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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 January 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-27122
ADEPT TECHNOLOGY, INC.
(Exact name of Registrant as Specified in its Charter)
California 94-2900635
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3011 Triad Drive, Livermore, California 94550
(Address of Principal Executive Offices) (Zip Code)
(925) 245-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES [_] NO [X ]
The number of shares of the Registrant's common stock outstanding as of February
8, 2005 was 30,536,710.
ADEPT TECHNOLOGY, INC.
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
January 1, 2005 and June 30, 2004.................................................. 3
Consolidated Statements of Operations
Three and six months ended January 1, 2005 and December 27, 2003................... 4
Consolidated Statements of Cash Flows
Three and six months ended January 1, 2005 and December 27, 2003................... 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 35
Item 4. Controls and Procedures.................................................... 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............... 37
Item 3. Defaults upon Senior Securities........................................... 37
Item 4. Submission of Matters to a Vote of Security Holders....................... 37
Item 5. Other Information......................................................... 38
Item 6. Exhibits................................................................... 39
Signatures......................................................................... 40
Index to Exhibits.................................................................. 41
2
ADEPT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 1, June 30,
2005 2004
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 4,735 $ 4,957
Accounts receivable, less allowance for doubtful accounts of $1,388 at
January 1, 2005 and $1,269 at June 30, 2004.......................... 10,389 13,385
Inventories............................................................... 7,676 6,233
Other current assets...................................................... 855 656
--------- ---------
Total current assets.................................................. 23,655 25,231
Property and equipment at cost................................................. 9,818 9,372
Less accumulated depreciation and amortization................................. 8,408 7,924
--------- ---------
Property and equipment, net.................................................... 1,410 1,448
Goodwill....................................................................... 3,176 3,176
Other intangibles, net......................................................... 325 423
Other assets................................................................... 1,299 1,293
--------- ---------
Total assets.......................................................... $ 29,865 $ 31,571
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 4,737 $ 5,689
Accrued payroll and related expenses...................................... 1,335 1,486
Accrued warranty expenses................................................. 1,909 2,111
Deferred revenue.......................................................... 306 1,589
Accrued restructuring expenses............................................ 29 191
Other accrued liabilities................................................. 689 455
--------- ---------
Total current liabilities............................................. 9,005 11,521
Long-term liabilities:
Subordinated convertible note............................................. 3,000 3,000
Other long-term liabilities............................................... 1,491 1,422
Commitments and contingencies
Redeemable convertible preferred stock, no par value:
5,000 shares authorized, no shares issued and outstanding at
January 1, 2005 and June 30, 2004......................................... -- --
Shareholders' equity:
Preferred stock, no par value: 5,000 shares authorized, none issued and
outstanding............................................................... -- --
Common stock, no par value: 70,000 shares authorized, 30,533 and 29,910
shares issued and outstanding at January 1, 2005 and June 30, 2004,
respectively.............................................................. 144,045 143,405
Accumulated deficit:.......................................................... (127,676) (127,777)
---------- --------
Total shareholders' equity ........................................... 16,369 15,628
--------- ---------
Total liabilities, redeemable convertible preferred stock and
shareholders' equity................................................ $ 29,865 $ 31,571
========= =========
See accompanying notes
3
ADEPT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Six months ended
------------------------- -----------------------
January 1, December 27, January 1, December 27,
2005 2003 2005 2003
-------- -------- -------- --------
Net revenues ............................................................... $ 11,785 $ 10,638 $ 23,078 $ 21,285
Cost of revenues ........................................................... 6,458 6,482 12,285 13,300
-------- -------- -------- --------
Gross margin ............................................................... 5,327 4,156 10,793 7,985
Operating expenses:
Research, development and engineering ................................ 1,560 1,753 3,221 3,519
Selling, general and administrative .................................. 3,806 3,770 7,587 6,955
Restructuring charge (reversal), net ................................. 9 -- (34) --
Amortization of intangible assets .................................... 49 107 98 285
-------- -------- -------- --------
Total operating expenses ................................................... 5,424 5,630 10,872 10,759
-------- -------- -------- --------
Operating loss ............................................................. (97) (1,474) (79) (2,774)
Interest expense, net ...................................................... (37) (131) (74) (263)
Foreign currency exchange gain ............................................. 200 268 271 306
-------- -------- -------- --------
Income (loss) from continuing operations before income tax ................. 66 (1,337) 118 (2,731)
Provision for income tax ................................................... 6 6 17 19
-------- -------- -------- --------
Income (loss) from continuing operations ................................... 60 (1,343) 101 (2,750)
Loss from discontinued operations .......................................... -- (234) -- (87)
-------- -------- -------- --------
Net income (loss) ......................................................... $ 60 $ (1,577) $ 101 $ (2,837)
======== ======== ======== ========
Basic income (loss) per share:
Continuing operations ................................................ $ 0.00 $ (0.06) $ 0.0 $ (0.15)
Discontinued operations .............................................. $ 0.00 $ (0.01) $ 0.00 $ 0.00
-------- -------- -------- --------
Basic income (loss) per share ........................................ $ 0.00 $ (0.07) $ 0.00 $ (0.15)
======== ======== ======== ========
Diluted income (loss) per share:
Continuing operations ................................................ $ 0.00 $ (0.06) $ 0.0 $ (0.15)
Discontinued operations .............................................. $ 0.00 $ (0.01) $ 0.0 $ 0.00
-------- -------- -------- --------
Diluted income (loss) per share ...................................... $ 0.00 $ (0.07) $ 0.0 $ (0.15)
======== ======== ======== ========
Number of shares used in computing basic per share amounts from:
Continuing operations ................................................ 30,367 21,794 30,153 18,594
Discontinued operations .............................................. 30,367 21,794 30,153 18,594
Number of shares used in computing diluted per share amounts from:
Continuing operations ................................................ 31,045 21,794 30,153 18,594
Discontinued operations .............................................. 31,045 21,794 30,153 18,594
See accompanying notes
4
ADEPT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended
-----------------------------
` January 1, December 27,
2005 2003
-------- --------
(unaudited) (unaudited)
Operating activities
Net income (loss) from continuing operations .................................................. $ 101 $ (2,837)
Non-cash adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation .............................................................................. 484 1,019
Amortization of intangibles ............................................................... 98 356
Loss on disposal of property and equipment ................................................ -- 56
Changes in operating assets and liabilities:
Accounts receivable, net ................................................................ 2,996 (1,637)
Inventories, net ........................................................................ (1,443) (1,095)
Other current assets .................................................................... (199) (377)
Other assets ............................................................................ (6) 261
Accounts payable ........................................................................ (952) 598
Other accrued liabilities ............................................................... (1,543) (199)
Accrued restructuring expenses .......................................................... (21) (467)
Other long term liabilities ............................................................. 69 (1,078)
-------- --------
Net cash (used in) operating activities from continuing operations ........................ (416) (5,400)
-------- --------
Net cash (used in) discontinued operations ................................................ -- --
-------- --------
Net cash (used in) operating activities ................................................... (416) (5,400)
-------- --------
Investing activities
Purchase of property and equipment ........................................................ (446) (137)
Purchase of short-term available-for-sale investments ..................................... -- (1,900)
-------- --------
Net cash (used in) investing activities .................................................... (446) (2,037)
-------- --------
Financing activities
Net proceeds from issuance of common stock ................................................ -- 9,355
Net increase in short-term borrowings ..................................................... -- 935
Proceeds from employee stock incentive program and employee stock purchase plan ........... 640 24
-------- --------
Net cash provided by financing activities ................................................. 640 10,314
-------- --------
Increase (decrease) in cash and cash equivalents ............................................... (222) 2,877
Cash and cash equivalents, beginning of period ................................................. 4,957 3,234
-------- --------
Cash and cash equivalents, end of period ....................................................... $ 4,735 $ 6,111
======== ========
Cash paid during the period for:
Interest .................................................................................. $ 92 $ 177
Taxes ..................................................................................... $ 17 $ 22
Supplemental disclosure of non-cash financing activities
Conversion of redeemable convertible preferred stock into common stock .................... $ -- $ 25,000
See accompanying notes.
5
ADEPT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying condensed consolidated financial statements have been prepared
in conformity with U.S. generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The information furnished in this
report reflects all adjustments that, in the opinion of management, are
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows as of January 1, 2005 and December 27,
2003, and for the interim periods then ended, and such adjustments consist of
items of a normal recurring nature. The results for such periods are not
necessarily indicative of the results to be expected for the full fiscal year or
for any other future period. The condensed consolidated financial statements
included in this quarterly report on Form 10-Q should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
fiscal year ended June 30, 2004 included in Adept Technology, Inc.'s ("Adept" or
the "Company") Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on September 27, 2004.
The preparation of condensed consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Therefore, actual results
could differ from those estimates and could have a material impact on our
consolidated financial statements, and it is possible that such changes could
occur in the near term.
2. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion 25 whereby
options are granted at market price, and therefore no compensation costs are
recognized. The Company has elected to retain its current method of accounting
as described above and has adopted the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) 123 and SFAS 148. If compensation expense
for the Company's stock option plans had been determined based upon fair values
at the grant dates for awards under those plans in accordance with SFAS 123, the
Company's pro forma net income (loss) and net income (loss) per share would be
as follows:
Three months ended Six months ended
--------------------------- ---------------------------
January 1, December 27, January 1, December 27,
(in thousands) 2005 2003 2005 2003
---------- ------- ------- -------
Net income (loss), as reported .................................... $ 60 $(1,577) $ 101 $(2,837)
Add: Stock-based employee compensation
expense included in the determination of net
income (loss), as reported .................................... -- -- -- --
Deduct: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net
of related tax effects ......................................... (222) (71) (453) (447)
---------- ------- ------- -------
Pro forma net loss ............................................... $ (162) $(1,648) $ (352) $(3,284)
========== ======= ======= =======
Basic and diluted loss per common share:
As reported ................................................... $ 0.00 $ (0.07) $ 0.00 $ (0.15)
========== ======= ======= =======
Pro forma ..................................................... $ (0.01) $ (0.08) $ (0.01) $ (0.18)
========== ======= ======= =======
6
3. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term investments
typically consist of commercial paper and tax exempt municipal bonds with
maturities between three and 12 months, as well as market auction rate preferred
stock and auction rate notes with maturities of 12 months or less. Investments
are classified as held-to-maturity, trading, or available-for-sale at the time
of purchase. At January 1, 2005, the Company held no short-term investments.
4. Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost under the first-in, first-out method, or market value. The components of
inventory are as follows:
(in thousands)
January 1, June 30,
2005 2004
---- ----
Raw materials ...................... $2,509 $1,694
Work-in-process .................... 1,429 2,005
Finished goods ..................... 3,738 2,534
------ ------
$7,676 $6,233
====== ======
5. Property and Equipment
Property and equipment are recorded at cost.
The components of property and equipment are summarized as follows:
(in thousands)
January 1, June 30,
2005 2004
------- -------
Machinery and equipment ...................... $ 2,645 $ 2,306
Computer equipment ........................... 5,116 5,020
Office furniture and equipment ............... 2,057 2,046
------- -------
9,818 9,372
Accumulated depreciation and amortization .... (8,408) (7,924)
------- -------
Net property and equipment ................... $ 1,410 $ 1,448
======= =======
7
6. Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization, aggregate amortization expense, and estimated amortization expense
for the next three successive fiscal years related to the intangible assets
subject to amortization.
(in thousands)
As of January 1, 2005
------------------------------------
Gross Net
Carrying Accumulated Carrying
Amortizable intangible assets Amount Amortization Amount
----------------------------- ------ ------------ ------
Developed technology .................. $ 2,389 $(2,064) $ 325
Non-compete agreements ................ 380 (380) 0
------- ------- -------
Total .............................. $ 2,769 $(2,444) $ 325
======= ======= =======
The aggregate amortization expense for the six months ended January 1, 2005
totaled $98,000, and the estimated amortization expense for the next three years
is as follows:
(in thousands)
Amount
Remaining for fiscal year 2005 ................. $ 97
For fiscal year 2006 ........................... 195
For fiscal year 2007 ........................... 33
----
$325
====
7. 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 warranty liability are as follows:
(in thousands)
Six months ended
---------------------------
January 1, December 27,
2005 2003
------- -------
Balance at beginning of period ................. $ 2,111 $ 1,833
Warranties issued .............................. 551 787
Change in estimated warranty provision ......... (264) (50)
Warranty claims ................................ (489) (453)
------- -------
Balance at end of period ....................... $ 1,909 $ 2,117
======= =======
8
8. Accrued Restructuring Expenses
The following table summarizes the Company's accrued restructuring expenses:
(in thousands)
Additional Additional
Charges/ Amounts Charges/ Amounts
Balance (Reversals) Paid (Reversals) Paid Balance
June 30, Q1 Fiscal Q1 Fiscal Q2 Fiscal Q2 Fiscal January 1,
2004 2005 2005 2005 2005 2005
---- ---- ---- ---- ---- ----
Employee severance costs ...................... $ 69 $ 7 $ 76 $ 0 $ 0 $ 0
Lease commitments ............................. 122 (50) 22 9 30 29
---- ---- ---- ---- ---- ----
Total ....................................... $191 $(43) $ 98 $ 9 $ 30 $ 29
==== ==== ==== ==== ==== ====
During the quarter ended January 1, 2005, the Company was able to complete the
restructuring of leases of formerly occupied facilities in Detroit, Michigan,
Santa Barbara, California and Southbury, Connecticut which resulted in a $21,000
reduction in the restructuring reserve. The balance at January 1, 2005 is
comprised entirely of scheduled obligations that are expected to be paid over
the next two quarters against non-cancelable lease commitments.
9. Discontinued Operations
During the third quarter of fiscal 2004, Adept adopted a formal plan to dispose
of and completed the disposition of its Solutions business segment for no cash
consideration. Adept fully disposed of the Solutions business segment and has no
continuing interest and accordingly, the Solutions business segment was
accounted for as a discontinued operation. The results of operations of the
Solutions business segment have been removed from Adept's continuing operations
for all periods presented and classified as a separate line item in the
accompanying consolidated statements of operations as discontinued operations.
10. Legal Proceedings
From time to time, the Company is party to various legal proceedings or claims,
either asserted or unasserted, which arise in the ordinary course of its
business. The Company has reviewed pending legal matters and believes that the
resolution of these matters will not have a material adverse effect on its
business, financial condition or results of operations.
Adept has in the past received communications from third parties asserting that
it has infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement. While it is not
feasible to predict or determine the likelihood or outcome of any actual or
potential actions from such assertions against the Company, it believes the
ultimate resolution of these matters will not have a material adverse effect on
its financial position, results of operations or cash flows.
11. Income Taxes
The Company provides for income taxes during interim reporting periods based
upon an estimate of its annual effective tax rate. The Company also maintains a
liability to cover the cost of additional probable tax exposure items pertaining
to the filing of federal and state income tax returns, as well as filings in
foreign jurisdictions. Each of these filing jurisdictions may audit the tax
returns filed and propose adjustments. Adjustments arise from a variety of
factors, including different interpretations of statutes and regulations. For
the six months ended January 1, 2005, the Company recorded a provision for
income taxes from continuing operations of $17,000 for domestic and
international tax liabilities.
9
12. Income (loss) per Share
Basic income (loss) per share is computed by dividing net income (loss), the
numerator, by the weighted average number of shares of common stock outstanding,
the denominator, during the period. Diluted income (loss) per share gives effect
to equity instruments considered to be potential common shares, if dilutive,
computed using the treasury stock method of accounting. During the three and six
months ended December 27, 2003, dilutive net loss per share was computed without
the effect of equity instruments considered to be potential common shares as the
impact would be anti-dilutive to the net loss.
---------------------------- ----------------------------
Three months ended Six months ended
---------------------------- ----------------------------
January 1, December 27, January 1, December 27,
(in thousands) 2005 2003 2005 2003
---------- ---------- ---------- ----------
Income (loss) from continuing operations .................... $ 60 $ (1,343) $ 101 $ (2,750)
Income from discontinued operations ......................... $ $ (234) $ -- $ (87)
---------- ---------- ---------- ----------
Net Income (loss) ........................................... $ 60 $ (1,577) $ 101 $ (2,837)
========== ========== ========== ==========
Basic:
Weighted average number of shares used in
computing basic per share amounts from
continuing and discontinued operations: ................ 30,367 21,794 30,153 18,594
========== ========== ========== ==========
Income (loss) per share from:
continuing operations .................................. $ 0.00 $ (0.06) $ 0.00 $ (0.15)
discontinued operations ................................ $ 0.00 $ (0.01) $ 0.00 $ 0.00
---------- ---------- ---------- ----------
Basic net income (loss) per share .......................... $ 0.00 $ (0.07) $ 0.00 $ (0.15)
========== ========== ========== ==========
Diluted:
Weighted average number of common shares used in
computing basic net income
(loss) per share from
continuing and discontinued operations: ................ 30,367 21,794 30,153 18,594
Add: Weighted average number of dilutive potential
Common stock ..................................... 678 -- -- --
---------- ---------- ---------- ----------
Weighted average number of common shares used
in computing diluted net loss per share from
continuing and discontinued operations: ................ 31,045 21,794 30,153 18,594
========== ========== ========== ==========
Income (loss) per share from:
continuing operations .................................. $ 0.00 $ (0.06) $ 0.00 $ (0.15)
discontinued operations ................................ $ 0.00 $ (0.01) $ 0.00 $ 0.00
---------- ---------- ---------- ----------
Diluted net income (loss) per share ........................ $ 0.00 $ (0.07) $ 0.00 $ (0.15)
========== ========== ========== ==========
13. Segment Information
Adept's business is focused towards delivering intelligent flexible production
automation products, components and services for assembly and material handling
applications under two categories: (1) Components and (2) Services and Support.
The Components segment provides intelligent production automation software and
hardware component products externally to customers and internally to the other
business segment for support of existing customer installations.
The Services and Support segment provides support services to customers
including providing information regarding the use of the Company's automation
equipment, assisting with the ongoing support of installed systems, consulting
services for applications, and training courses ranging from system operation
and maintenance to advanced programming geared towards manufacturing engineers
who design and implement automation lines.
10
The Company evaluates performance and allocates resources based on segment
revenue and segment operating income (loss). Segment operating income (loss) is
comprised of income before unallocated research, development and engineering
expenses, unallocated selling, general and administrative expenses, interest
income, and interest and other expenses.
Management does not fully allocate research, development and engineering
expenses and selling, general and administrative expenses when making capital
spending and expense funding decisions or assessing segment performance. There
is no inter-segment revenue recognized. Transfers of materials or labor between
segments are recorded at cost.
Segment information for total assets and capital expenditures is not presented
as such information is not used in measuring segment performance or allocating
resources between segments.
Three months ended Six months ended
--------------------------- ---------------------------
January 1, December 27, January 1, December 27,
(in thousands) 2005 2003 2005 2003
-------- -------- -------- --------
Revenue:
Components .......................... $ 8,426 $ 7,265 $ 16,345 $ 14,727
Services and Support ................ 3,359 3,373 6,733 6,558
-------- -------- -------- --------
Total revenue ....................... $ 11,785 $ 10,638 $ 23,078 $ 21,285
======== ======== ======== ========
Operating income (loss):
Components .......................... $ 1,537 $ (263) $ 3,179 $ 35
Services and Support ................ 400 476 1,155 $ 712
-------- -------- -------- --------
Segment profit (loss) ............... 1,937 213 4,334 747
Unallocated research, development
and engineering and selling,
general and administrative ........ (1,976) (1,580) (4,349) (3,236)
Restructuring charges (reversal), net 9 -- (34) --
Amortization of intangible assets ... (49) (107) (98) (285)
Interest income ..................... 9 25 18 44
Interest expense .................... (46) (156) (92) (307)
Foreign currency gain ............... 200 268 271 306
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes .... $ 66 $ (1,337) $ 118 $ (2,731)
======== ======== ======== ========
14. Comprehensive Income
For the three and six months ended January 1, 2005 and December 27, 2003, there
were no significant differences between the Company's comprehensive income or
loss and its net income or loss.
15. Equity
During the six months ended January 1, 2005, 506,986 shares of common stock were
issued upon the exercise of options under the Company's stock option plans, and
116,473 shares of common stock were issued under the Company's employee stock
purchase plan (ESPP). Shares are issued semi-annually under the ESPP, in
February and August. Total shares outstanding at January 1, 2005 were
30,533,398.
11
16. Foreign Currency Translation
The Company applies Financial Accounting Standards Board Statement No. 52 ("SFAS
52"), "Foreign Currency Translation," with respect to its international
operations, which are primarily sales and service entities. The accounts
denominated in non-U.S. currencies have been re-measured using the U.S. dollar
as the functional currency. All monetary assets and liabilities are remeasured
at the current exchange rate at the end of the period, nonmonetary assets and
liabilities are remeasured at historical exchange rates, and revenues and
expenses are remeasured at average exchange rates in effect during the period.
Translation gains (losses) resulting from the process of remeasuring foreign
currency financial statements into U.S. dollars were $37,000 and $44,000 for the
three and six months ended January 1, 2005 respectively, and $122,000 and
$59,000 for the three and six months ended December 27, 2003 respectively.
Foreign currency transaction gains (losses) were $200,000 and $271,000 for the
three and six months ended January 1, 2005 respectively, and $268,000 and
$306,000 for the three and six months ended December 27, 2003 respectively.
17. Impact of Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board issued Statement
123R, Share-Based Payment, which is a revision of Statement 123, Accounting for
Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends Statement No. 95, Statement
of Cash Flows.
Statement 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values (i.e., proforma disclosure is no longer an alternative to
financial statement recognition). Statement 123R is effective for public
companies (excluding small business issuers) at the beginning of the first
interim or annual period beginning after June 15, 2005. Statement 123R will be
effective for Adept for the quarter ending October 1, 2005. Adept is currently
evaluating option valuation methodologies and assumptions in light of FAS 123R
pronouncement guidelines related to employee stock options. Current estimates of
option values using the Black Scholes method may not be indicative of results
from the final methodology adopted by the Company for reporting under Statement
123R guidelines.
Statement 151, Inventory Cost, an amendment to ARB No 43, Chapter 4, was issued
by the FASB in November, 2004. The pronouncement clarifies that abnormal amounts
of idle facility exposure, freight, handling costs and wasted materials
(spoilage) be recognized as current period charges and requires the allocation
of fixed production overheads to inventory based on the normal capacity and cost
of the production facilities. Statement 151 is the result of a broader effort by
the FASB to improve the comparability of cross-border financial reporting by
working with the International Accounting Standards Board (IASB) toward
development of a single set of high quality accounting standards. Statement 151
is effective for inventory costs incurred during fiscal periods beginning after
June 15, 2005. The Company believes that Adept is currently following the
practices mandated in Statement 151, and as a result, the Company does not
anticipate that the adoption of Statement 151 will have a significant impact on
the results of operations.
18. Subsequent Event
The Board of Directors approved a one-for-five reverse stock split of the
Company's common and preferred stock, to be effective on February 25, 2005.
Adept shareholders had authorized a reverse stock split at a ratio of between
1:4 and 1:7 at the Annual Shareholders meeting held on November 4, 2004, with
the final ratio to be decided upon by the Board of Directors. As the effective
date of the reverse stock split is subsequent to the filing of this Form 10-Q,
these condensed consolidated financial statements have not been adjusted to
reflect the reverse stock split.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
o the economic environment affecting us and the markets we serve;
o sources of revenues and anticipated revenues, including the
contribution from the growth of new products and markets;
o our expectations regarding our cash flows and the impact of the timing
of receipts and disbursements;
o our estimates regarding our liquidity and capital requirements;
o marketing and commercialization of our products under development;
o our ability to attract customers and the market acceptance of our
products;
o our ability to establish relationships with suppliers, systems
integrators and OEMs for the supply and distribution of our products;
o plans for future products and services and for enhancements of existing
products and services;
o plans for future acquisitions; and
o our intellectual property.
In some cases, you can identify forward-looking statements by terms such as
"may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "estimate," "predict," "potential," or the negative of these terms,
and similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events, are based on
assumptions which may or may not prove to be correct, and are subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these statements. We discuss many of these risks in this quarterly
report on Form 10-Q in greater detail under the heading "Factors Affecting
Future Operating Results." Also, these statements represent our estimates and
assumptions only as of the date of this report.
In this report, unless the context indicates otherwise, the terms "Adept," "we,"
"us," and "our" refer to Adept Technology, Inc., a California corporation, and
its subsidiaries.
This report contains trademarks and trade names of Adept and other companies.
Adept has 139 trademarks of which 14 are registered trademarks, some of which
include the Adept Technology logo, AIM(R), FireBlox(R), HexSight(R),
MetaControls(R), Adept Cobra 600(TM), Adept Cobra 800(TM), Adept SmartAmp(TM),
Adept SmartModule(TM), Adept SmartServo(TM), AdeptOne(TM), and AdeptSix(TM).
OVERVIEW
We provide intelligent flexible production automation products, components and
services to our customers in many industries including the
electronics/communications, automotive, appliance, food and pharmaceuticals,
semiconductor, original equipment manufacturer, or OEM, and life sciences
industries. This mix varies considerably from period to period due to a variety
of market and economic factors. We utilize our portfolio of high reliability
mechanisms, high-performance motion controllers and application development
software to deliver automation products that meet our customers' increasingly
complex manufacturing requirements. We offer our customers comprehensive and
tailored automation products that reduce the time and cost to design, engineer
and launch products into high-volume production. The benefits of Adept
automation products include increased manufacturing flexibility for future
product generations, less customized engineering and reduced dependence on
production engineers. Our product range currently includes system design
software, process knowledge software, integrated real-time vision and multi-axis
motion controls, machine vision systems and software, industrial robots, and
other flexible automation equipment. Our software has not generally been sold or
licensed separately, though we intend to market and sell software licenses on a
standalone basis in the foreseeable future. In recent years, we have expanded
our robot product lines and developed advanced software and sensing technologies
that have enabled robots to perform a wider range of functions. In fiscal 2004,
13
we introduced the Adept i-series robots, the first self-contained SCARA
(Selective Compliance Assembly Robot Arm) robot with the controller built inside
the robot arm. These robots are designed for a broad range of basic applications
that are currently utilizing dedicated automation or manual labor. We believe
this SCARA technology has had and will continue to have, a significant positive
impact on our gross margins during fiscal 2005 and beyond, as discussed in
"Results of Operations-Gross Margin" below.
International sales generally comprise between 45% and 75% of our total revenues
for any given quarter, and represented approximately 63% of our total revenues
for the quarter ended January 1, 2005.
This discussion summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the
three- and six-month periods ended January 1, 2005. Unless otherwise indicated,
references to any quarter in this Management's Discussion and Analysis of
Financial Condition and Results of Operations refer to our fiscal quarter ended
January 1, 2005. This discussion should be read with the unaudited condensed
consolidated financial statements and related disclosures included in this
Quarterly Report on Form 10-Q and in conjunction with the audited financial
statements and notes thereto for the fiscal year ended June 30, 2004 included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on September 27, 2004.
Critical Accounting Policies
Management's discussion and analysis of Adept's financial condition and results
of operations are based upon Adept's consolidated financial statements which
have been prepared in conformity with U.S. generally accepted accounting
principles. The preparation of these financial statements requires management to
make estimates, judgments and assumptions that affect reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates,
including those related to fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellation costs associated with long-term
commitments, investments, intangible assets, income taxes, restructuring
expenses, service contracts, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by
their nature, are based on judgment and available information. Therefore, actual
results could differ from those estimates and could have a material impact on
our consolidated financial statements, and it is possible that such changes
could occur in the near term.
We have identified the accounting principles which we believe are most critical
to our consolidated financial statements by considering accounting policies that
involve the most complex or subjective decisions or assessments. These critical
accounting policies described below include:
o revenue recognition;
o allowance for doubtful accounts;
o inventories;
o warranties;
o deferred tax valuation allowance; and
o foreign currency exchange gain (loss).
Revenue Recognition. We 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. Generally, Adept does not have
multi-element arrangements.
We recognize software revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2 ("SOP 97-2"), Software
Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition With Respect to Certain Transactions. Under SOP 97-2,
revenue attributable to an element in a customer arrangement is recognized when
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(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the fee is fixed or determinable, (iv) collectibility is probable and (v)
the arrangement does not require services that are essential to the
functionality of the software. License revenue is recognized on shipment of the
product provided that no significant vendor or post-contract support obligations
remain and that collection of the resulting receivable is deemed probable by
management. Insignificant vendor and post-contract support obligations are
accrued upon shipment of the licensed product. For software that is installed
and integrated by the customer, revenue is recognized upon shipment assuming
functionality has already been proven in prior sales and there are no
customizations that would cause a substantial acceptance risk.
Service revenue includes training, consulting and customer support, the latter
of which includes all field service activities; i.e., maintenance, repairs,
system modifications or upgrades, and sales of remanufactured products. Revenues
from training and consulting are recognized at the time the service is performed
and the customer has accepted the work. These revenues are not essential to the
product functionality and, therefore, do not bear on revenue recognition policy
for the products.
Deferred revenues represent payments received from customers in advance of the
delivery of products and/or services, or before the satisfaction of all revenue
recognition requirements enumerated above, as well as cases in which we have
invoiced the customer but cannot yet recognize the revenue for the same reasons
discussed above.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We assess the customer's ability to pay based on a number of
factors, including our past transaction history with the customer and credit
worthiness of the customer. Management specifically analyzes accounts receivable
and historical bad debts, customer concentrations, customer 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.
Our policy is to record specific allowances against known doubtful accounts. An
additional allowance is also calculated based on the greater of 0.5% of
consolidated accounts receivable or 20% of consolidated accounts receivable more
than 120 days past due. Specific allowances are netted out of the respective
receivable balances for purposes of calculating this additional allowance. On an
ongoing basis, we evaluate the credit worthiness of our customers and, should
the default rate change or the financial positions of our customers change, we
may increase this additional allowance percentage.
Inventories. Inventories are stated at the lower of standard cost, which
approximates actual cost under the first-in, first-out method, or market value.
We perform a detailed assessment of inventory at each balance sheet date, which
includes, among other factors, a review of component demand requirements,
product lifecycle and product development plans, and quality issues. As a result
of this assessment, we write down inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of the inventory
and the estimated liquidation value based upon assumptions about future demand
and market conditions. If actual demand and market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
Manufacturing inventory includes raw materials, work-in-process, and finished
goods. All work-in-process inventories with work orders that are open in excess
of 180 days are fully written down. The remaining inventory valuation provisions
are based on an excess and obsolete systems report, which captures all obsolete
parts and products and all other inventory, which have quantities on hand in
excess of one year's projected demand. Individual line item exceptions are
identified for either inclusion or exclusion from the inventory valuation
provision. The materials control group and cost accounting function monitor the
line item exceptions and make periodic adjustments as necessary.
Warranties. We provide for the estimated cost of product warranties at the time
revenue is recognized. Factors that affect the Company's warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims, and costs per claim for repair or replacement. While we engage
in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of our components suppliers, our warranty
obligation is affected by product failure rates, material usage and service
labor and delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage, service labor or delivery costs differ
from our estimates, revisions to the estimated warranty liability would be
required.
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Deferred Tax Valuation Allowance. We record a valuation allowance to reduce
deferred tax assets to the amount that is more likely than not to be realized.
While we have considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event we were to determine that we would be able to realize deferred tax
assets in the future in excess of our net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should we have a net deferred tax asset and determine that we
would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax assets would be charged to income in
the period that such determination was made.
Foreign Currency Exchange Gain (Loss). The Company applies Financial Accounting
Standards Board Statement No. 52 ("SFAS 52"), "Foreign Currency Translation,"
with respect to its international operations, which are primarily sales and
service entities. The accounts denominated in non-U.S. currencies have been
re-measured using the U.S. dollar as the functional currency. All monetary
assets and liabilities are remeasured at the current exchange rate at the end of
the period, nonmonetary assets and liabilities are remeasured at historical
exchange rates, and revenues and expenses are remeasured at average exchange
rates in effect during the period.
Results of Operations
Three Months and Six Months Ended January 1, 2005 as compared to Three and Six
Months Ended December 27, 2003.
Net revenues. Net revenues increased by 10.8% to $11.8 million for three months
ended January 1, 2005 as compared to $10.6 million for three months ended
December 27, 2003. Net revenues for the six months ended January 1, 2005 were
$23.1 million, an increase of 8.4% from net revenues of $21.3 million for the
six months ended December 27, 2003. The increase in revenues was attributable
primarily to increased sales in our components segment, although our services
and support segment showed modest growth as well. Components revenues increased
16% to $8.4 million for the three months ended January 1, 2005 from $7.3 million
for the three months ended December 27, 2003. Components revenues increased 11%
to $16.3 million for the six months ended January 1, 2005 compared to $14.7
million in revenues for the six months ended December 27, 2003. The increases
were attributable to increased sales of our advanced line of Cobra robots and a
significant software license sale in the first quarter of fiscal 2005. Services
and Support revenues were $3.4 million for the three months ended January 1,
2005, which was unchanged from the three months ended December 27, 2003.
Services and Support revenues increased 2.7% to $6.7 million for the six months
ended January 1, 2005, from $6.5 million for the six months ended December 27,
2003. The increase was primarily in revenues from remanufactured robots.
Our domestic sales were $4.4 million for the three months ended January 1, 2005
compared to $5.7 million for the three months ended December 27, 2003, a
decrease of 24%. Our domestic sales totaled $7.6 million for the six months
ended January 1, 2005, compared with $11.0 million for the six months ended
December 27, 2003, a decrease of 31%. Our international sales were $7.4 million
for the three months ended January 1, 2005 compared to $4.9 million for the
comparable period in fiscal 2004, an increase of 51%. Our international sales
totaled $15.5 million for the six months ended January 1, 2005, compared with
$10.3 million for the six months ended December 27, 2003, an increase of 51%.
The increase in revenues from international sales is primarily attributable to
strong sales to automotive and consumer electronics applications in Europe,
aided by the favorable exchange rate between the Euro and the U.S. Dollar. In
addition, sales in Asia increased by $1.2 million or 117% to $2.3 million for
the six months ended January 1, 2005 as compared with the same period of the
prior year.
Gross Margin. Gross margin as a percentage of net revenues was 45.2% for the
three months ended January 1, 2005 compared to 39.1% for three months ended
December 27, 2003. The improvement in gross margin was primarily driven by the
lower cost structure and improved competitive positioning of our advanced line
of Adept Cobra robots and Smart Controller-based products. We also benefited
from improved utilization of our manufacturing capacity and improvements in our
inventory and materials management. Gross margin as a percentage of net revenues
was 46.8% for the six months ended January 1, 2005 compared to 37.5% for the six
months ended December 27, 2003. The improvement in gross margin for the six
month period reflects both the aforementioned impacts, as well as the positive
impact of a vision software license sale, which had minimal associated cost of
revenues. Over the past several quarters, we have aggressively sought to
16
outsource those processes where we provide little or no additional manufacturing
value. The improvements in production volumes combined with the lower fixed
overhead expense resulted in lower unit standard costs and higher corresponding
gross margins. We expect gross margins to be in the mid-40% range through the
remainder of fiscal 2005 due to the reduction in our fixed overhead costs, the
completion of continuing cost improvement programs including further subassembly
outsourcing, and the introduction and sale of higher margin products. We could,
however, experience significant fluctuations in our gross margin percentage due
to changes in volume, changes in availability of components, changes in product
configuration, increased price based competition, and/or changes in sales mix,
particularly with respect to any software license sales.
Research, Development and Engineering Expenses. Research, development and
engineering expenses associated with continuing operations decreased by 11.0% to
$1.6 million, or 13.2% of net revenues for the three months ended January 1,
2005, from $1.8 million, or 16.5% of net revenues for three months ended
December 27, 2003. Research, development and engineering expenses decreased by
8.5% to $3.2 million, or 14.0% of net revenues, for the six months ended January
1, 2005 from $3.5 million, or 16.5% of net revenues, for the six months ended
December 27, 2003. The decreases are primarily the result of fewer expensed
prototypes and reduced on-site engineering activities associated with customer
installations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.8 million, or 32.4% of net revenues, for the
three months ended January 1, 2005, an increase of $36,000 or 1.0 % over the
three months ended December 27, 2003. Selling, general and administrative
expenses were $7.6 million, or 32.7% of net revenues, for the six months ended
January 1, 2005, as compared with $7.0 million, which was also 32.7% of net
revenues, for the six months ended December 27, 2003. The increase reflected
increases in sales and marketing expenditures to secure new business in consumer
electronic and telecommunications product markets, as well as increased staffing
levels in customer service to expand our reach in Europe and China.
Intangible Assets Amortization. Intangibles amortization was $49,000 for three
months ended January 1, 2005 compared to $107,000 for three months ended
December 27, 2003. Intangibles amortization was $98,000 for the six months ended
January 1, 2005 compared to $285,000 for the six months ended December 27, 2003.
The amortization has declined because certain of the intangible assets have now
been fully amortized.
Interest Expense, Net. Interest expense, net of interest income, was $37,000 for
the three months ended January 1, 2005 compared to $131,000 for the three months
ended December 27, 2003. Net interest expense for the six months ended January
1, 2005 was $74,000 compared to $263,000 for six months ended December 27, 2003.
Interest expense for the three and six month periods ended January 1, 2005 and
December 27, 2003 included interest expense accrued on a $3.0 million
convertible note, which bears a 6% fixed interest rate. In addition, interest
expense for the three and six months ended December 27, 2003 includes charges
incurred on advances received under an accounts receivable purchase facility and
a promissory note, both of which have since been repaid.
Foreign Currency Exchange Gain. Foreign currency exchange gain was $200,000 for
the three months ended January 1, 2005 compared to $268,000 for the three months
ended December 27, 2003. Foreign currency exchange gain for the six months ended
January 1, 2005 was $271,000 compared to $306,000 for six months ended December
27, 2003. These foreign currency exchange gains resulted primarily from our
sales activity in Europe and the strengthening of the Euro versus the U.S.
Dollar during the first half of fiscal 2005 and 2004. Historically we have
included foreign currency exchange gains or losses in selling, general and
administrative expenses, but beginning this quarter we have classified them as a
separate line item in the income statement.
Provision for Income Taxes. Our effective tax rate was 14% for the six months
ended January 1, 2005 as compared to an effective tax rate of less than 1% for
the six months ended December 27, 2003. In both periods we recorded a tax
provision related to our state franchise taxes and a provision related to our
Singapore subsidiary tax.
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents decreased $222,000 from
June 30, 2004. Net cash used by operating activities of $416,000 was
attributable to an increase in inventory of $1.4 million and decreases in
accounts payable and other current liabilities of $2.5 million, partially offset
by a decrease in accounts receivable of $3.0 million. The inventory increase was
the result of a program to improve customer order lead times by maintaining
17
standard robot components in stock, as well as increased parts inventory to
support expansion of the remanufacturing and service business. The decline in
accounts receivable resulted from significant collection of past due
receivables. Other items affecting the operating cash flows were net income of
$101,000 and non-cash charges including depreciation and amortization of
$582,000
Cash used in investing activities of $446,000 reflects capital expenditures
primarily for test equipment, test stations, and computer hardware and software,
and includes investment in our Dortmund, Germany facility to begin carrying out
final assembly and test operations.
Cash provided by financing activities of $640,000 reflects activity in our
employee stock purchase program as well as stock option exercises.
We have limited cash resources, and because of certain regulatory restrictions
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 held outside the United States, although this portion is estimated to
be less than $500,000. As of January 1, 2005, we had an aggregate cash balance
of $4.7 million, and a short term receivables financing credit facility of up to
$4.0 million, with no outstanding balance at quarter-end. We currently depend on
funds generated from operating activities plus our cash and the funds available
through our credit facility to meet our operating requirements. As a result, if
any of our assumptions, some of which are described below, are incorrect, we may
have difficulty satisfying our obligations in a timely manner. We expect our
cash balance to be between $4.0 and $6.0 million as of April 2, 2005, the end of
our third fiscal quarter. Our ability to effectively operate and grow our
business is predicated upon certain assumptions, including (i) that we will
receive continued timely payment of outstanding receivables and not otherwise
experience severe cyclical swings in our billings and associated receipts
resulting in a shortfall of cash available for our disbursements during any
given quarter, (ii) that we will not incur significant unplanned capital
expenditures for the balance of fiscal 2005, and (iii) that funds remain
available under our existing credit facility or a new credit facility. We
believe our sources of funds will be sufficient to finance our operations for at
least the next twelve months, and if necessary we will take various actions to
reduce our operating expenses in an effort to achieve that result.
On April 22, 2004, we executed an Amendment to Loan Documents with Silicon
Valley Bank ("SVB") pursuant to which we entered into a loan and security
agreement with SVB (the "Loan and Security Agreement") that amends and restates
our prior Accounts Receivable Purchase Agreement with SVB. 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. Excluding any overadvance amounts, our actual
borrowing base as of January 1, 2005 would have permitted us to borrow
approximately $2.5 million against this line. 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 as
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. 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.
The Loan and Security Agreement includes certain financial and other covenants
with which we must comply. Financial covenants specify that Adept must maintain
a tangible net worth of at least $9.5 million, plus 50% of all consideration we
may receive for any equity securities and subordinated debt we issue subsequent
to the date of the Loan and Security Agreement, plus 50% of our net income in
each fiscal quarter ending after the date of the agreement. Once an increase in
our minimum tangible net worth takes effect, it remains in effect thereafter,
and does not decrease. The minimum tangible net worth requirement at January 1,
2005 was $10.2 million, and we were in compliance with this and other covenants
of the Loan and Security Agreement as of that date. The Loan and Security
Agreement will expire on April 22, 2005, at which time Adept intends to seek to
renew the credit facility or seek alternative credit arrangements to maintain an
external source of funds.
Total long term debt and operating lease obligations at January 1, 2005 were
$12.4 million, which consists of $9.4 million in operating lease obligations and
$3.0 million in long-term debt in the form of a convertible subordinated note. A
summary of our long-term debt and operating lease obligations as of January 1,
2005 follows:
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Less Than More than 5
Total 1 Year 1-3 Years 3-5 Years Years
------------ ------------ ------------ ------------ ------------
Operating lease obligations........ $ 9,447 $ 999 $ 3,354 $ 2,651 $ 2,443
Long-term debt..................... 3,000 - 3,000 - -
------------ ------------ ------------ ------------ ------------
Total long-term debt and
Operating lease obligations..... $ 12,447 $ 999 $ 6,354 $ 2,651 $ 2,443
=========== =========== =========== =========== ===========
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued Statement
123R, Share-Based Payment, which is a revision of Statement 123, Accounting for
Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends Statement No. 95, Statement
of Cash Flows.
Statement 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values (i.e., proforma disclosure is no longer an alternative to
financial statement recognition). Statement 123R is effective for public
companies (excluding small business issuers) at the beginning of the first
interim or annual period beginning after June 15, 2005. Statement 123R will be
effective for Adept for the quarter ending October 1, 2005. We are currently
evaluating option valuation methodologies and assumptions in light of FAS 123R
pronouncement guidelines related to employee stock options. Current estimates of
option values using the Black-Scholes method may not be indicative of results
from the final methodology the Company elects to adopt for reporting under
Statement 123R guidelines.
Statement 151, Inventory Cost, an amendment to ARB No 43, Chapter 4, was issued
by the FASB in November, 2004. The pronouncement clarifies that abnormal amounts
of idle facility exposure, freight, handling costs and wasted materials
(spoilage) be recognized as current period charges and require the allocation of
fixed production overheads to inventory based on the normal capacity of
production facilities. Statement 151 is the result of a broader effort by the
FASB to improve the comparability of cross-border financial reporting by working
with the International Accounting Standards Board (IASB) toward development of a
single set of high quality accounting standards. Statement 151 is effective for
inventory costs incurred during fiscal periods beginning after June 15, 2005. We
believe that we are currently following the practices mandated in Statement 151,
and as a result, we do not anticipate that the adoption of Statement 151 will
have a significant impact on the results of operations.
19
FACTORS AFFECTING FUTURE OPERATING RESULTS
Risks Related to Our Business
Our operating results fluctuate from quarter to quarter due to factors which are
difficult to forecast, are often out of our control and which can be extremely
volatile.
Our past revenues and other operating results may not be accurate indicators of
our future performance, and you should not rely on such results to predict our
future performance. Our operating results have been subject to significant
fluctuations in the past, and could be subject to fluctuations in the future.
The factors that may contribute to these fluctuations include:
o our limited cash resources;
o our ability to effectively manage our working capital;
o fluctuations in aggregate capital spending, cyclicality and other
economic conditions domestically and internationally in one or more
industries in which we sell our products;
o changes or reductions in demand in the electronics/communications,
automotive, food, or semiconductor industries and other markets we
serve;
o a change in market acceptance of our products or a shift in demand for
our products;
o new product introductions by us or by our competitors;
o changes in product mix and pricing by us, our suppliers or our
competitors;
o pricing and related availability of components and raw materials for
our products;
o our failure to manufacture a sufficient volume of products in a timely
and cost-effective manner;
o our failure to anticipate the changing product requirements of our
customers;
o changes in the mix of sales by distribution channel;
o exchange rate fluctuations;
o seasonal fluctuations in demand and our associated revenue;
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 can vary greatly for a number of reasons, and our operating
results tend to fluctuate as a result of the variance in gross margins. The mix
of products we sell, particularly with respect to the volume of lower margin
hardware products (such as mechanical subsystems purchased from third party
vendors), and higher margin software products. Other factors that impact gross
margins include:
o the average selling prices of products we sell including changes in the
average discounts offered;
o the costs to manufacture, service and support our products and
enhancements;
o the costs to customize our systems;
o the volume of products produced and associated production volume
variances, if any, generated;
o our efforts to enter new markets; and
o certain inventory-related costs including obsolescence of products and
component demand changes resulting in excess inventory.
We generally recognize product revenues upon shipment or, for certain
international sales, upon receipt and acceptance by the customers. As a result,
our net revenues and results of operations for a fiscal period will be affected
by the timing of orders received and orders shipped during the period. A 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.
Our indirect costs, production capacity and operating expenses are largely fixed
in the short run. Continued investments in research and development, capital
20
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.
Our product sales are seasonal. We have historically had higher bookings for our
products during the fourth quarter of each fiscal year and lower bookings during
the first quarter of each succeeding fiscal year, due primarily to the slowdown
in sales to European markets and summer vacations. In the event bookings for our
products in the fourth fiscal quarter are lower than anticipated and our backlog
at the end of the fourth fiscal quarter is insufficient to compensate for lower
bookings in the succeeding first fiscal quarter, our results of operations for
the first 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 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 and substantially impact
our liquidity.
In the event that in some fiscal quarter our net revenues or operating results
fall below the expectations of public market analysts and investors, the price
of our common stock may fall. We may not be able to increase or sustain our
profitability on a quarterly or annual basis in the future.
The long sales cycle, customer evaluation process, and implementation period of
our products may increase the costs of obtaining orders and reduce the
predictability of our earnings.
Our products are technologically complex. Prospective customers generally must
commit significant resources to test and evaluate our products and to install
and integrate them into larger systems. Orders expected in one quarter may shift
to another quarter or be cancelled with little advance notice as a result of the
customers' budgetary constraints, internal acceptance reviews, and other factors
affecting the timing of customers' purchase decisions. In addition, customers
often require a significant number of product presentations and demonstrations,
in some instances evaluating equipment on site, before reaching a sufficient
level of confidence in the product's performance and compatibility with the
customer's requirements to place an order. As a result, our sales process is
often subject to delays associated with lengthy evaluation and approvals that
typically accompany capital expenditure approval processes. The sales cycles of
our products often last for many months or even years. In addition, the time
required for our customers to incorporate our products into their systems can
vary significantly with the needs of our customers and generally exceeds several
months, which further complicates our planning processes and reduces the
predictability of our operating results. Longer sales cycles require us to
invest significant resources in attempting to make sales, which may not be
realized in the near term and therefore may delay or prevent the generation of
revenue. In addition, should our financial condition deteriorate, prospective
customers may be reluctant to purchase our products, which would have an adverse
effect on our revenue.
Sales of our products depend on the capital spending patterns of our customers,
which tend to be cyclical; we have experienced reduced demand in some of the
industries in which we operate, which has and may continue to adversely affect
our revenue and we may not be able to quickly ramp up if demand significantly
increases.
Intelligent automation systems using our products can range in price from $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
electronic/communications and food and pharmaceuticals industries, and resulting
cutbacks in capital spending would have a direct, negative impact on our
business.
21
Downturns in the industries we serve often occur in connection with, or
anticipation of, maturing product cycles for both companies and their customers
and declines in general economic conditions. Industry downturns have been
characterized by reduced demand for devices and equipment, production
over-capacity and accelerated decline in average selling prices. During a period
of declining demand, we must be able to quickly and effectively reduce expenses
while at the same time, continue to motivate and retain key employees. We
implemented a worldwide restructuring program in fiscal 2002 to realign our
businesses to the changes in our industry and our customers' decrease in capital
spending. We made additional cost reductions in fiscal 2003 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.
We have significant dependence on outsourced manufacturing capabilities and
single source suppliers. If we experience disruptions in the supply of one or
more key components, we may be unable to meet product demand and we may lose
customers and suffer decreased revenue.
We obtain many key components and materials and some significant mechanical
subsystems from sole or single source suppliers with whom we have no guaranteed
supply arrangements. In addition, some of our sole or single sourced components
and mechanical subsystems incorporated into our products have long procurement
lead times. Our increased reliance on outsourced manufacturing and other
capabilities, and particularly our reliance on sole or single source suppliers,
involves certain significant risks including:
o loss of control over the manufacturing process;
o potential absence of adequate supplier capacity;
o potential for significant price increases in the components and
mechanical subsystems;
o potential inability to obtain an adequate supply of required
components, materials or mechanical subsystems; and
o reduced control over manufacturing yields, costs, timely delivery,
reliability and quality of components, materials and mechanical
subsystems.
We do not have contracts with certain of our sole or single source suppliers. If
any one of our suppliers were unable or unwilling to manufacture the components,
materials or mechanical subsystems we need in the volumes we require, we would
have to identify and qualify acceptable replacements. The process of qualifying
suppliers may be lengthy, and additional sources may not be available to us on a
timely basis, on acceptable terms or at all. If sufficient quantities of these
items were not available from our existing suppliers and a relationship with an
alternative vendor could not be developed in a timely manner, shipments of our
products could be interrupted and reengineering of these products could be
required. We have limited control over the quality of certain manufactured
products and their acceptance by our customers. In the past, we have experienced
quality control or specification problems with certain key components provided
by sole source suppliers, and have had to design around the particular flawed
item. Any quality issues could result in customer dissatisfaction, lost sales,
and increased warranty costs. In addition, some of the components that we use in
our products are in short supply. We have also experienced delays in filling
customer orders due to the failure of certain suppliers to meet our volume and
schedule requirements. Some of our suppliers have also ceased manufacturing
components that we require for our products, and we have been required to
purchase sufficient supplies for the estimated life of such product line.
Problems of this nature with our suppliers may occur in the future.
22
Disruption, significant price increases, or termination of our supply sources
could require us to seek alternative sources of supply, could delay our product
shipments and damage relationships with current and prospective customers,
require us to absorb a significant price increase or risk pricing ourselves out
of the market, or prevent us from taking other business opportunities, any of
which could have a material adverse effect on our business. If we incorrectly
forecast product mix for a particular period and we are unable to obtain
sufficient supplies of any components or mechanical subsystems on a timely and
cost effective basis due to long procurement lead times, our business, financial
condition and results of operations could be substantially impaired. Moreover,
if demand for a product for which we have purchased a substantial amount of
components fails to meet our expectations, or due to component price increases
causes us to be priced out of the market, we would be required to write off the
excess inventory. A prolonged inability to obtain adequate timely deliveries of
key components or obtain components at prices within our business model could
have a material adverse effect on our business, financial condition and results
of operations.
If we fail to maintain an effective system of internal controls, we may not be
able to accurately report our financial results or obtain an unqualified
attestation report from our independent auditors in the future, which could
subject us to regulatory sanctions, harm our operating results and cause the
trading price of our stock to decline.
Effective internal controls required under Section 404 of the Sarbanes-Oxley Act
of 2002 are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed. We have in
the past discovered, and may in the future discover, areas of our internal
controls that need improvement. For example, our external auditors recently
identified a "material weakness" in the course of their review of this quarterly
report which means that they believed that there was "a significant deficiency,
or a combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected." Although we believe we have
strengthened our internal controls to address the matter that gave rise to the
"material weakness," we seek to continue improving our internal controls. To
prepare for compliance with Section 404, we have undertaken certain actions
including the adoption of an internal plan, which includes a timeline and
schedule of activities for the evaluation, testing and remediation, if
necessary, of internal controls. These actions have resulted in and are likely
to continue to result in increased expenses, and have required and are likely to
continue to require significant efforts by management and other employees. In
the future, our independent auditors must evaluate management's assessment
concerning the effectiveness of our internal controls over financial reporting
and render an opinion on our assessment and the effectiveness of our internal
controls over financial reporting. We cannot be certain that our internal
controls measures will be timely or successful to ensure that we implement and
maintain adequate controls over our financial processes and reporting in the
future and our independent auditors may not be able to render the required
attestation concerning our assessment and the effectiveness of our internal
controls. Any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could subject us to regulatory
sanctions, harm our business and operating results or cause us to fail to meet
our reporting obligations. Inferior internal controls could also harm our
reputation and cause investors to lose confidence in our reported financial
information, which could have a negative impact on the trading price of our
stock.
Proposed regulations related to equity compensation could adversely affect our
results of operations.
On December 16, 2004, the Financial Accounting Standards Board issued Statement
123R, Share-Based Payment, which is a revision of Statement 123, Accounting for
Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends Statement No. 95, Statement
of Cash Flows. Statement 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values (i.e., proforma disclosure is no longer an
alternative to financial statement recognition). Statement 123R will be
effective for Adept for the quarter ending October 1, 2005. Adept is currently
evaluating option valuation methodologies and assumptions in light of FAS 123R
pronouncement guidelines related to employee stock options. Current estimates of
option values using the Black-Scholes method may not be indicative of results
from the final methodology adopted by the Company for reporting under Statement
123R guidelines, and recognition of compensation costs for stock options granted
at fair market value could adversely affect our results of operations.
23
We have limited cash resources, and the possibility of future operating losses,
negative cash flow and debt obligations could impair our operations and
revenue-generating activities and adversely affect our results of operations.
We have limited cash resources, and because of certain regulatory restrictions
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, although this portion is estimated at less than $500,000. As of
January 1, 2005, we had an aggregate cash balance of $4.7 million, and a short
term receivables financing credit facility of up to $4.0 million, under which no
amounts were outstanding. We currently depend on funds generated from operating
activities plus our cash and the funds available through our credit facility to
meet our operating requirements. As a result, if any of our assumptions, some of
which are described below, are incorrect, we may have difficulty satisfying our
obligations in a timely manner. Our ability to effectively operate and grow our
business is predicated upon certain assumptions, including (i) that we will
experience continued timely receipt of payment of outstanding receivables, and
not otherwise experience severe cyclical swings in our receipts resulting in a
shortfall of cash available for our disbursements during any given quarter, (ii)
that we will not incur additional unplanned capital expenditures in fiscal 2005,
(iii) that funds remain available under our existing credit facility or a new
credit facility.
If our projected revenue falls below current estimates or if operating expenses
exceed current estimates beyond our available cash resources, we may be forced
to curtail our operations, or, at a minimum, we may not be able to take
advantage of market opportunities, develop or enhance new products to an extent
desirable to execute our strategic growth plan, pursue acquisitions that would
complement our existing product offerings or enhance our technical capabilities
to fully execute our business plan or otherwise adequately respond to
competitive pressures or unanticipated requirements. Any of these actions would
adversely impact our business and results of operations.
We do not generally have long-term contracts with our customers, and our order
bookings and backlog cannot be relied upon as a future indicator of sales .
We generally do not have long-term contracts with our customers and existing
contracts and purchase commitments may, under certain circumstances, be
cancelled. As a result, our agreements with our customers do not provide
meaningful assurance of future sales. Furthermore, our customers are not
required to make minimum purchases and may cease purchasing our products at any
time without penalty. Backlog should not be relied on as a measure of
anticipated demand for our products or future revenue, because the orders
constituting our backlog are subject to changes in delivery schedules and in
certain instances are subject to cancellation without significant penalty to the
customer. Because our customers are free to purchase products from our
competitors, we are exposed to competitive price pressure on each order. Any
reductions, cancellations or deferrals in customer orders could have a negative
impact on our financial condition and results of operations.
We have completed a management reorganization and have hired additional critical
management team personnel, and we may not successfully retain these personnel or
realize the expected benefits of the changes.
We hired our Chief Executive Officer, Mr. Robert Bucher, in November 2003. In
December 2003, our employment relationships with our former Chief Executive
Officer and Vice President, Research and Development, were terminated. We have
made and are continuing to make other changes in the management team, including
the elimination of some positions and the replacement of certain other
personnel. In March 2004, we promoted Matt Murphy to Vice President of
Operations and Product Development. In May and June 2004, we recruited a new
Vice President of Business Development, Vice President of Service and Support,
and a Chief Financial Officer. To achieve benefits from these personnel changes,
we must retain the services of Mr. Bucher, Mr. Strickland, our CFO, and other
key managerial personnel. In connection with this effort, we must minimize any
business interruption or distraction of personnel as a result of these changes
24
and our reorganization efforts. We cannot guarantee that we will be successful
in doing so, or that such management and personnel changes will result in, or
contribute to, improved operating results.
We have engaged in substantial restructuring activities in the past, and may
need to implement further restructurings in the future, and our restructuring
efforts may negatively impact our business.
The intelligent automation industry is subject to rapid change. We have
responded to increased changes in the industry in which we compete by
restructuring our operations and reducing the size of our workforce while
attempting to maintain our market presence in the face of increased competition.
Despite our efforts to structure Adept and our businesses to meet competitive
pressures and customer needs, we cannot assure that we will be successful in
continuing to implement these restructuring activities or that the reductions in
workforce and other cost-cutting measures will not harm our business operations
and prospects. Our inability to structure our operations based on evolving
market conditions could negatively impact our business. We also cannot be
certain that we will not be required to implement further restructuring
activities, make additions or other changes to our management or reductions in
workforce based on other cost reduction measures or changes in the markets and
industry in which we compete. Restructuring activities can create unanticipated
consequences and adverse impacts on the business, and we cannot be sure that any
future restructuring efforts will be successful.
We market and sell our products primarily through an indirect channel comprised
of third party resellers, and are subject to certain risks associated with this
method of product marketing and distribution.
We believe that our ability to sell products to system integrators and OEMs will
continue to be important to our success. However, our relationships with system
integrators and OEMs are generally not exclusive, and some of our system
integrators and OEMs may expend a significant amount of effort or give higher
priority to selling products of our competitors. In the future, any of our
system integrators or our OEMs may discontinue their relationships with us or
form additional competing arrangements with our competitors. The loss of, or a
significant reduction in revenue from, system integrators or OEMs to which we
sell a significant amount of our product could negatively impact our business,
financial condition or results of operations.
We cannot control the procurement, either with respect to the timing or amount
of orders placed, by our resellers. We also cannot control the sales or
marketing efforts of the systems integrators and OEMs who sell our products,
which may result in lower revenue if they do not successfully market and sell
our products or choose instead to promote competing products.
As we enter new geographic and applications markets, we must locate and
establish relationships with system integrators and OEMs to assist us in
building sales in those markets. It can take an extended period of time and
significant resources to establish a profitable relationship with a system
integrator or OEM because of product integration expenses, training in product
and technologies and sales training. We may not be successful in obtaining
effective new system integrators or OEMs or in maintaining sales relationships
with them. In the event a number of our system integrators and/or OEMs
experience financial problems, terminate their relationships with us or
substantially reduce the amount of our products they sell, or in the event we
fail to build or maintain an effective systems integrator or OEM channel in any
existing or new markets, our business, financial condition and results of
operations could be adversely affected.
We may incur credit risk related losses because many of the resellers we sell to
are small operations with limited financial resources.
A substantial portion of our sales are to system integrators that specialize in
designing and building production lines for manufacturers. Many of these
companies are small operations with limited financial resources, and we have
from time to time experienced difficulty in collecting payments from certain of
these companies. As a result, we perform ongoing credit evaluations of our
customers. To the extent we are unable to mitigate this risk of collections from
system integrators, our results of operations may be harmed. In addition, due to
their limited financial resources, during extended market downturns the
viability of some system integrators may be in question, which would also result
in a reduction in our revenue or credit losses.
25
We may incur currency exchange-related losses in connection with our reliance on
our single or sole source foreign suppliers.
We make yen-denominated purchases of certain components and mechanical
subsystems from certain of our sole or single source Japanese suppliers. We
remain subject to the transaction exposures that arise from foreign exchange
movements between the dates foreign currency export sales or purchase
transactions are recorded and the dates cash is received or payments are made in
foreign currencies. Our current or any future currency exchange risk management
strategy may not be successful in avoiding exchange-related losses. Any
exchange-related losses or exposure may negatively affect our business,
financial condition or results of operations.
Our 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 from continuing operations were $15.5 million for the six
months ended January 1, 2005, $22.7 million for the fiscal year ended June 30,
2004, $17.1 million for the fiscal year ended June 30, 2003, and $31.8 million
for the fiscal year ended June 30, 2002. This represented 67.1%, 46.1%, 44.8%,
and 64.1% of net revenue for the respective periods. We also purchase some
critical components and mechanical subsystems from foreign suppliers. As a
result, our operating results are subject to the risks inherent in international
sales and purchases, which include the following:
o unexpected changes in regulatory requirements;
o political, military and economic changes and disruptions, including
terrorist activity;
o transportation costs and delays;
o foreign currency fluctuations;
o export/import controls;
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. The decline in value of the U.S. Dollar to the Euro has resulted in
currency exchange gain and future fluctuations may result in significant gains
or 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 weakness in underlying economic conditions in certain
Asian countries may continue to impact our sales to OEM customers who deliver
to, are located in, or whose projects are based in those Asian countries. In
addition, customers in those countries may face reduced access to working
capital to fund component purchases, such as our products, due to higher
interest rates, reduced bank lending due to contractions in the money supply or
the deterioration in the customer's or our bank's financial condition or the
inability to access local equity financing. In the past, as a result of this
lack of working capital and higher interest rates, we have experienced a
significant decline in sales to OEMs serving the Asian market.
Maintaining operations in different countries requires us to expend significant
resources to keep our operations coordinated and subjects us to differing laws
and regulatory regimes that may affect our offerings and revenue.
Our future success depends on our continuing ability to attract, integrate,
retain and motivate highly-qualified managerial and technical personnel.
Competition for qualified personnel in the intelligent automation industry is
intense. Our inability to recruit, train and motivate qualified management and
technical personnel on a timely basis would adversely affect our ability to
manage our operations and design, manufacture, market, and support our products.
We have also reduced headcount in connection with our restructurings and
26
recently made changes in other senior personnel including the recent promotion
of our Vice President of Operations and Product Development and the hiring of a
Vice President of Business Development, and Vice President, Service Operations,
which changes may lead to employee questions regarding future actions by Adept
leading to additional retention difficulties. Other than the CEO's offer letter,
and offer letters with certain of our officers that include only basic
compensation terms, we have no employment agreements with our senior management.
We operate in several geo-political regions where the legal system tends to be
pro-labor. If we become subject to unfair hiring or termination claims, we could
be prevented from hiring needed personnel, incur liability for damages and/or
incur substantial costs in defending ourselves.
Companies in our industry whose employees accept positions with competitors
frequently claim that these competitors have engaged in unfair hiring practices
or that the employment of these persons would involve the disclosure or use of
trade secrets. These claims could prevent us from hiring personnel or cause us
to incur liability for damages. We could also incur substantial costs in
defending ourselves or our employees against these claims, regardless of their
merits. We may also experience actions against us for employment terminations
which are perceived to be unjustified. Although to date we have not experienced
any material claims, defending ourselves from these claims could divert the
attention of our management away from our operations.
Our hardware and software products may contain defects that could increase our
expenses and exposure to liabilities and or harm our reputation and future
business prospects.
Our hardware and software products are complex and, despite extensive testing,
our new or existing products or enhancements may contain defects, errors or
performance problems when first introduced, when new versions or enhancements
are released, or even after these products or enhancements have been used in the
marketplace for a period of time. We may discover product defects only after a
product has been installed and used by customers. We may discover defects,
errors, or performance problems in future shipments of our products. These
problems could result in expensive and time consuming design modifications or
large warranty charges, expose us to liability for damages, damage customer
relationships, and result in loss of market share, any of which could harm our
reputation and future business prospects. In addition, increased development and
warranty costs could reduce our operating profits and could result in losses.
The existence of any defects, errors, or failures in our products could also
lead to product liability claims or lawsuits against us, our channel partners,
or against our customers. A successful product liability claim could result in
substantial cost and divert management's attention and resources, which could
have a negative impact on our business, financial condition and results of
operations. Although we are not aware of any product liability claims to date,
the sale and support of our products entail the risk of these claims.
If our hardware products do not comply with standards set forth by the European
Union, we will not be able to sell them in Europe.
The hardware products we sell in the European Union are required to comply with
European Union Low Voltage, Electro-Magnetic Compatibility and Machinery Safety
directives. The European Union mandates that our products carry the CE mark
denoting that these products are manufactured in strict accordance to design
guidelines in support of these directives. These guidelines are subject to
change and to varying interpretation. New guidelines impacting machinery design
go into effect each year. To date, we have retained TUV Rheinland to help
certify that our controller-based products, including some of our robots, meet
applicable European Union directives and guidelines. Although our existing
certified products meet the requirements of the applicable European Union
directives, we cannot provide any assurance that future products can be
designed, within market window constraints, to meet the future requirements. If
any of our robot products or any other major hardware products do not meet the
requirements of the European Union directives, we would be unable to legally
sell these products in Europe. Thus, our business, financial condition and
results of operations could be harmed. Such directives and guidelines could
change in the future, forcing us to redesign or withdraw from the market one or
more of our existing products that may have been originally approved for sale.
27
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.
We may face costly intellectual property infringement claims.
We have received in the past, and may receive in the future, communications from
third parties asserting that we are infringing certain patents and other
intellectual property rights of others or seeking indemnification against such
alleged infringement. The asserted claims and/or initiated litigation could
include claims against us or our manufacturers, suppliers, or customers,
alleging infringement of their proprietary rights with respect to our existing
or future products or components of those products. There are numerous patents
in the automation components industry. It is not always practicable to determine
in advance whether a product or any of its components infringes the intellectual
property rights of others. As a result, from time to time, we may be forced to
respond to intellectual property infringement claims to protect our rights or
defend a customer's rights. These claims, regardless of merit, could consume
valuable management time, result in costly litigation, or cause product shipment
delays, all of which could seriously harm our business, operating results and
financial condition. In settling these claims, we may be required to enter into
royalty or licensing agreements with the third parties claiming infringement.
These royalty or licensing agreements, if available, may not have terms
favorable to us. Being forced to enter into a license agreement with unfavorable
terms could seriously harm our business, operating results and financial
condition. Any potential intellectual property litigation could force us to do
one or more of the following:
o Pay damages, license fees or royalties to the party claiming
infringement;
o Stop selling products or providing services that use the challenged
intellectual property;
o Obtain a license from the owner of the infringed intellectual property
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o Redesign the challenged technology, which could be time-consuming and
costly.
If we were forced to take any of these actions, our business and results of
operations may suffer.
If we cannot identify and make acquisitions, our ability to expand our
operations and increase our revenue may be impaired.
In the past, a significant portion of our growth has been attributable to
acquisitions of other businesses and technologies. 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
28
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.
Any acquisition we have made or may make in the future could disrupt our
business, increase our expenses and adversely affect our financial condition or
operations.
In the future we may make acquisitions of, or investments in, other businesses
that offer products, services, and technologies that management believes will
further our strategic objectives. We cannot be certain that we would
successfully integrate any businesses, technologies or personnel that we might
acquire, and any acquisitions might divert our management's attention away from
our core business. Any future acquisitions or investments we might make would
present risks commonly associated with these types of transactions, including:
o difficulty in combining the product offerings, operations, or workforce
of an acquired business;
o potential loss of key personnel of an acquired business;
o adverse effects on existing relationships with suppliers and customers;
o disruptions of our on-going businesses;
o difficulties in realizing our potential financial and strategic
objectives through the successful integration of the acquired business;
o difficulty in maintaining uniform standards, controls, procedures and
policies;
o potential negative impact on results of operations due to goodwill
impairment write-offs, amortization of intangible assets other than
goodwill, or assumption of anticipated liabilities;
o risks associated with entering markets in which we have limited
previous experience;
o potential negative impact of unanticipated liabilities or litigation;
and
o the diversion of management attention.
The risks described above, either individually or in the aggregate, could
significantly harm our business, financial condition and results of operations.
We expect that future acquisitions, if any, could provide for consideration to
be paid in cash, shares of our common stock, or a combination of cash and common
stock. In addition, we may issue additional equity in connection with future
acquisitions, which could result in dilution of our shareholders' equity
interest. Fluctuations in our stock price may make acquisitions more expensive
or prevent us from being able to complete acquisitions on terms that are
acceptable to us.
Risks Related to Our Industry
The market for intelligent automation products is intensely competitive, which
may make it difficult to manage and grow our business or to maintain or enhance
our profitability.
We compete with a number of robot, motion control, machine vision, and
simulation software companies. Many of our competitors have substantially
greater financial, technical, and marketing resources than we do. In addition,
we may in the future face competition from new entrants in one or more of our
markets.
Many of our competitors in the robot market are integrated manufacturers of
products that produce robotics equipment internally for their own use and may
also compete with our products for sales to other customers. Some of these large
manufacturing companies have greater flexibility in pricing because they
generate substantial unit volumes of robots for internal demand and may have
access through their parent companies to large amounts of capital. Any of our
competitors may seek to expand their presence in other markets in which we
compete.
We believe that other principal competitive factors affecting the market for our
products are:
o product functionality and reliability;
o price;
o customer service;
o delivery, including timeliness, predictability, and reliability of
delivery commitment dates; and
o product features such as flexibility, programmability, and ease of use.
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Our current or potential competitors may develop products comparable or superior
in terms of price and performance features to those developed by us or adapt
more quickly than we can to new or emerging technologies and changes in customer
requirements. We may be required to make substantial additional investments in
connection with our research, development, engineering, marketing, and customer
service efforts in order to meet any competitive threat, so that we will be able
to compete successfully in the future. We expect that in the event the
intelligent automation market expands, competition in the industry will
intensify as additional competitors enter our markets and current competitors
expand their product lines. Increased competitive pressure could result in a
loss of sales or market share or cause us to lower prices for our products, any
of which could harm our business.
If we are unable to effectively support the distinct needs of the multiple
industries of our customers, the demand for our products may decrease and our
revenue may decline.
We market products for the electronic/communications, automotive, appliance,
food, 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;
30
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.
Over the past three years, our total expenditures for research and development
have declined significantly. We have limited resources to allocate to research
and development and must allocate our resources among a wide variety of
projects. Because of intense competition in our industry, the cost of failing to
invest in strategic products is high. If we fail to adequately invest in
research and development, we may be unable to compete effectively in the
intelligent automation markets in which we operate.
We may not receive significant revenue from our current research and development
efforts for several years, if at all.
Internally developing intelligent automation products is expensive, and these
investments often require a long time to generate returns. Our strategy involves
significant investments in research and development and related product
opportunities. Although our total expenditures for research and development have
declined, we 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.
31
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 trades on the OTC Bulletin Board, which may negatively impact
the trading activity and price of our common stock.
Our common stock trades on the OTC Bulletin Board, which is generally considered
less liquid and efficient than Nasdaq and other listed exchanges. Trading in our
stock has been relatively thin with increased price volatility because smaller
quantities of shares are bought and sold, transactions may take longer to
complete, and securities analysts' and news media coverage of Adept has
diminished. These factors could result in lower prices and larger spreads in the
bid and ask prices for our common stock. We have announced a 1-for-5 reverse
stock split which will become effective February 25, 2005, and this could
further reduce liquidity. Reduced liquidity may reduce the value of our common
stock and our ability to use our equity as consideration for an acquisition or
other corporate opportunity. Our stock's OTC status could result in a number of
other negative implications, including the potential loss of confidence by
suppliers, customers, and employees, the lack of institutional investor
interest, the availability of fewer business development and other strategic
opportunities, and the additional cost of compensating our employees using cash
and equity compensation.
The 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 30,536,710 shares of common stock outstanding as of
February 8, 2005. In November 2003, we completed a private placement of an
aggregate of approximately 11.1 million shares of common stock to several
accredited investors. Investors in the 2003 financing 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. 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 an agreement
we had with JDS Uniphase Corporation, or JDSU, JDSU converted its shares of
Adept preferred stock (which JDSU had acquired pursuant to an October, 2001
private placement of our Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock) to acquire 3,074,135 shares of our common stock,
equal to approximately 19.9% of our outstanding common stock prior to the 2003
financing, and surrendered its remaining shares of preferred stock to us. The
JDSU Agreement provides that JDSU is entitled to certain rights, 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.
32
We registered with the SEC for resale to the public 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 under
the Securities Act. Selling security holders included in the registration
statement are offering up to 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 February 8, 2005, options to purchase approximately 3,017,791
shares of our common stock were outstanding under our stock option plans, and an
aggregate of 5,845,110 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. SVB
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 our
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. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions, financings, and other corporate purposes, could have the
effect of delaying, deferring, or preventing a change in control of Adept
without further action by the shareholders and may adversely affect the market
price of, and the voting and other rights of, the holders of common stock.
Additionally, the conversion of preferred stock into common stock may have a
dilutive effect on the holders of common stock.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price of our common stock has fluctuated substantially in the past.
The market price of our common stock will continue to be subject to significant
fluctuations in the future in response to a variety of factors, including:
o fluctuations in operating results;
o our liquidity needs and constraints;
o our restructuring activities and changes in management and other
personnel;
o the trading of our common stock on the OTC Bulletin Board;
o the business environment, including the operating results and stock
prices of companies in the industries we serve;
o future announcements concerning our business or that of our competitors
or customers;
o the introduction of new products or changes in product pricing policies
by us or our competitors;
o litigation regarding proprietary rights or other matters;
o change in analysts' earnings estimates;
o developments in the financial markets;
o general conditions in the intelligent automation industry; and
o perceived dilution from stock issuances for acquisitions, our 2003
equity financing, the convertible note conversion, the SVB financing
warrant, and other transactions.
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.
33
We may be subject to securities class action litigation if our stock price
remains volatile or operating results suffer, which could result in substantial
costs, distract management, and damage our reputation.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities or where operating results suffer. Companies like us, that are
involved in rapidly changing technology markets are particularly subject to this
risk. In addition, we have incurred net operating losses for the last few fiscal
years. We may be the target of litigation of this kind in the future. Any
securities litigation could result in substantial costs, divert management's
attention and resources from our operations, and negatively affect our public
image and reputation.
Recent legislation, higher liability insurance costs and other increased costs
of being public are likely to impact our future consolidated financial position
and results of operations.
Recently there have been significant regulatory changes, including the
Sarbanes-Oxley Act of 2002 and rules and regulations promulgated as a result of
the Sarbanes-Oxley Act, and there may be new accounting pronouncements or
regulatory rulings that will have an impact on our future financial position and
results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes and
proposed legislative initiatives following several highly publicized corporate
accounting and corporate governance failures are likely to increase general and
administrative costs. In addition, insurance companies significantly increased
insurance rates as a result of higher claims over the past year, and our rates
for our various insurance policies increased as well. These and other potential
changes could materially increase the expenses we report under generally
accepted accounting principles and adversely affect our consolidated operating
results.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. We maintain an investment policy, which seeks to
ensure the safety and preservation of our invested funds by limiting default
risk, market risk and reinvestment risk. The table below presents principal cash
amounts and related weighted-average interest rates for our investment
portfolio, all of which matures in less than twelve months.
January 1, Fair
(in thousands) 2005 Value
-------------- ---- -----
Cash and cash equivalents ........ $ 4,735 $ 4,735
Average rate ..................... 0.87% 0.87%
Total Investment Securities ... $ -- $ --
Average rate ..................... -- --
We mitigate default risk by investing in high credit quality securities and by
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. Our portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity and contains what management believes to be a prudent amount
of diversification.
We conduct business on a global basis. Consequently, we are exposed to adverse
or beneficial movements in foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the fiscal quarter ended January 1, 2005, Adept carried out an
evaluation, under the supervision and with the participation of members of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of Adept's disclosure controls
and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of
1934. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of January 1, 2005, our disclosure controls and
procedures designed to ensure that information related to Adept and our
consolidated subsidiaries is recorded, processed, and reported timely and is
accumulated and made known to our Chief Executive Officer and Chief Financial
Officer to allow timely decisions regarding required disclosures, particularly
during the period in which this report was being prepared, were not effective in
light of the material weakness described below.
Our audit committee was advised by Ernst & Young LLP, our independent auditors,
that during their performance of review procedures related to our unaudited
interim financial statements for the quarter ended January 1, 2005 they
identified a "material weakness" in our internal controls over financial
reporting as defined in Public Company Accounting Oversight Board ("PCAOB")
Standard No. 2. As defined by the PCAOB, a material weakness is "a significant
deficiency, or a combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected." The material weakness
related to a failure to correctly apply FAS 52 to currency-related transactions.
An entry to correct the error was subsequently recorded and is included in our
unaudited interim financial statements for the quarter ended January 1, 2005,
enabling timely reporting of our quarterly results. We are in the process of
strengthening our internal control procedures to ensure all aspects of our
financial reporting process, including FAS 52 application, are reviewed and
approved monthly by our Corporate Controller to evidence full compliance with
U.S. generally accepted accounting principles.
In addition, we have hired several additional personnel in our accounting and
reporting function to address the significant deficiency noted in our prior 10-Q
for the quarter ended October 2, 2004. We also enhanced our internal controls in
revenue recognition of standalone software licensing by updating our revenue
recognition policy, and adding expertise in accounting for all new contracts. We
believe we have addressed the significant deficiency previously noted.
35
We continue to improve and refine our internal controls as an ongoing process.
Other than as summarized above, there have been no changes in our internal
controls over financial reporting or other factors that have materially
affected, or are reasonably likely to materially affect, our internal controls.
36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings or claims, either
asserted or unasserted, which arise in the ordinary course of our business. We
have reviewed pending legal matters and believe that the resolution of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.
Adept has in the past received communications from third parties asserting that
we have infringed certain patents and other intellectual property rights of
others, or seeking indemnification against alleged infringement. While it is not
feasible to predict or determine the likelihood or outcome of any actual or
potential actions from such assertions against us, we believe the ultimate
resolution of these matters will not have a material adverse effect on our
financial position, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Adept's Annual Meeting of Shareholders, held on November 4, 2004, the
shareholders of Adept approved the following actions:
a) Election of five (5) directors to serve until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified:
Robert H. Bucher: For: 28,880,806 Withheld: 489,694
Ronald E.F. Codd: For: 28,840,679 Withheld: 529,821
Michael P. Kelly: For: 28,841,559 Withheld: 528,941
Robert J. Majteles: For: 28,840,479 Withheld: 530,021
Cary R. Mock: For: 28,879,313 Withheld: 491,187
b) Approval of Amendment to 2003 Stock Option Plan
For: 18,611,336 Against: 2,995,411 Abstain: 26,668
c) Approval of 2004 Director Option Plan
For: 18,618,296 Against: 2,989,601 Abstain: 25,518
d) Approval of Reverse Stock Split
For: 28,680,497 Against: 645,525 Abstain: 44,478
e) Ratification of the appointment of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending June 30, 2004.
For: 29,289,719 Against: 75,344 Abstain: 5,437
37
ITEM 5. OTHER INFORMATION
At Adept's November 4, 2004 Annual Meeting of Shareholders, the shareholders
approved an amendment to Adept's Articles of Incorporation to effect a reverse
split at a ratio to be determined by the Board of Directors within a range of
one-for-four to one-for-seven. On February 1, 2005, Adept announced that its
Board of Directors approved a reverse stock split at a ratio of one-for-five to
be effected on February 25, 2005.
38
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report.
31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification by the Chief Executive Officer and the Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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/ Robert R. Strickland
----------------------------------------
Robert R. Strickland
Vice President, Finance and
Chief Financial Officer
By: /s/ Robert H. Bucher
----------------------------------------
Robert H. Bucher
Chairman of the Board of Directors and
Chief Executive Officer
Date: February 15, 2005
40
INDEX TO EXHIBITS
31.1 Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer and the Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
41