 2004, compared with $4.5 million for the
three months ended March 29, 2003, a decrease of 12%. Our international sales
totaled $13.5 million for the nine months ended March 27, 2004, compared with
$11.4 million for the nine months ended March 29, 2003, an increase of 18%.
Gross margin. Gross margin from continuing operations was 41.3% for the three
months ended March 27, 2004 compared to 34% for the three months ended March 29,
2003. Gross margin from continuing operations was 39% for the nine months ended
March 27, 2004 compared to 31.9% for the nine months ended March 29, 2003. The
improvement in gross margin primarily reflects higher 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 from continuing operations decreased by 37% to $1.7
million, or 13% of net revenue, for the three months ended March 27, 2004 from
$2.7 million, or 28% of net revenue, for the three months ended March 29, 2003.
Research, development and engineering expenses decreased by 38.7% to $5.2
million, or 15% of net revenue, for the nine months ended March 27, 2004 from
$8.5 million, or 30% of net revenue, for the nine months ended March 29, 2003.
The decrease in expense for the three and nine months ended March 27, 2004 as
compared to the three and nine months ended March 29, 2003 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses from continuing operations were $3.8 million, or 28% of
net revenue, for the three months ended March 27, 2004, as compared with $4.7
million, or 50% of net revenue, for the three months ended March 29, 2003.
Selling, general and administrative expenses were $10.4 million, or 30% of net
revenue, for the nine months ended March 27, 2004, as compared with $17.1
million, or 61% of net revenue, for the nine months ended March 29, 2003.
The decrease in expense for the three and nine months ended March 27, 2004 as
compared to the nine months ended March 29, 2003 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.
Restructuring Charges. Restructuring charges for the three and nine months ended
March 27, 2004 reflect a net reversal of $697,000 in previously accrued
restructuring charges. The $697,000 consists of $1.1 million in reversals of
previously accrued lease termination costs offset by $0.4 in charges primarily
attributable to severance arrangements entered into in connection with the
departure of Adept's co-founders. The reversal of previously accrued lease
termination costs was the result of the execution during the quarter of an
agreement with a former landlord to favorably settle litigation relating to an
outstanding lease obligation. 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. At March 27, 2004, the accrued restructuring balance of $400,000 consists
20
of approximately $364,000 in short-term restructuring charges and approximately
$36,000 in long-term restructuring charges. These charges were made during
fiscal years 2002, 2003 and 2004 and are comprised entirely of cash charges that
are expected to be paid over the next five quarters related to employee
severance costs and non-cancelable lease commitments.
The following table summarizes our accrued restructuring costs at March 27,
2004:
Additional Amounts Amounts Amounts Amounts
Balance Charges/ Utilized Utilized Utilized Utilized Balance
June 30, (Reversals) Q1 Fiscal Q2 Fiscal Q3 Fiscal Q3 Fiscal March 27,
(in thousands) 2003 Q3 Fiscal 2004 2004 2004 2004 2004 2004
------- ------- ------- ------- ------- ------- -------
Cash Cash Cash Non-Cash
------- ------- ------- -------
Employee severance costs ........ $ 184 $ 448 $ 45 $ 139 $ 120 $ 84 $ 244
Lease commitments ............... 3,321 (1,146) 146 137 1,736 -- 156
Asset impairment charges ........ -- 1 -- -- -- 1 --
------- ------- ------- ------- ------- ------- -------
Total ......................... $ 3,505 $ (697) $ 191 $ 276 $ 1,856 $ 85 $ 400
======= ======= ======= ======= ======= ======= =======
Amortization of Goodwill and Other Intangibles. Other intangibles amortization
from continuing operations was approximately $142,000 for the three months ended
March 27, 2004 compared to approximately $150,000 for the three months ended
March 29, 2003. Other intangibles amortization from continuing operations was
approximately $427,000 for the nine months ended March 27, 2004 compared to
approximately $426,000 for the nine months ended March 29, 2003. Goodwill is no
longer subject to amortization, but instead is now subject to impairment testing
at least on an annual basis. During the quarter ended March 27, 2004, we
impaired $4.6 million of goodwill and other intangibles as part of the loss from
discontinued operations (See Note 8).
Interest Income (Expense). Net interest expense for the three months ended March
27, 2004 was approximately $71,000 compared to net interest expense of
approximately $16,000 for three months ended March 29, 2003. Net interest
expense for the nine months ended March 27, 2004 was approximately $334,000
compared to net interest income of approximately $193,000 for nine months ended
March 29, 2003. Interest expense for the three and nine months ended March 27,
2004 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 also relates to interest
on our $1.0 million promissory note owed to JDSU, which was paid in November
2003.
Provision for (Benefit) from Income Taxes. Adept typically provides for income
taxes during interim reporting periods based upon an estimate of our annual
effective tax rate. We also maintain a liability to cover the cost of additional
tax exposure items on the filing of federal and state income tax returns as well
as filings in foreign jurisdictions. Each of these filing jurisdictions may
audit the tax returns filed and propose adjustments. Adjustments arise from a
variety of factors, including different interpretations of statutes and
regulations. For the three and nine months ended March 27, 2004, we recorded a
benefit from income taxes from continuing operations of $1.4 million, which
reflects a benefit for the reversal of previously accrued taxes. This reversal
reflects management's reassessment of the appropriate level of tax liabilities
based upon our current level of operating activities recent filing of federal,
state and certain international tax returns.
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 $142,000 and $271,000 for the
three and nine months ended March 29, 2004. 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 net losses in the first three 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 and fiscal 2003. We recorded additional
restructuring charges in the third quarter of fiscal 2004 related to the
departure of Messrs. Carlisle and Shimano, pursuant to the Severance Agreements
entered into between Adept and each of them, as described in "Overview" of
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations. 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 March 27, 2004, we had working capital of approximately $12.7 million,
including $5.7 million in cash, cash equivalents and short-term investments, and
a short-term receivables financing credit facility of $1.75 million net, of
which $0.5 million was outstanding and $1.3 million remained available under
this facility. On April 22, 2004, this facility was amended and now permits us
to borrow up to $4.0 million, as discussed below. 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 amended loan facility to
meet our operating requirements. As a result, if any of our assumptions, some of
which are described below, are incorrect, we may have difficulty satisfying our
obligations in a timely manner. We expect our cash ending balance to be between
approximately $5.0 and $5.5 million at June 30, 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 revenue, (ii)
that we will not incur additional unplanned capital expenditures for the next
twelve months, (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, we paid
the landlord of our San Jose facility approximately $1.65 million on January 26,
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, the restructuring adjustment resulted in a
positive income statement impact of $0.7 million in the third quarter of fiscal
2004.
Cash and cash equivalents increased $624,000 from June 30, 2003. The increase in
cash is attributable to the completion of the 2003 equity financing, which
provided Adept with net proceeds of approximately $9.4 million as discussed
above, offset by cash used in operating and investing activities from continuing
operations and a loss on discontinued operations associated with the disposed
Solutions business segment. Net cash used in operating activities of $57,000 is
primarily attributable to cash used in operating activities from continuing
operations of $6.0 million partially offset by a non-cash loss on disposal of
assets of $6.0 million from discontinued operations. Cash used in operating
activities from continuing operations was primarily attributable to decreases in
restructuring accruals and other long-term liabilities, increases in accounts
receivable and inventory adjusted by non-cash charges including depreciation,
amortization, the reversal of lease obligations in excess of settlement amounts
and the reversal of previous tax liabilities. The decrease in accrued
restructuring charges is primarily attributable to a payment to the landlord of
our San Jose facility for the settlement of an outstanding lease obligation and
payments on lease commitments for vacated facilities and payments attributable
to severance arrangements entered into in connection with the departure of
Adept's co-founders. The decrease in other long-term liabilities is primarily
attributable the repayment of the $1.0 million promissory note to JDSU as
discussed above. The increase in accounts receivable and inventory reflects
increased revenue levels. Cash used in investing activities during the nine
months was $2.1 million, which is attributable to the purchase of short-term
investments and property and equipment. Cash provided by financing activities of
$9.9 million is primarily attributable to $9.4 million in net proceeds from the
2003 financing and $0.4 million in purchased receivables under our Accounts
Receivable Purchase Agreement with SVB.
On April 22, 2004, we entered into an Amendment to Loan Documents with SVB,
pursuant to which Adept and SVB entered the Loan and Security Agreement that
amends and restates the Accounts Receivable Purchase Agreement dated March 20,
2003 between Adept and SVB, referred to as the Purchase Agreement, described in
Note 6 in the notes to the financial statements in this quarterly report on Form
10-Q, in its entirety. Under the terms of the Loan and Security Agreement, we
may borrow amounts under the credit facility not to exceed the lesser of $4.0
million or the sum of 80% of our eligible accounts receivable plus any
overadvance loans that may be granted by SVB from time to time in its sole and
absolute discretion. The aggregate of overadvance loans may not exceed the
lesser of $0.5 million or 30% of the amount of our eligible accounts receivable.
In connection with the Loan and Security Agreement, we granted to SVB a security
interest in substantially all of our assets. Interest is payable on loans at a
rate equal to the prime rate announced from time to time by SVB, referred to as
the Prime Rate, plus 1.75% per annum, and adjusts on each date there is a change
in the Prime Rate, provided that the rate in effect on any given date will not
be less than 5.75% per annum. We paid a one-time loan fee of $30,000 upon
entering the Loan and Security Agreement, and must make quarterly payments for
any unused available loan amounts at a rate of 0.25% per annum. In addition,
under the terms of the Amendment to Loan Documents, certain agreements,
instruments and other related documents initially entered into between Adept and
SVB in connection with the Purchase Agreement remain in effect, including the
security interest in substantially all of our assets granted to SVB by us in
connection with the Purchase Agreement, the guaranty executed by certain of our
wholly-owned subsidiaries in connection with the Purchase Agreement and the
warrant we issued SVB to purchase 100,000 shares of our common stock at a price
of $1.00 per share.
22
The Loan and Security Agreement includes certain financial and other covenants
with which we must comply. Financial covenants specify that we must maintain a
tangible net worth of at least $9.5 million, plus 50% of all consideration
received by us for any of our equity securities and subordinated debt, plus 50%
of our net income in each fiscal quarter ending after the date of the agreement.
Once an increase in the minimum tangible net worth of Adept takes effect, it
remains in effect thereafter, and does not decrease. Other covenants with which
we must comply include, but are not limited to, the payment of our tax
obligations as and when due, the periodic submission of certain financial and
other specified information to SVB, and the maintenance of our primary deposit
and investment accounts with SVB. In addition, we cannot 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
$300,000 million in any fiscal quarter. We would be deemed to be in default
under the Loan and Security Agreement if we failed to timely pay any amount owed
to SVB; if amounts owed to SVB exceed the credit limit; if we failed to comply
with our financial and other covenants, including those listed above; if we
become insolvent or are generally not paying our debts as they become due; 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 without cure any non-monetary provision under the agreement; if
any payment is made on account of subordinate obligations except as permitted in
the applicable subordination agreement; if there is a change in the ownership of
more than 20% of our outstanding shares without SVB's prior written consent; if
any event of default occurs under any obligation secured by a permitted lien
which is not waived or cured within any applicable period allowed by the lien
holder; any revocation of any guaranty of our obligations or any revocation of
any pledge of assets to secure our obligations; or if we breached any material
contract or obligation that may be expected to lead to, or there otherwise
occurred 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
default under the Loan and Security Agreement, SVB may, among other things,
cease making loans to us; accelerate and declare all or any part of our
obligations to be immediately due and payable, and enforce our security against
the collateral. The Loan and Security Agreement will expire on April 22, 2005.
Per the terms of the CHAD acquisition agreement, $26,000 remained due to the
employees of CHAD on October 9, 2004 contingent on the continued employment of
such employees, but Adept has no obligation for any contingent payments as all
Solutions business segment employees, which include all CHAD employees, were
terminated in the third quarter of fiscal 2004 in connection with the
disposition of the Solutions business segment.
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. 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 March 27, 2004.
Total long term debt and operating lease obligations at March 27, 2004 were
$13.3 million, which consists of $10.3 million in operating lease obligations
and $3.0 million in long-term debt in the form of the Tri-Valley Campus, LLC
convertible subordinated note.
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.
23
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.
Although we have experienced revenue growth and narrowed losses in the third
quarter of fiscal 2004, we have previously experienced declining revenue in each
of the last two fiscal years and have incurred net losses in the first three
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.
Our auditor's report for our financial statements for fiscal 2003 included a
qualification as to our ability to continue as a going concern. 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. In addition, in the quarter ended March 27, 2004, we
disposed of our Solutions business segment. 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 March 27, 2004, we had working capital of approximately $12.7 million,
including $5.7 million in cash, cash equivalents and short-term investments, and
a receivable financing credit facility of $1.75 million net, of which $0.4
million was outstanding and $1.3 million remained available under this facility.
On April 22, 2004, this facility was amended and restated as a credit facility,
which now permits us to borrow up to $4.0 million. 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 and SVB credit facility, we currently depend
on funds generated from operations 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 between $5.0 and $5.5
million at June 30, 2004. Our ability to effectively operate and grow our
business is predicated upon certain assumptions, including (i) that we will not
incur additional unplanned capital expenditures for the next twelve months, (ii)
that we will receive funds under the amended credit facility, (iii) 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
(iv) that we will not incur unexpected significant cash outlays during any
quarter.
If our projected revenue falls below current estimates or if operating expenses
exceed current estimates beyond our available cash resources, we may be forced
to curtail our operations, or, at a minimum, we may not be able to take
advantage of market opportunities, develop or enhance new products to an extent
desirable to execute our strategic growth plan, pursue acquisitions that would
complement our existing product offerings or enhance our technical capabilities
to fully execute our business plan or otherwise adequately respond to
competitive pressures or unanticipated requirements. 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 could be subject to fluctuations 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;
24
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.
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 hired a new Chief
Executive Officer in late 2003 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.
25
We hired our Chief Executive Officer, Mr. Robert Bucher, in November 2003. In
December 2003, our employment relationships with our former Chief Executive
Officer and Vice President, Research and Development, 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. In March 2004, we promoted Matt Murphy to Vice President of
Operations and Product Development, and appointed him as an executive officer of
Adept. 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 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 sell some of our products to the consumer electronics industry which includes
disk drive manufacturers and manufacturers of other electronic equipment as well
as the semiconductor industry, which are 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. While the disk drive industry is currently experiencing
significant growth, the semiconductor industry is currently flat due to soft
worldwide demand. In all of these industries, manufacturers may contribute to
these cycles by misinterpreting the conditions in the industry and over- or
under-investing in manufacturing capacity and equipment. We may not be able to
respond effectively to these industry cycles.
Downturns in these industries often occur in connection with, or anticipation
of, maturing product cycles for both companies and their customers and declines
in general economic conditions. Industry downturns have been characterized by
reduced demand for devices and equipment, production over-capacity and
accelerated decline in average selling prices. During a period of declining
demand, we must be able to quickly and effectively reduce expenses 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 and 2004 to further realign our business. Despite this restructuring
activity, our ability to reduce expenses in response to any downturn in any of
these industries is limited by our need for continued investment in engineering
and research and development and extensive ongoing customer service and support
requirements. The long lead time for production and delivery of some of our
products creates a risk that we may incur expenditures or purchase inventories
for products that we cannot sell. We believe our future performance will
continue to be affected by the cyclical nature of these industries, and thus,
any future downturn in these industries could therefore harm our revenue and
gross margin if demand drops or average selling prices decline.
Industry upturns have been characterized by abrupt increases in demand for
devices and equipment and production under-capacity. During a period of
increasing demand and rapid growth, we must be able to quickly increase
manufacturing capacity to meet customer demand and hire and assimilate a
sufficient number of qualified personnel. Our inability to ramp-up in times of
increased demand could harm our reputation and cause some of our existing or
potential customers to place orders with our competitors.
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.
Because we do not have long-term contracts with our customers, our future sales
are not guaranteed.
26
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 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.
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.
We have reduced our absolute amount of expenses in all areas of our operations
in connection with our restructuring activities in fiscal 2002, 2003 and 2004.
We have also reduced additional fixed costs in connection with the disposal of
the Solutions business segment. However, 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.
27
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 for significant price increases in the components and
mechanical subsystems:
o potential inability to obtain an adequate supply of required
components, materials or mechanical subsystems; and
o reduced control over manufacturing yields, costs, timely delivery,
reliability and quality of components, materials and mechanical
subsystems.
We 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, significant price increases, or termination of our supply sources
could require us to seek alternative sources of supply, could delay our product
shipments and damage relationships with current and prospective customers,
require us to absorb a significant price increase or risk pricing ourselves out
of the market, or prevent us from taking other business opportunities, any of
which could have a material adverse effect on our business. If we incorrectly
forecast product mix for a particular period and we are unable to obtain
sufficient supplies of any components or mechanical subsystems on a timely and
cost effective basis due to long procurement lead times, our business, financial
28
condition and results of operations could be substantially impaired. Moreover,
if demand for a product for which we have purchased a substantial amount of
components fails to meet our expectations, or due to component price increases
causes us to be priced out of the market, we would be required to write off the
excess inventory. A prolonged inability to obtain adequate timely deliveries of
key components or obtain components at prices within our business model, they
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 $13.5 million for the nine months ended March 27, 2004,
$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 39.1%, 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;
29
o transportation costs and delays;
o foreign currency fluctuations;
o export/import controls;
o tariff regulations and other trade barriers;
o higher freight rates;
o difficulties in staffing and managing foreign sales operations;
o greater difficulty in accounts receivable collection in foreign
jurisdictions; and
o potentially adverse tax consequences.
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
30
marketplace for a period of time. We may discover product defects only after a
product has been installed and used by customers. We may discover defects,
errors or performance problems in future shipments of our products. These
problems could result in expensive and time consuming design modifications or
large warranty charges, expose us to liability for damages, damage customer
relationships and result in loss of market share, any of which could harm our
reputation and future business prospects. In addition, increased development and
warranty costs could reduce our operating profits and could result in losses.
The existence of any defects, errors or failures in our products could also lead
to product liability claims or lawsuits against us, our channel partners or
against our customers. A successful product liability claim could result in
substantial cost and divert management's attention and resources, which could
have a negative impact on our business, financial condition and results of
operations. Although we are not aware of any product liability claims to date,
the sale and support of our products entail the risk of these claims.
If 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.
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 received in the past, and may receive in the future, communications from
third parties asserting that we are infringing certain patents and other
intellectual property rights of others or seeking indemnification against such
alleged infringement. The asserted claims and/or initiated litigation, could
include claims against us or our manufacturers, suppliers, or customers,
alleging infringement of their proprietary rights with respect to our existing
or future products or components of those products. There are numerous patents
in the automation components industry. It is not always practicable to determine
in advance whether a product or any of its components infringes the intellectual
property rights of others. As a result, from time to time, we may be forced to
respond to intellectual property infringement claims to protect our rights or
defend a customer's rights. These claims, regardless of merit, could consume
31
valuable management time, result in costly litigation, or cause product shipment
delays, all of which could seriously harm our business, operating results and
financial condition. In settling these claims, we may be required to enter into
royalty or licensing agreements with the third parties claiming infringement.
These royalty or licensing agreements, if available, may not have terms
favorable to us. Being forced to enter into a license agreement with unfavorable
terms could seriously harm our business, operating results and financial
condition. Any potential intellectual property litigation could force us to do
one or more of the following:
o Pay damages, license fees or royalties to the party claiming
infringement;
o Stop selling products or providing services that use the challenged
intellectual property;
o Obtain a license from the owner of the infringed intellectual property
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o Redesign the challenged technology, which could be time-consuming and
costly.
If we were forced to take any of these actions, our business and results of
operations may suffer.
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 hired our Chief Executive Officer in November 2003 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 including
the recent promotion of our Vice President of Operations and Product
Development, 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.
32
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 broad market
acceptance. Our decision to continue to offer products to a given market or to
penetrate new markets is based in part on our judgment of the size, growth rate
and other factors that contribute to the attractiveness of a particular market.
If our product offerings in any particular market are not competitive or our
analyses of a market are incorrect, our business and results of operations could
be harmed.
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.
33
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.
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 affect
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 was 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, which 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 delayed
34
and securities analysts' and news media coverage of Adept diminished. 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.
We had an aggregate of 29,901,643 shares of common stock outstanding as of April
29, 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 surrendered
its remaining shares of preferred stock to Adept. The JDSU Agreement 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 filed a registration statement with the SEC 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
,which registration statement was declared effective by the SEC on February 24,
2004. 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 April 29, 2004, options to purchase approximately 3,662,879
shares of our common stock were outstanding under our stock option plans, and an
aggregate of 5,874,466 shares of common stock were issued or reserved for
issuance under our stock option plans and employee stock purchase plan. Shares
of common stock issued under these plans will be freely tradable in the public
market, subject to the Rule 144 limitations applicable to our affiliates. 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 trading of our common stock on the OTC Bulletin Board;
35
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
o perceived dilution from stock issuances for acquisitions, our 2003
equity financing, SVB 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
On April 22, 2004, we entered into an Amendment to Loan Documents with SVB,
which permits us to borrow up to the lesser $4.0 million and 80% of Adept's
eligible accounts receivable. Interest is payable on loans at a rate equal to
the prime rate announced from time to time by SVB, plus 1.75% per annum, and
adjusts on each date there is a change in the prime rate, provided that the rate
in effect on any given date will not be less than 5.75% per annum. As the term
of the loan expires in exactly one year, we believe our exposure to market risk
for changes in interest rates on this obligation to be immaterial. Additionally,
we incur fixed interest rates on 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 this obligation is also 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.
March 27, Fair Fiscal Fair
(in thousands except average rate) 2004 Value 2003 Value
- ---------------------------------- ------ ------ ------ ------
Cash equivalents
Fixed rate .................... $3,858 $3,858 $3,234 $3,234
Average rate .................. 0.67% 0.03%
Short-term marketable securities
Fixed rate .................... $1,850 $1,850 $ -- $ --
Average rate .................. 1.09% --
Total Investment Securities $5,708 $5,708 $3,234 $3,234
------ ------ ------ ------
Average rate .................. 0.81% 0.03%
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 March 27, 2004, 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
36
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.
37
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 released and
payment of plaintiff costs and attorney's fees. 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). Dismissal of the litigation was entered by the court on February 4,
2004. The landlord's full release took effect on April 28, 2004. We and the
landlord also acknowledged the termination of the lease agreements that were the
subject of the litigation.
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.
While it is not feasible to predict or determine the likelihood or outcome of
any potential 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, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 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 5. OTHER INFORMATION
None.
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report.
10.1 Severance Agreement and Release of All Claims between the Registrant
and Brian Carlisle dated January 31, 2004 (incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 19, 2004.
10.2 Severance Agreement and Release of All Claims between the Registrant
and Bruce Shimano dated January 31, 2004 (incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 19, 2004.
10.3 Amendment to Loan Documents, dated as of April 22, 2004 by and between
the Registrant and Silicon Valley Bank.
10.4 Loan and Security Agreement, dated April 22, 2004 by and between the
Registrant and Silicon Valley Bank.
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.
b) Reports on Form 8-K.
On March 18, 2004, a Form 8-K was filed with the SEC by Adept announcing the
promotion of Matt Murphy to Vice President of Operations and Product Development
and appointment as an officer of Adept.
On February 19, 2004, a Form 8-K was filed with the SEC by Adept announcing that
it has entered into separation agreements with its former Chief Executive
Officer and Vice President, Research and Development.
On January 21, 2004, a Form 8-K was furnished to the SEC by Adept announcing its
financial results for its second fiscal quarter ended December 27, 2003.
39
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: May 10, 2004
40
INDEX TO EXHIBITS
10.1 Severance Agreement and Release of All Claims between the Registrant
and Brian Carlisle dated January 31, 2004 (incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 19, 2004.
10.2 Severance Agreement and Release of All Claims between the Registrant
and Bruce Shimano dated January 31, 2004 (incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 19, 2004.
10.3 Amendment to Loan Documents, dated as of April 22, 2004 by and among
the Registrant and the investors named therein
10.4 Loan and Security Agreement, dated April 22, by and between the
Registrant and Silicon Valley Bank.
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.
41