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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 1997
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Commission File Number 0-22472
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ADAPTIVE SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
OREGON 93-0981962
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 N.W. COMPTON DRIVE, SUITE 340, BEAVERTON, OR 97006
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(Address of principal executive offices) (Zip Code)
(503) 690-1236
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(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.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
March 31, 1997:
6,987,864 SHARES, NO PAR VALUE
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ADAPTIVE SOLUTIONS, INC.
Index to Form 10-Q
PART I FINANCIAL INFORMATION
PAGE NO.
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Item 1. Financial Statements
Balance Sheets as of March 31, 1997
and December 31, 1996 3
Statements of Operations for the three months
ended March 31, 1997 and 1996 4
Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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ADAPTIVE SOLUTIONS, INC.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 3,263 $ 3,612
Short-term investments 337 0
Trade accounts receivable, net 1,171 1,084
Inventory, net 774 1,007
Prepaid expenses 24 33
Total current assets 5,569 5,736
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Property and equipment - net 423 1,337
Other assets 148 139
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$ 6,140 $ 7,212
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 113 $ 115
Accrued expenses 1,011 1,626
Current portion of capital lease obligations 415 447
Deferred revenue 411 720
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Total current liabilities 1,950 2,908
Capital lease obligations, less current portion 164 259
Notes payable 247 0
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Stockholders' equity:
Common stock, no par value. Authorized
30,000 shares; issued and outstanding 6,988
shares and 6,961 shares at March 31, 1997 and
December 31, 1996, respectively 31,117 31,104
Accumulated deficit (27,338) (27,059)
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Total stockholders' equity 3,779 4,045
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$ 6,140 $ 7,212
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See accompanying notes to condensed financial statements.
3
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ADAPTIVE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended March 31
1997 1996
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REVENUE:
Net product revenue $ 676 $ 3,348
Research and development revenue 49 483
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TOTAL REVENUE 725 3,831
OPERATING COSTS AND EXPENSES
Cost of product revenue 240 2,134
Research and development 284 931
Sales and marketing 202 812
General and administrative 285 487
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TOTAL OPERATING COSTS AND EXPENSES 1,011 4,364
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OPERATING LOSS (286) (533)
Interest income 34 26
Interest expense & other income (17) (42)
Gain\(Loss) on sale of asset (9) 0
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NET LOSS $ (278) $ (549)
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Net loss per common and common equivalent
share $ (0.04) $ (0.08)
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Weighted average common and common
equivalent shares outstanding 6,972 6,459
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See accompanying notes to condensed financial statements.
4
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ADAPTIVE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (278) $ (549)
Adjustments to reconcile net loss to cash
provided/(used in) operating activities:
Depreciation and amortization 74 151
Loss on sale of asset 8 0
Amortization of unearned compensation 0 10
Changes in assets and liabilities:
Short-term investment (337) 0
Trade accounts receivable (87) 1,616
Inventory 233 559
Prepaid expenses 9 37
Accounts payable (2) (191)
Accrued expenses (615) (375)
Deferred revenue (309) (21)
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Net cash provided/(used in)
operating activities (1,312) 1,237
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 869
Purchases of property and equipment (30) (186)
Purchases of other assets (9) --
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Net cash provided by(used in)
investing activities 830 (186)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 13 2,290
Proceeds from (payments on) capital lease
obligations (127) 106
Proceeds from issuance of notes payable 247 0
Proceeds from line of credit, net 0 438
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Net cash provided by financing activities 133 2,834
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NET INCREASE(DECREASE) IN CASH AND
CASH EQUIVALENTS (349) 3,885
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,612 974
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CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 3,263 $ 4,859
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid for interest $ 17 $ 41
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See accompanying notes to condensed financial statements.
5
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ADAPTIVE SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
by the Company in conformity with generally accepted accounting principles
for interim financial information. Accordingly, certain financial
information and footnotes have been omitted or condensed, therefore, these
financial statements should be read in conjunction with the Company's 1996
annual report to stockholders filed with the Securities and Exchange
Commission. In the opinion of management, the condensed financial statements
include all necessary adjustments (which are of a normal and recurring
nature) for the fair presentation of the results of the interim periods
presented. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results for the entire fiscal year
ending December 31, 1997.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
the average cost method. The components of inventories are as follows:
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
Finished goods $ 14 $ 6
Work in process 2 0
Raw materials 949 1,192
Reserve for obsolete inventory (191) (191)
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$ 774 $ 1,007
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INCOME TAXES
The difference between the expected tax expense (benefit), computed by
applying the federal statutory rate of 34% to income (loss) before taxes, and
the actual tax expense (benefit) of $-0- is primarily due to the increase in
the valuation allowance for deferred tax assets.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $24,250 to offset against future income for federal and state
tax purposes. These carryforwards expire in 2003 through 2011.
The Company's ability to use its net operating loss carryforwards to offset
future taxable income is subject to annual restrictions contained in the
United States Internal Revenue Code of 1986, as amended (the Code). These
restrictions act to limit the Company's future use of its net operating
losses following certain substantial stock ownership changes enumerated in
the Code and referred to hereinafter as an "ownership change."
6
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A provision of the Tax Reform Act of 1986 required the utilization of net
operating losses and credits be limited when there is a change of more than
50% in ownership of the Company. Such a change occurred with the sale of
preferred stock in 1990 and the initial public offering in 1993.
Accordingly, the utilization of the net operating loss carryforwards
generated from periods prior to August 21, 1990 and the period from August
22, 1990 to November 1, 1993 is limited; the amounts subject to the
limitation are approximately $1,109 and $10,732, respectively.
Additionally, the completion of private placement offerings in 1994, 1995 and
1996 may have constituted a change of ownership that will further limit the
use of net operating loss carryforwards to offset future taxable income. No
analysis has been performed by the Company to determine whether such
ownership change has occurred or to what extent the use of net operating loss
carryforwards to offset future taxable income may be limited.
At December 31, 1996, the Company is in a net deferred tax asset position
resulting primarily from net operating loss carryforwards and has recorded a
valuation allowance for all deferred tax assets in excess of existing
deferred liabilities.
COMMITMENTS
The Company purchases some of its inventory through the use of letters of
credit. At March 31, 1997, the Company had letters of credit outstanding in
the amount of $27.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per share is computed using the weighted average number of common
and dilutive common equivalent shares assumed to be outstanding during the
period. Outstanding options and warrants are assumed not to be common stock
equivalents due to the reported net losses.
RESTRUCTURING
During the second quarter of 1996, management and the Board of Directors of
the Company authorized and committed the Company to a restructuring of its
organizational and product strategies. The restructuring included
discontinuing production of chips from raw wafers and closing the California
manufacturing facility. Additionally, a certain product line was
discontinued. The Company recorded costs of $2,817 associated with these
changes. The costs were charged to the related expense categories. The
primary components of this charge related to employee termination costs
($521), lease termination costs ($200), reserves for inventory ($1,056) and
fixtures and equipment writedowns ($1,040). At March 31, 1997 there was $379
of accrued restructuring costs relating to lease termination costs ($182) and
property and equipment ($197). All other costs had been charged against the
restructuring reserve.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH
AN ASTERISK ("*")) THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
OVERVIEW
Adaptive Solutions, Inc., (the "Company"), incorporated in Oregon in 1988,
designs and markets high performance image recognition solutions targeted at
the transportation, finance, and health care industries. As of March 31,
1997, the Company had an accumulated deficit of $27,338,000. For the three
months ended March 31, 1997, the Company incurred a net loss of $278,000.
The parallel processing, image processing, recognition knowledge, and applied
expertise that is incorporated in the Company's current products provides the
basis for the Company's strategy. Key elements of the strategy include: 1) a
focus on high performance image recognition applications, including
accelerated data entry for forms processing in the transportation, medical
and finance markets, 2) development of partnerships with software and other
companies with expertise in optical character recognition ("OCR") and related
imaging application areas; 3) development of high performance programmable
image and recognition processing engine products for Windows NT and Intel CPU
based server and embedded systems environments, and 4) a gradual transition
from the Company's proprietary CNAPS processor to parallel processing
microprocessors being brought to market by Motorola, Inc.("Motorola") and
Intel Corporation ("Intel"). The parallel processing chip to be produced by
Motorola, the "VeComP" chip, uses architecture purchased from the Company.
The Company anticipates building image recognition systems using these
processors. Two vertical markets targeted for this technology are: high
volume business forms and package label processing. In addition, the Company
will focus on enhancing horizontal markets for programmable PC based image
recognition engines running under Windows NT. The Company has also announced
its direction to vigorously pursue external relationships to formulate key
partnerships. The Company feels these partnerships will have a positive
affect on the Company's ability to deliver value added solutions to customers
by leveraging sales channels, products, and technologies.* The company has
formed two such partnerships with software companies, Mitek Systems of San
Diego, California ("Mitek"), and Mimetics S.A. of Paris, France ("Mimetics").
These partnerships will initially be used to create products that provide
significantly higher performance hand print and machine print Intelligent
Character Recognition ("ICR") capabilities. The products developed will be
sold to the financial and medical forms processing markets by Mitek and
Mimetics, and to express courier, postal applications, and broader image
processing and recognition rich application domains by the Company.*
8
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In order to become profitable, the Company must successfully develop these
new products, obtain market acceptance for the products, obtain design wins
for incorporation of its board level products into developers' OEM systems,
develop sufficiently higher sales volumes and manufacturing efficiencies,
manage its operating expenses and capability.* There can be no assurance
that the Company will meet any of these objectives or achieve profitability.
The Company expects that operating losses will continue at least through the
first half of 1997.
REVENUES
Net product revenue for the three months ended March 31, 1997 of $676,000
consisted of the sale of CNAPS and PCI-XL boards and software. Included, in
the quarter ending March 31, 1997 is revenue of $300,000 in connection with
the sale and license of technology to a major customer. Revenue from the
board products is recognized at the time of product shipment. Revenue from
the software and maintenance agreements is deferred and recognized over the
life of the agreement. Net product revenue for the comparable period in 1996
was $3,348,000.
The Company's future success and its ability to continue operations will
depend in substantial part on its ability to significantly maintain and
increase sales of its existing products and products to be developed under
its revised product strategy.* There can be no assurance that the Company
will be able to generate significant additional sales or maintain sales at
current or historical levels; failure to do so would have a material adverse
effect on the Company's financial position and results of operations.
Research and development revenue for the three months ended March 31, 1997
was $49,000. For the comparable period in 1996, research and development
revenue was $483,000. Research and development revenue for the three months
ended March 31, 1997 was generated primarily from technology development
contracts with a large aerospace company. Research and development revenue
for the three months ended March 31, 1996 was largely attributable to
technology development contracts with the U.S. Government.
International sales totaled $75,000 (10% of total revenue) for the three
months ended March 31, 1997. For the comparable period in 1996,
international sales were $591,000 (15% of total revenue). The percentage of
international revenues to total revenues has decreased slightly as a result
of the Company's decision to discontinue the PowerShop product in 1996.
9
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Foreign regulatory bodies often establish technical standards different from
those in the United States; while the Company tests its products to meet
these standards, there can be no assurance that the Company's products will
comply with such standards in the future. The Company's international sales
and operations may also be materially adversely affected by the imposition of
governmental controls, export license requirements, restrictions on the
export of critical technology, political and economic instability, trade
restrictions, changes in taxes, varying exchange rates, difficulties in
establishing and managing international operations and general economic
conditions. Compliance or noncompliance with international quality standards
may also affect operating results. In this respect, the Company has not
applied for and has no present plans to apply for ISO 9000 certification.
COST OF PRODUCT REVENUE
The cost of product revenue for the three months ended March 31, 1997 and
1996 was $240,000 and $2,134,000, respectively. The cost of product revenue
consists of direct manufacturing costs, overhead costs associated with the
manufacturing operations in Beaverton, Oregon, provisions for warranty costs,
and reserves for inventory obsolescence and return. The decrease in cost for
the three months ended March 31, 1997 was due mainly to the decrease in
revenues and the reduced overhead associated with the shutdown of the
California manufacturing site.
Cost of product revenue could be negatively affected in future periods due to
a number of factors, including problems with component supplies, variability
of component cost, product quality or reliability problems or other factors.
Additionally, the shutdown of the Company's Sunnyvale, California
manufacturing site which manufactured the Company's proprietary CNAPS
processors from silicon wafer has led the Company to outsource the testing of
the CNAPS processors. The transition of this part of the manufacturing
process may lead to increased processor costs. In addition, the Company
purchases many of its components from Japanese manufacturers and pricing for
these components is generally in yen. When the value of the yen increases
relative to the dollar, the cost to the Company of these components increases
correspondingly. Accordingly, future increases in the value of the yen
relative to the dollar could adversely affect the Company's gross margins or
make the prices of the Company's products less competitive.
10
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RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $284,000 for the three months ended
March 31, 1997 were associated with the development of high performance image
recognition applications for the forms processing market and the development
of image processing and recognition engines for server and embedded systems
environments. Research and development expenses were $931,000 for the
comparable period in 1996. The research and development focus has been
shifted toward forms processing solutions utilizing application software from
Mitek Systems and Mimetics S.A. and software developed by the Company. The
reduction in expenses for the three months ended March 31, 1997 were a result
of the Company's new organizational structure, revised product strategy, and
decreased compensation and development expenses associated with the
termination of the development of the Company's next generation processor.
The Company believes that a significant investment in research and
development is critical to its future success. To the extent permitted by
its liquidity position, the Company plans to continue to invest substantial
resources in research and development. If resource constraints cause the
Company to allocate resources away from its research and development
activities, the Company's future financial position and results of operations
could be adversely affected.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended March 31, 1997 and
1996 were $202,000 and $812,000, respectively. Sales and marketing expenses
are primarily comprised of labor costs, sales commissions, and promotion, and
customer literature. Commissions generally vary with sales volume. The
level of spending for promotion and literature costs is largely dependent on
the level of promotion for new products. The decrease in sales and marketing
expenses from the prior year consists of decreases in advertising, promotion,
personnel, travel, sales samples, and commission related to lower sales
levels.
The Company believes that effective sales and marketing activities are
critical to any future growth in sales; accordingly, if resource constraints
cause the Company to allocate resources away from these activities, the
Company's future financial position and results of operations could be
adversely affected.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended March 31, 1997
were $285,000 as compared to $487,000 for the same period in 1996. The
primary components of these expenses are salaries, insurance and fees related
to legal, accounting and consulting services. The decreased level of expense
from the prior year was primarily due to a reduction in personnel and reduced
costs associated with the Company's information systems services.
11
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INTEREST INCOME AND EXPENSE
Interest income for the three months ended March 31, 1997 and 1996 was
$34,000 and $26,000, respectively. Interest income varies depending upon the
cash balances and prevailing interest rates from period to period. Interest
expense for the three months ended March 31, 1997 and 1996 was $17,000 and
$42,000, respectively. In 1997 interest expense was mainly due to the
Company's capital lease obligations while in 1996 interest expense was
primarily attributable to the Company's line of credit and capital lease
obligations. The Company has not entered into additional capital lease
obligations in the current year.
INCOME TAXES
The completion of the initial public offering in November 1993 constituted a
change in ownership that will limit the net operating loss carryforwards that
can be used to offset taxable income in future years. See Notes to Condensed
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations primarily through (i) sales of
its equity and convertible debt securities with venture capital and other
investors, (ii) equipment leases, (iii) revenues from technology development
agreements and government research contracts and (iv) revenues from the sales
of its CNAPS development systems, boards and software products and PowerShop
products.
As of March 31, 1997, the Company had established capital leases with two
major equipment leasing companies at effective interest rates ranging from
10% to 21%. The aggregate principal amount outstanding under these capital
leases, including the current portion, totaled $579,000 as of March 31,
1997. Although the Company has no material commitments to purchase capital
equipment, the Company may need to expend significant additional amounts for
capital equipment in connection with its change in product strategy. The
Company's cash and cash equivalents at March 31, 1997 were $3,263,000, a
decrease of $349,000 from the cash and cash equivalents balance of $3,612,000
at December 31, 1996. The Company's working capital at March 31, 1997 was
$3,619,000, an increase of $791,000 from the working capital balance of
$2,828,000 at December 31, 1996. The Company expects that it may need
additional funding in the future, although it is unable to predict the
precise amount or date that such funding will be required.
12
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The Company will continue considering alternative sources for expected future
funding, including equity or debt financings, corporate partnering
relationships involving up-front payments and/or equity investments, sales of
technology and other alternatives. The Company has not yet identified which,
if any, of these courses it will pursue, nor has it received commitments from
any such sources for any funding of any kind. Accordingly, there can be no
assurance that any such funding can be obtained. If adequate funds are not
available as required, the Company's ability to fulfill product orders, as
well as the Company's financial position and results of operations, will be
adversely affected. In particular, the Company could be required to
significantly reduce or suspend its operations, seek a merger partner or sell
additional securities on terms that are highly dilutive to existing
stockholders. The Company's future capital needs will depend upon numerous
factors, including the success of the Company's revised product strategy, the
progress of the Company's research and development activities, the extent and
timing of the acceptance of the Company's products, the cost of the Company's
sales, marketing and manufacturing activities and the amount of revenues
generated from operations, none of which can be predicted with certainty,
and, therefore, there can be no assurance that the Company will not require
additional funding earlier than anticipated.
The Company has 1,680,764 outstanding warrants entitling the holders to
purchase 2,286,319 shares of the Company's common stock at an exercise price
of $6.393. In addition, there are 75,000 warrants outstanding which entitle
the holders to purchase 75,000 shares of the Company's common stock at an
exercise price of $3.375.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128 "Earnings per Share". This
statement establishes a different method of computing net income per share
than is currently required under the provisions of Accounting Principles
Board Opinion No. 15. Under SFAS No. 128, the Company will be required to
present both basic net income per share and diluted net income per share.
Basic net income per share is expected to be comparable or slightly higher
than the currently presented net income per share as the effect of dilutive
stock options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable or slightly lower
than the currently presented net income per share.
The Company plans to adopt SFAS No. 128 in the fourth quarter of 1997 and at
that time all historical net income per share data presented will be restated
to conform to the provisions of this Statement.
13
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADAPTIVE SOLUTIONS, INC.
----------------------------
(Registrant)
DATE: MAY 11, 1997 BY /S/ DANIEL J. MEUB
---------------- --------------------------------
DANIEL J. MEUB
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
BY /S/ RICHARD L. BOONSTRA
--------------------------------
RICHARD L. BOONSTRA
CORPORATE CONTROLLER AND
PRINICIPAL FINANCIAL OFFICER
15
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,263
<SECURITIES> 337
<RECEIVABLES> 1,321
<ALLOWANCES> 150
<INVENTORY> 774
<CURRENT-ASSETS> 5,569
<PP&E> 3,009
<DEPRECIATION> 2,586
<TOTAL-ASSETS> 6,140
<CURRENT-LIABILITIES> 1,950
<BONDS> 0
0
0
<COMMON> 31,117
<OTHER-SE> (27,338)
<TOTAL-LIABILITY-AND-EQUITY> 6,140
<SALES> 676
<TOTAL-REVENUES> 725
<CGS> 240
<TOTAL-COSTS> 240
<OTHER-EXPENSES> 771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17)
<INCOME-PRETAX> (278)
<INCOME-TAX> 0
<INCOME-CONTINUING> (278)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (278)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
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