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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1996
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 NUMBER: 0-22472
ADAPTIVE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0981962
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1400 NW COMPTON DRIVE, SUITE 340
BEAVERTON, OREGON 97006
(Address of principal executive offices and zip code)
503-690-1236
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
COMMON STOCK PURCHASE WARRANTS
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
--------------------
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $7,852,021 as of February 28, 1997 based upon the last sales
price as reported by Nasdaq.
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1997 was 6,981,447 shares.
The Index to Exhibits appears on page 19 of this document.
--------------------
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference
portions of its Proxy Statement for its Annual Meeting of Shareholders to be
held May 21, 1997.
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ADAPTIVE SOLUTIONS, INC.
1996 FORM 10-K
TABLE OF CONTENTS
PART I
Page
----
Item 1 - Business 2
Item 2 - Properties 8
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote
of Security Holders 8
PART II
Item 5 - Market for the Registrant's Common
Equity and Related Stockholder Matters 9
Item 6 - Selected Financial Data 10
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 8 - Financial Statements and Supplementary
Data 17
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
PART III
Item 10 - Directors and Executive Officers of the
Registrant 17
Item 11 - Executive Compensation 17
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 17
Item 13 - Certain Relationships and Related
Transactions 17
PART IV
Item 14 - Exhibits, Financial Statement Schedule
and Reports on Form 8-K 18
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PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K 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 BUSINESS SECTION AND UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" BELOW.
GENERAL
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. The Company's principal
executive offices are located at 1400 N.W. Compton Drive, Suite 340, Beaverton,
Oregon 97006.
In mid-1996, the Company implemented significant changes in its organizational
structure and its product strategy. Prior to the announced changes, the Company
sold computing products, notably its PowerShop-Registered Trademark- product,
to retail dealers, distributors and end-users for a pre-press printing and
advertising companies who use Adobe Systems, Inc.'s Photoshop product
primarily in the Apple MacIntosh market. Additionally, the Company's products
were sold to original equipment manufacturers and researchers for a wide range
of pattern recognition applications primarily in the Microsoft Windows, VME, and
UNIX markets. The underlying technology and certain PC related system and
board-level computing products, which the Company continues to sell to existing
customers, are based on the company's proprietary CNAPS parallel processing
microprocessor. In addition, the Company provides various software tools and
libraries to facilitate development of applications using the CNAPS processor.
In the second half of 1996, due to several factors including a) decreased demand
and increased costs associated with the manufacture and sale of the PowerShop
product, b) the general decline of VME based product sales industry wide and
through the Company's channels and c) a strategic decision by the Company to
focus its attention on solutions based product offerings for forms processing,
the company made the decision to discontinue several of its products including
PowerShop-Registered Trademark-, VME servers, VME and ISA boards, and certain
UNIX based software and development kits. This decision along with the decision
to use third party commercial Digital Signal Processing chips instead of the
Company's proprietary CNAPS chip, precipitated a significant restructuring of
people, skills, and organizational structure.
Key elements of the Company's new 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, and product
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 using capabilities 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.*
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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.
PRODUCTS
The parallel processing, image processing, recognition knowledge, and applied
expertise that is incorporated in the Company's current products provides the
basis for its revised strategy. Current products include image recognition
accelerator boards for Intel and Windows NT based Server and embedded computers,
development software targeted for use by OEMs, VARs, software partners, and
systems integrators in a wide variety of markets such as postal label
processing, security systems, medical pattern recognition, parallel Digital
Signal Processing ("DSP") chips, and other facilitating software libraries for
general purpose image recognition and image processing. These products are
currently implemented using the Company's proprietary Single Instruction
Multiple Data ("SIMD") parallel processing microprocessor called CNAPS. Each
CNAPS chip contains 16 or 64 fixed point arithmetic processors with special
capability and performance, including some patents that are unique for the
Company.
Current software and software library products consist of Windows NT Software
Development Kit, a kit for software development of applications using the
Company's CNAPS board products in a Windows NT environment. The company also
provides Cyanlib, a library of frequently used algorithms to help in the
development of applications, and CnSapi, software which allows the Company's
CNAPS processor boards to interface with different user applications.
The Company's 1996 product line included boards and software for VME
architectures, and for personal computers ("PC's") which use industry standard
PCI and ISA bus architectures. These products operated in Microsoft Windows and
UNIX environments. The VME board products contained up to 256 processors while
PC board products have from 64 to 256 processors. These boards remain very
useful to reduce the need for multiple PCs or other similar computers in
production applications by providing up to 36 times the performance of a 200 MHz
Pentium. However, in late 1996, due to several factors including: a) decreased
demand and increased costs associated with the manufacture and sale of the
PowerShop product, b) the general decline of VME based product sales industry
wide and through the Company's channels and c) a strategic decision by the
company to focus its attention on solutions based product offerings for forms
processing, the company made the decision to discontinue several of its
products including PowerShop-Registered Trademark-, VME servers, VME and ISA
boards, and certain UNIX based software and development kits. The PCI board
products remain scaleable for real-time image processing and recognition
applications in alignment with the Company's new strategy and are, therefore,
retained products for the Company in 1997.
PRODUCT DEVELOPMENT
As a part of the Company's general image recognition mission, current product
development efforts are aimed at two distinct product areas: 1) accelerated data
entry products for forms processing in the transportation, medical and finance
industries, and 2) image recognition hardware and software subsystems for high
performance image processing (pattern recognition and filtering) in the emerging
field of cognitive computing including as applied to production data entry
systems. and intelligent document processing. New systems products, which are
scheduled for introduction in 1997 and 1998, are expected to combine the
Company's expertise in parallel data programming with components from several
other companies including the Company's OCR/ICR technology partners. Mimetics,
which provides sophisticated machine-print ICR technology, and Mitek, which has
licensed its hand-print ICR technology to the Company are two of these partners.
The combination of hand-print and machine-print recognition capability with the
processing speed available from parallel processing is expected to produce
unique capabilities for the Company's target markets.* The Company will also
seek additional
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partnerships in the areas of technology, products, and application expertise to
add incremental capability to its own in support of future product development
consistent with its stated vision and mission.
Initial systems of the company's new products will incorporate the CNAPS chip
technology. Future systems will be implemented using Intel's Pentium Pro MMX
enhanced processor, which is now available, and Motorola's VeComP processor
which is expected to be available to the Company in 1998.* The Company believes
its experience in building parallel processors will provide a foundation for
developing new image recognition applications that will run on industry standard
microprocessors, which are now using SIMD architectures similar to the Company's
proprietary CNAPS processors.*
The Company's research and development expenses for the years ended December 31,
1996, 1995 and 1994 were $2,705,000, $3,587,000 and $2,825,000 respectively.
During 1994 and 1995, the Company's research and development expenses were
primarily attributable to development of the PowerShop product, the next
generation CNAPS product and a contract from the Advanced Research Projects
Agency of the U.S. Government. In 1996, development of the next-generation CNAPS
product was suspended, sales of the PowerShop product were discontinued, and
research and development spending was refocused on forms processing solutions,
including the porting of software from Mitek and Mimetics to the CNAPS based
systems. The Company intends to continue its investment in research and
development in future periods to support its revised business strategy, but
total research and development spending is expected to be below 1996 levels at
least through 1997.*
The markets for the Company's products are characterized by rapid technological
change and evolving industry standards, and are highly competitive with respect
to timely product innovation. The introduction of products embodying new
technology and the emergence of new industry standards can render existing
products obsolete and unmarketable. The Company's success will be substantially
dependent upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If the Company is unable for technological or other reasons to
develop products in a timely manner in response to changes in the industry or if
products or product enhancements that the Company develops do not achieve market
acceptance, the Company's results of operations will be materially adversely
affected. The Company has experienced delays in product development in the
past, including the development of the CNAPS-1064 chip and the PowerShop
product, and there can be no assurance that the Company will not encounter
technical or other difficulties that could in the future delay the introduction
of new products or product enhancements.
TECHNOLOGY DEVELOPMENT AGREEMENTS, MARKETING AGREEMENTS AND LICENSES
In March 1995, the Company entered into an agreement with Motorola to work
together on parallel processor requirements and technology. Motorola has
incorporated elements of the Company's technology in its VeComP chip, which it
has introduced and plans to have commercially available in 1998, and the Company
intends to utilize the VeComP chip in future generations of its forms processing
systems products and programmable image recognition engines.* Under the terms
of the agreement, Motorola will pay approximately $1,000,000 to the Company
between September 1996 and June 1997 for certain research and development, and
may make future payments to the Company based on achievement of certain volume
shipments of the VeComP chip. The Company recorded $300,000 in research and
development revenue from Motorola in 1996.
In August 1996, the Company entered into an agreement with Mimetics under which
Mimetics Optical Character Recognition ("OCR") software for machine printing has
been ported to the CNAPS processor. The Company has exclusive worldwide sales
rights for the CNAPS-enabled version of Mimetics OCR software, except for
France, where Mimetics will sell the joint product. The Company has purchased a
minority interest in Mimetics and has been assigned one seat on the Board of
Directors of Mimetics. The Company also has an option to purchase the remainder
of Mimetics' stock at predefined prices until July 1998.
In October 1996 the Company entered into a bilateral agreement with Mitek.
Mitek's ICR and OCR software has been ported to the Company's CNAPS/PCI board
product, and Mitek will use future generations of products from the Company to
continue providing high performance, accelerated versions of their software.
Additionally, the
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Company has licensed Mitek's Quickstrokes/API ICR software for use in its future
forms processing and label processing product line. The companies will
cooperate on future marketing and sales efforts. Mitek's focus will be on
finance and government accounts, where it has extensive experience, and the
Company will primarily focus its effort on transportation markets.
The Company's research and development revenue for the years ended December 31,
1996, 1995 and 1994 was $1,010,000, $1,354,000, and $1,634,000, respectively.
The Company expects that most of its future revenues, if any, will be generated
from product sales rather than research and development revenue.* In the event
that the Company is not able to generate sufficient product sales to replace
revenues derived from technology development agreements, the Company's results
of operations would be materially adversely affected.
SALES, MARKETING AND DISTRIBUTION
In the United States, the Company sold its server, PC-based, and VME-based
(Versa Module Europe, a Motorola defined hardware protocol) board products and
software through a direct sales force and a network of dealers. Future systems
products for forms processing and label processing, as well as, image
recognition engines will be sold in the U.S. by the Company's direct sales
force, VARS, systems integrators, and OEM's. The Company believes that the
complex nature of the problems addressed by the Company's products necessitates
the use of a direct sales force in the majority of cases.
The Company retains the services of Matsushita Industrial Electric Company
("Matsushita") as a distributor in Japan, Ssang Yong as a non-exclusive
distributor in Korea, Cromemco GmbH ("Cromemco") as a non-exclusive distributor
in Germany and Switzerland, various non-exclusive dealers in Europe, and
Mimetics as a specialized forms processing distributor in France. In 1996, sales
to two major OEM customers accounted for 31% of total revenue compared with 75%
and 35% of total revenues in 1995 and 1994 respectively. SEE NOTE 12 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
In late 1995 and the first half of 1996, the Company completed deliveries on
major contracts to Matsushita and Cromemco. However, the Company was unable to
obtain additional sales, resulting in a significant decline in revenue in 1996
which prompted the company to make changes to a territory and exclusivity
allowed for in the Company's distribution contract with Cromemco GmbH. The
Company does not currently expect to obtain significant replacement contracts
through these distributors in the near future, but is pursuing additional
distribution channels in the affected territories.
As it executes its revised strategy, the Company will be required to invest in
sales and marketing activities. Expanding the Company's marketing capabilities
will require significant product launch and program expenditures including
additions to personnel. There can be no assurance that the Company will realize
returns commensurate with such commitment or that the Company's attempts to
expand its sales and marketing and manufacturing efforts will be successful. In
addition, there can be no assurance that the Company will have such amounts
available to commit to its marketing and sales efforts or that the Company will
not be required to commit more than such amounts to such marketing and sales
efforts.
COMPETITION
The market for high performance computing products and for forms processing
systems using OCR and ICR technology are intensely competitive, and the Company
expects this competition to continue. Many of the Company's competitors are
more established, benefit from greater name recognition, and have significantly
greater financial, technological, production and marketing resources than the
Company. In addition, many of these companies have established sales forces and
have been selling their products to the same customers targeted by the Company
for a substantial period of time. There can be no assurance that the Company
will be able to compete effectively in its selected markets.
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MANUFACTURING, SUPPLIES, SERVICE AND WARRANTY
The Company formerly performed all CNAPS chip testing, laser fusing and final
packaged chip testing at its facility in Sunnyvale, California. That facility
was closed during the second half of 1996. The Company believes that it has
sufficient supplies of CNAPS 1064 processor and has subcontracted all chip
packaging, laser fusing, and final chip testing of its CNAPS 1016 processor,
which will allow the Company to meet anticipated customer requirements until a
next generation product is available using industry standard microprocessors
such as the Motorola VeComP and the Intel MMX chip.
Under its revised product strategy, the Company will continue production of its
CNAPS chips for use in its products until a complete migration to the next
generation chip can be achieved. The Company does not manufacture the
semiconductor wafers used for the CNAPS chips included in its products. Wafer
capacity in the semiconductor industry is currently limited. Any increase in
demand for wafers over currently expected levels or any failure of wafer supply
in the industry to grow at anticipated rates would magnify any potential
shortages of chips. To date, the Company has not been able to negotiate long-
term supply agreements with its wafer manufacturers or its future suppliers of
mainstream parallel processing chips. There can be no assurance that the
Company's wafer manufacturers or chip suppliers will allocate sufficient
capacity to the Company to meet its demand. If the Company were unable to
obtain adequate supplies of wafers and chips on a timely basis, its financial
position and results of operations would be materially and adversely affected.
Final test and burn-in of the Company's hardware products is performed at the
Company's Beaverton, Oregon facility. The Company does not have alternative
capabilities, either internally or through third parties, to perform these
manufacturing activities. In the event of an interruption of production at the
Beaverton facility, the Company's ability to deliver products in a timely
fashion would be compromised, which could have a material adverse impact on the
Company's operations.
The Company subcontracts all of the processing required to package tested chips
and to assemble CNAPS processor boards and system enclosures. The Company
obtains these services on a purchase order basis and does not have long-term
contracts with any of these subcontractors. Although to date the Company has
not experienced interruptions in these services and believes that other
qualified subcontractors are available, the inability of any of these
subcontractors to provide the Company with these services in a timely fashion
could have a material adverse effect on the Company's operations until such time
as alternate sources for such services are established.
BACKLOG
The Company's backlog is not material. The absence of significant backlog
limits the Company's ability to plan production and inventory levels, which, in
turn, could lead to substantial fluctuations in quarterly operating results.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve its rights pertaining to its products. Such protection,
however, may not preclude competitors from developing products similar to the
Company's. In addition, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its proprietary rights vigorously, there can be no assurance
that these efforts will be successful.
The Company owns or has exclusive rights to two basic groups of patents: those
that were developed at the Oregon Graduate Institute ("OGI") in Beaverton,
Oregon and those developed by the Company. The Company has obtained an
exclusive, perpetual, fully paid-up license to three OGI patents. These patents
were obtained for possible future architectures and are not being used in the
current CNAPS hardware implementation. A second
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group of patents and applications are owned by the Company. This group consists
of four patents. All of these patents relate to the CNAPS architecture and chip
implementation. Filings in Japan and with the European Patent Commission have
been performed on all of these patents, but no foreign patents have as yet been
issued.
Adaptive Solutions and CNAPS are registered trademarks of the Company. CodeNet,
BuildNet, PowerNet, QuickLib, ADAPTbus, Accelerating Pattern Recognition, and
PowerShop are trademarks of the Company.
There can also be no assurance that third parties will not assert intellectual
property infringement claims against the Company. Although no written claims
or litigation related to any such matters are currently pending against the
Company, the Company has not conducted any patent searches or obtained an
opinion of counsel with respect to its proprietary rights. Accordingly, there
can be no assurance that no claims will be initiated, that the Company would
prevail in any such litigation seeking damages or an injunction against the sale
of the Company's products or, if necessary, that the Company would be able to
obtain any necessary licenses on reasonable terms or at all. Any such litigation
could be protracted and costly and could have a material adverse effect on the
Company's results of operations regardless of the outcome of the litigation.
EMPLOYEES
As of December 31, 1996 the Company employed 21 persons on a full-time basis,
including 3 executive officers, 6 engineers, 3 manufacturing employees, and 9
marketing, sales, and administrative personnel. The Company believes its
relations with its employees are good.
In February 1996, the board of directors named John J. Migliore as President and
Chief Executive Officer to replace John D. Heightley, who retired effective
March 4, 1996. In December 1996, the board of directors named Daniel J. Meub as
President and Chief Executive Officer to replace John J. Migliore who resigned
in September 1996. The Company's future success will depend in significant part
upon the continued service of certain key technical and senior management
personnel and the Company's continuing ability to attract and retain highly
qualified technical, managerial and sales and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its existing key managerial, technical or sales and marketing
personnel or that it can attract, assimilate and retain such employees in the
future. In addition, the Company does not have employment agreements with any of
its executive officers or any key person life insurance. The loss of key
personnel or the inability to hire or retain qualified personnel in the future
could have a material adverse effect upon the Company's results of operations.
EXECUTIVE OFFICERS
Information with respect to the Company's current executive officers is set
forth below. Officers of the Company are elected by the board of directors at
its annual meeting and hold office until their successors are elected and
qualified.
Name Age Position
- ----------------------- --- -----------------------------------------------
Daniel J. Meub 43 President, Chief Executive Officer and Director
Dan Hammerstrom, Ph. D 48 Chief Technical Officer and Director
Wendell Henry 53 Vice President, Hardware System Engineering and
Manufacturing
DANIEL J. MEUB has been President and Chief Executive Officer and a director of
the Company since December 1996. From 1995 to 1996 he was Executive Vice
President of Marketing and Product Development with Now Software, a supplier of
Macintosh and PC based time management and utility software. From 1993 to 1994
he was with Central Point Software, a supplier of PC and Macintosh software
utilities, first as Vice President of Corporate Marketing and then as Vice
President/General Manager of the Desktop Product Group. From 1991 to 1993 he
was Vice President of Marketing and Product Development for Calera Recognition
Systems, a supplier
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of optical character recognition software and hardware. Prior to 1991 he held
positions with Software Publishing Corporation and the Clorox Company. Mr. Meub
holds a B.A. with honors from Stanford University and an M.B.A. from
Northwestern University.
DAN HAMMERSTROM, PH.D., the founder of the Company, has been a director and
Chief Technical Officer of the Company since September 1988 and was President of
the Company until June 1990. He was an Associate Professor in the Computer
Science/Engineering Department at the Oregon Graduate Institute from 1985 until
1988 where he conducted research in VLSI neurocomputers. From 1980 to 1985 he
was a computer architect and chip designer at Intel Corporation where he worked
on the iAPX-432 and i960 family of chips. From 1977 to 1980 he was an Assistant
Professor in the Electrical Engineering Department at Cornell University. Dr.
Hammerstrom received a B.S.E.E. from Montana State University, an M.S.E.E from
Stanford University and a Ph.D. in Electrical Engineering from the University of
Illinois.
WENDELL HENRY has served as a Vice President of the Company since October 1989.
Mr. Henry was Director of Engineering of the Context Division of Mentor Graphics
Corp, a supplier of computer aided design equipment and software, from March
1989 to October 1989. Mr. Henry was Vice President of Software Engineering for
Saba Technologies, a startup company developing OCR products for the PC
marketplace, from 1984 until 1989. Prior to joining Saba, Mr. Henry was Manager
of System Software Development for Apple Computer from 1980 until 1984. Mr.
Henry holds a B.S.A.A.E. from Northrop Institute of Technology and an M.S. in
Computer Science from San Jose State University.
ITEM 2. PROPERTIES
The Company's corporate offices and hardware and software development facilities
are located in Beaverton, Oregon, where the Company leases approximately 10,000
square feet at a cost of $10,000 per month, including common area charges, under
a two-year lease beginning in July 1996.
Additionally, the Company leases approximately 5,500 square feet in Sunnyvale,
California, where its chip development facilities were located, at a cost of
$6,200 per month on a five-year lease beginning August, 1994. This space is
currently being sublet, to a non-affiliated private company, at a cost which
directly offsets the Company's liability.
The Company believes that its existing facilities are adequate for the Company's
current needs. If required, the Company will lease additional space to support
its future requirements. The Company believes there is adequate space available
in its existing locations for expansion, but there can be no assurance that
space can be leased on favorable terms or that the Company will not incur
significant expenses if it has to relocate to new facilities.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the over-the-counter market and
prices are quoted on the Nasdaq Small-Cap Market under the symbol "ADSO". The
Company's common stock is also listed on the Boston Stock Exchange. The
following table sets forth the high and low sale prices for the common stock
for 1996 and 1995. On February 28, 1997, the last reported sale price of the
common stock was $1.25. There were approximately 133 shareholders of record
and 3643 beneficial shareholders at February 28, 1997.
HIGH LOW
1996
First Quarter $ 6 1/8 $ 4 3/8
Second Quarter 5 1/4 1 7/8
Third Quarter 2 1/16 1
Fourth Quarter 1 3/4 1
1995
First Quarter $ 5 1/8 $ 3 3/8
Second Quarter 7 3/4 4 7/8
Third Quarter 7 7/16 6 5/8
Fourth Quarter 6 7/8 4 3/4
The Company has never declared or paid cash dividends on its capital stock and
currently intends to retain any future earnings for use in the development and
operation of its business. Accordingly, the Company does not expect to pay cash
dividends in the foreseeable future.
The trading price of the Company's common stock has been and could continue to
be subject to significant fluctuations in response to variations in quarterly
operating results, changes in analysts' earnings estimates, announcements of
technological innovations by the Company or its competitors, general conditions
in the computer industry and other factors. In addition, the stock market is
subject to price and volume fluctuations that affect the market prices for
companies in general, and high technology companies in particular, and that are
often unrelated to operating performance.
The Nasdaq Small-Cap Market does not offer last sale reporting and may be a
significantly less liquid market than the National Market System. Moreover, if
the Company should continue to experience losses from operations, it may be
unable to maintain the standards for continued quotation on Nasdaq and the
common stock could be subject to removal from the Nasdaq system. Trading, if
any, in the common stock would thereafter be conducted in the over-the-counter
market on an electronic bulletin board established for securities that do not
meet the Nasdaq listing requirements or in what are commonly referred to as the
"pink sheets". As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. In addition, if the Company's securities were removed from the
Nasdaq system, they would be subject to so-called "penny stock" rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. Consequently, removal from the Nasdaq system, if it were to occur,
could affect the ability or willingness of broker-dealers to sell the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain historical selected financial data with respect to
the Company for each of the years in the five-year period ended December 31,
1996:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net product revenue. . . . . . . . . . . . . . . . . $ 6,255 $ 9,414 $ 2,370 $ 2,038 $ 904
Research and development
revenue . . . . . . . . . . . . . . . . . . . . . . 1,010 1,354 1,634 650 671
Other. . . . . . . . . . . . . . . . . . . . . . . . 10 9 43 21 69
--------------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . . 7,275 10,777 4,047 2,709 1,644
Operating costs and expenses:
Cost of product revenue. . . . . . . . . . . . . . . 5,382 6,132 1,391 1,563 492
Research and development . . . . . . . . . . . . . . 2,705 3,587 2,825 2,132 3,090
Sales and marketing. . . . . . . . . . . . . . . . . 1,888 3,305 3,809 2,888 971
General and administrative . . . . . . . . . . . . . 2,953 1,138 945 503 352
--------------------------------------------------------------------
Total operating costs and
expenses . . . . . . . . . . . . . . . . . . . . . 12,928 14,162 8,970 7,086 4,905
Operating loss . . . . . . . . . . . . . . . . . . . . (5,653) (3,385) (4,923) (4,377) (3,261)
Interest income. . . . . . . . . . . . . . . . . . . . 170 158 168 33 28
Interest expense . . . . . . . . . . . . . . . . . . . 134 185 48 324 211
Gain on sale of assets . . . . . . . . . . . . . . . . 67 - - - -
--------------------------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(5,550) $(3,412) $(4,803) $(4,668) $(3,444)
--------------------------------------------------------------------
--------------------------------------------------------------------
Net loss per common and common equivalent share(1) . . $(.82) $(.61) $(1.23) $(3.50) $(3.78)
--------------------------------------------------------------------
--------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding(1) . . . . . . . . . . . . . . 6,791 5,605 3,891 1,332 911
--------------------------------------------------------------------
--------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
BALANCE SHEET DATA:
Working capital (deficit). . . . . . . . . . . . . . . $2,828 $5,883 $6,478 $7,430 $(2,276)
Total assets . . . . . . . . . . . . . . . . . . . . . 7,212 10,221 8,462 9,724 2,171
Capital lease obligations, less current portion. . . . 259 496 108 40 430
Total stockholders' equity (deficit) . . . . . . . . . 4,045 7,148 7,325 8,177 (1,633)
</TABLE>
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing net loss per common and
common equivalent shares.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was founded in 1988 and first shipped products in 1993. In 1996 the
Company implemented significant changes to its business strategy. SEE BUSINESS
- - GENERAL. The Company's revised strategy is aimed at providing more complete
high-performance image recognition software solutions by providing accelerated
data entry for forms processing in the transportation, medical and financial
markets, and by providing programmable image recognition products for
specialized and broad-based applications. The new strategy also includes a
transition to microprocessors manufactured by large third party suppliers for
future generations of the Company's products. Prior to the changes in business
strategy, the Company focused on selling server and board-level products based
on the Company's proprietary microprocessor to original equipment manufacturers
("OEMs") in a wide range of industries. In connection with its change in
strategy, the Company significantly reduced the number of employees and
instituted cost controls during 1996.
The Company has incurred significant operating losses through December 31, 1996.
At December 31, 1996 and December 31, 1995, the Company's accumulated deficit
was approximately $27,059,000 and $21,509,000 respectively. In order to become
profitable, the Company must successfully introduce new products to support its
new strategy; market those products to customers, many of whom will be new
customers for the Company; manage the transition from its proprietary
microprocessor to next-generation chips from other suppliers; develop additional
new products; manage its operating expenses and expand its distribution
capability. There can be no assurance that the Company will achieve any of
these objectives or ever achieve profitability. The Company expects operating
losses will continue at least through the first half of 1997.*
The Company expects that revenues in the first half of 1997 will be limited as
it makes the transition to the revised strategy. New product sales are expected
to begin in the second half of 1997.* The Company expects that revenues will
fluctuate substantially from quarter to quarter and will be difficult to
forecast. The absence of significant backlog will also limit the Company's
ability to plan production and inventory levels. Operating results may also
fluctuate based upon other factors, including, but not limited to, cancellation
or rescheduling of orders, currency fluctuations, seasonal fluctuations in
business activity, product announcements by the Company or its competitors or
changes in pricing policies by the Company, its competitors or its suppliers.
Because significant portions of the Company's future revenues will depend upon
sales of its board level products to OEM application developers for
incorporation into their systems, factors affecting such OEMs, including the
timing of new orders for their products, general market acceptance of such
products or product announcements by such developers, could cause variability in
the Company's operating results. In addition, the Company intends to continue
to devote resources to research and development associated with planned new
products. Once the expenditure of such resources is contemplated, it may be
difficult to reduce quickly if funds are limited. The Company may therefore be
unable to adjust spending in a timely manner to compensate for any unanticipated
shortfall in revenues. Accordingly, any significant shortfall in revenues in
any quarter, regardless of the cause of such shortfall, would have an almost
immediate adverse impact on the Company's operating results and on the Company's
ability to achieve and maintain profitability.
RESTRUCTURING
In June 1996, the Company implemented significant changes in its organizational
structure and in its product strategy which included the decision to close its
Sunnyvale, California manufacturing facility by December 1996. In connection
with these structural and strategy changes, the Company recorded restructuring
costs aggregating $1,973,000 and related liabilities of $1,248,000 in the second
quarter of 1996. The primary components of these costs and liabilities related
to employment termination costs, lease termination costs, reserves for obsolete
inventory, and property and equipment. Additionally, in the third quarter of
1996, the Company recorded restructuring costs of $805,000 which consisted of
additional inventory and fixed asset write-offs relating to the decision to
completely exit certain product lines. The closure of the Sunnyvale facility
began in June 1996 and
11
<PAGE>
was completed in December 1996 resulting in the termination of eleven employees
engaged in manufacturing, engineering, and administrative functions. At
December 31, 1996, there was $200,000 of liabilities related to lease
termination costs and $751,000 related to property and equipment remaining. All
other costs had been charged against the restructuring reserve in fiscal 1996.
SEE NOTE 4 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RECENT DEVELOPMENTS
On February 28, 1997, the Company entered into a loan agreement between Mimetics
S.A., Thomson-CSF Ventures, and Compagnie de Participations en Capital-Risque
Paris et Ile-de-France ("COPARIS"), all French corporations. The terms of the
agreement provide a loan to the Company from Thomson-CSF Ventures and COPARIS of
1,375,00 French francs. The terms also provide a loan from the Company to
Mimetics S.A. in the amount of 1,875,000 French francs at a rate of interest
equal to five percent. As additional consideration for the loan, Mimetics S.A.
will perform certain engineering work for the Company.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
REVENUES
Net product revenue for 1996 and 1995 of $6,255,000 and $9,414,000,
respectively, consisted of the sale of CNAPS development systems, boards,
software and maintenance agreements. Net product revenue in 1995 and 1996 also
included revenue of $1,113,000 and $1,934,000 respectively, associated with
sales of the PowerShop product. Revenue from the development systems and boards
and PowerShop products is recognized at the time of product shipment. Revenue
from software and maintenance agreements is deferred and recognized over the
life of the agreement. The decrease in revenues in 1996 is primarily due to the
decrease in orders from two major OEMs which had significant orders in 1995, and
the discontinuance of the Company's PowerShop product in the fourth quarter of
1996. SEE NOTE 12 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.* Although the Company has agreements with various OEMs, none of these
agreements include minimum purchase commitments. 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 was $1,010,000 and $1,354,000 in 1996 and 1995,
respectively. Research and development revenue in 1996 was generated primarily
from technology development contracts with the U.S. Government, a major U.S.
imaging systems corporation, and Motorola, Inc. Research and development revenue
in 1995 was largely attributable to technology development contracts with the
U.S. Government. The Company expects revenues from research and development
contracts to remain constant in future periods.* Accordingly, growth in the
Company's revenues in future periods will be dependent upon the Company's
success in increasing product sales, as to which there can be no assurance.
International sales totaled $2,377,000 (33% of total revenues) in 1996 and
$4,682,000 (43% of total revenues) in 1995. The decrease in international
revenue was primarily due to reduced shipments to several large OEM customers,
and the Company's decision to exit certain lower volume product lines. The
Company expects international net revenues as a percentage of total net revenues
to continue to decrease.
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
12
<PAGE>
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 was $5,382,000, (86% of net product revenue) in
1996, and $6,132,000, (65% of net product revenue) in 1995. Cost of product
revenue consists of direct manufacturing costs, overhead costs associated with
the manufacturing operations in Beaverton, Oregon and Sunnyvale, California,
provisions for warranty costs, and reserves for inventory obsolescence and
return. The Sunnyvale, California operations were shut down during the second
half of 1996. The increase in cost of product revenue as a percentage of sales
in 1996 as compared to 1995 was primarily a result of costs totaling $1,206,000
in 1996 associated with the Company's change in organizational structure, and
product strategy revisions including the write-off of inventory associated with
the discontinuation of the PowerShop product and certain low volume product
lines.
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 Company's restructuring plans included the shutdown of its
Sunnyvale, California manufacturing site to reduce overhead costs. The
Sunnyvale site manufactured the Company's proprietary CNAPS processors from
silicon wafers. The manufacturing of the Company's CNAPS processors will now be
performed by outside vendors. The transition of this part of the new
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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $2,705,000 and $3,587,000 in 1996 and 1995,
respectively, were associated with the continuing support of enhancements to the
Company's current products, the development of the CNAPS/PCI board, and the
development of the Company's new forms processing products. The Company's
research and development focus has shifted toward forms processing solutions
utilizing application software from Mitek and Mimetics, and software developed
by the Company. The reduction in expenses in 1996, as compared to 1995, was a
result of the Company's new organizational structure, revised product strategy,
and decreased expenses associated with the decision in June 1996 to terminate
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 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 were $1,888,000 and $3,305,000 in 1996 and 1995,
respectively. Sales and marketing expenses are primarily comprised of sales
commissions, advertising and promotion, and customer literature. Commissions
generally vary with sales volume. The level of spending for advertising,
promotion, and literature costs is largely dependent on the level of promotion
for new products. Sales and marketing expenses have decreased in 1996, as
compared to 1995, primarily as a result of the reduction of the number of
domestic sales offices, personnel, and advertising and promotion expenses as the
company focuses on its product development activities.
The Company expects that sales and marketing expenses will increase as sales
support, advertising, public relations and product introduction activities
increase, in accordance with the Company's new strategy. The
13
<PAGE>
Company believes that increased 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 were $2,953,000 and $1,138,000 in 1996 and
1995, respectively. The primary components of these expenses are salaries,
insurance and fees related to legal, accounting and consulting services. The
increase in 1996, as compared to 1995, was primarily attributable to $1,227,000
in costs associated with the termination of certain employees, the change in
organizational structure and revised product strategy, the hiring of and
transition to a new chief executive officer during the year, and increased
spending for information systems services.
INTEREST INCOME AND EXPENSE
Interest income was $170,000 and $158,000 in 1996 and 1995, respectively.
Interest income varies depending upon the cash balances and prevailing interest
rates from period to period. Interest expense was $134,000 and $185,000 in 1996
and 1995, respectively. The decrease in interest expense during 1996 was
attributable to the decreased level of capital lease obligations.
INCOME TAXES
The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying statements of operations. The
Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's deferred tax assets will be realized.
The completion of the initial public offering in November 1993 constituted a
change in ownership that limits the net operating losses that can be used to
offset taxable income in future years. The private placement offerings in
November 1994, June 1995 and January 1996 may also have constituted changes in
ownership which may limit the net operating loss that can be used to offset
taxable income in future years. No recent analysis has been performed by the
Company to determine whether such ownership change has occurred or to what
extent the utilization of net operating losses will be limited. (SEE NOTE 9 OF
NOTES TO FINANCIAL STATEMENTS)
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
REVENUES
Net product revenue for 1995 and 1994 of $9,414,000 and $2,370,000,
respectively, consisted of the sale of CNAPS development systems, boards,
software and maintenance agreements. Net product revenue in 1995 also included
sales of the PowerShop product. Revenue for the software and maintenance
agreements is deferred and recognized over the life of the agreement. The
increase in revenues in 1995 is primarily due to the shipment of several large
OEM orders during 1995.
Research and development revenue for 1995 and 1994 was $1,354,000 and
$1,634,000, respectively. Research and development revenue for 1995 was
generated primarily from technology development contracts with the U.S.
Government. Research and development revenue for 1994 was attributable to
technology development contracts with the U.S. Government, a major European
company, a major U.S. delivery company, and a U.S. imaging systems corporation.
International sales totaled $4,682,000 (43% of total revenues) in 1995 and
$1,780,000 (44% of total revenues) in 1994. The increase in international
revenue is primarily due to the shipment of several large OEM orders.
14
<PAGE>
COST OF PRODUCT REVENUE
The cost of product revenue for 1995 and 1994 of $6,132,000, or 65% of product
revenue, and $1,391,000, or 59% of product revenue, respectively, consisted of
direct manufacturing costs, overhead costs associated with the manufacturing
operations in Beaverton, Oregon and Sunnyvale, California, provisions for
warranty costs, and reserves for inventory obsolescence and return. The
increase in cost from the prior year is primarily due to the associated increase
in sales volume and to an increase in reserves consistent with the initial
shipments of a new product.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for 1995 and 1994 of $3,587,000 and
$2,825,000, respectively, were associated with the continuing support of
enhancements to the Company's existing products, the development of the
CNAPS/PCI board and the continued development of the PowerShop accelerator
product. The increase in research and development expenses from the prior year
is primarily due to the hiring of additional personnel, increased facilities and
equipment, and more extensive use of contract development resources.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the years ended 1995 and 1994 were $3,305,000
and $3,809,000, respectively. Sales and marketing expenses have decreased from
the prior year primarily as a result of the reduction of the number of domestic
sales offices from seven to four, offset by an increase in commissions and
bonuses. This is coincident with the direction of the Company's selling
strategy toward a focus on major account and OEM opportunities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 1995 and 1994 were $1,138,000 and
$945,000, respectively. The primary components of these expenses are salaries
and legal and accounting fees. The increased level of expense from the prior
year is primarily due to increasing consulting, legal and accounting fees
associated with the expanded reporting requirements associated with being a
public corporation and the Company's recent private placements of common stock.
INTEREST INCOME AND EXPENSE
Interest income for the year ended 1995 was $158,000 compared to $168,000 for
the comparable period 1994. Interest income varies depending upon the cash
balances and prevailing interest rate from period to period. Interest expense
for the year ended 1995 was $185,000 compared to $48,000 for the comparable
period in 1994. The increase in interest expense during 1995 is attributable to
the increased level of capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations primarily through (i) sale of
stock pursuant to its initial public offering in 1993 (ii) private placements of
its equity and convertible debt securities with venture capital and other
investors in 1994, 1995 and 1996, (iii) equipment leases, (iv) revenues from
technology development agreements and government contract research and (v)
revenues from the sales of its CNAPS development systems, boards and software
products and its PowerShop products.
As of December 31, 1996, the Company had established capital leases with three
major equipment leasing companies at effective interest rates ranging from 6% to
15%. The aggregate principal amount under these capital leases, including the
current portion, totaled $706,000 as of December 31, 1996. In addition,
although the Company has no material commitments to purchase capital equipment,
the Company intends to expend approximately $200,000 over the next twelve months
for capital equipment in connection with the continued support of its
manufacturing and engineering operations and business information systems.*
15
<PAGE>
The Company's cash and cash equivalents at December 31, 1996 were $3,612,000, an
increase of $2,638,000 from December 31, 1995. The Company obtained additional
funding of approximately $2,400,000 in January 1996 through the private
placement of common stock. The Company's working capital at December 31, 1996
was $2,828,000. Decreases of $3,136,000 in the accounts receivable balance and
$1,878,000 in inventory levels along with increases in accrued expenses and
deferred revenue in 1996 were offset by decreases in accounts payable and
operating losses to provide cash of $776,000 from operations. The decrease in
the accounts receivable, accounts payable, and inventory balances is mainly
attributable to reduced product sales in the second half of 1996, while the
increase in accrued expenses and deferred revenue are mainly due to
restructuring costs and the technology agreement with Motorola, respectively.
Investing activities used $75,000, while financing activities provided
$1,937,000 ($2,430,000 from issuance of common shares offset by $493,000 in
capital lease payments).
The Company expects that it will require additional funding, although it is
unable to predict the precise amount or date that such funding will be required.
The Company is currently 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 will be available on reasonable terms or at all. 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 progress of the Company's research and development
activities, the extent and timing of the acceptance of the Company's products,
the cost of increasing 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 funding earlier than anticipated.
The Company believes its existing cash and cash equivalents and cash generated
from operations will be sufficient to fund its operations for at least the next
12 months. All cash in excess of working capital requirements will be kept in
short-term, investment grade securities.
The Company has 1,680,764 outstanding warrants entitling the holders to purchase
2,202,041 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.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is as listed in Item 14 of Part IV of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held May 21, 1997 to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive
officers is set forth in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the section captioned
"Executive Compensation" contained in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" contained in
the Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
- ----------------------------
With the exception of the information specifically incorporated in Items 10, 11
and 12 of this Form 10-K, the Company's definitive proxy statement for its 1997
Annual Meeting of Stockholders is not deemed "filed" as part of this Form 10-K.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The Financial Statements, together with the report thereon of KPMG Peat
Marwick LLP., are included on the pages indicated below.
Page
----
Balance Sheets as of
December 31, 1996 and 1995 F-1
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-2
Statements of Stockholders' Equity--
December 31, 1996, 1995 and 1994 F-3
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 F-4
Notes to Financial Statements F-5
Independent Auditors' Report F-17
(a) (2) FINANCIAL STATEMENT SCHEDULE
The following schedule and report of independent public accountants are
filed herewith:
Page No.
--------
Schedule II Valuation and Qualifying Accounts S-1
Report of Independent Accountants on Financial Statement Schedule S-2
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included in the
Consolidated Financial Statements or notes thereto.
18
<PAGE>
(a) (3) EXHIBITS INCLUDED HEREIN:
3.1 Articles of Incorporation of Registrant.+
3.2 Bylaws of Registrant.+
4.1 Form of Representative's Warrant.+
4.2 Form of Common Stock Certificate.+
4.3 Form of Warrant Agreement (including Form of Common Stock
Purchase Warrant).+
10.1 Form of Indemnification Agreement for directors and
officers.+
10.2 1988 Stock Incentive Plan and forms of options agreements
thereunder.+
10.3 1993 Stock Purchase Plan and form of Subscription
Agreement.+
10.4 Sublease between Science Park Limited Partnership I and
the Registrant dated as of July 1, 1993.+
10.5 Lease between Sun Life Assurance Company of Canada and
the Registrant dated as of May 5, 1993.+
10.6 Employment Agreement between the Registrant and Scott
Gibson.+
10.7 Form of Subscription Agreement used for conversion of
bridge loans into Series C Preferred Stock.+
10.8. Lease Modification and Extension Agreement dated July 30,
1993.+
10.9 Forbearance Agreement dated June 17, 1993.+
10.10 License Agreement between Inova Microelectronics
Corporation and the Registrant dated as of June 12, 1991.+
10.11 Technology Development Agreement between Meidensha
Corporation and the Registrant dated as of March 12,
1992.+
10.12 Technology Development Agreement between Sharp Corporation
and the Registrant dated as of January 5, 1989.+
10.13 Technology Development Agreement between Mitsubishi
Electric Corporation and the Registrant dated as of
January 5, 1989.+
23.1 Consent of KPMG Peat Marwick LLP++
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
- -----------------------
+ Incorporated by reference to the Registration Statement on Form S-1 (File
No. 33-67882) as declared effective on November 3, 1993 by the Securities
and Exchange Commission.
++ Included in this 1996 Report on Form 10-K on page S-2.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 26th day of
March 1997.
ADAPTIVE SOLUTIONS, INC.
By /s/ DANIEL J. MEUB
Daniel J. Meub
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated, on the 26th day of March 1997.
Signature Title
- --------- -----
/s/ DANIEL J. MEUB President and Chief Executive Officer
- ----------------------------- (Principal Executive Officer)
Daniel J. Meub
/s/ RICHARD L. BOONSTRA Controller
- ----------------------------- (Principal Financial Officer)
Richard L. Boonstra
/s/ DAN HAMMERSTROM Ph.D. Chief Technical Officer and Director
- -----------------------------
Dan Hammerstrom, Ph.D.
/s/ C. SCOTT GIBSON Chairman of the Board of Directors
- -----------------------------
C. Scott Gibson
/s/ JEAN-CLAUDE PETERSCHMITT Director
- -----------------------------
Jean-Claude Peterschmitt
/s/ FREDERICK M. HANEY Ph.D. Director
- -----------------------------
Frederick M. Haney, Ph.D.
/s/ T. PETER THOMAS Director
- -----------------------------
T. Peter Thomas
20
<PAGE>
ADAPTIVE SOLUTIONS, INC.
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------
ASSETS 1996 1995
---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . $ 3,612 $ 974
Accounts receivable, net . . . . . . . . . . . . 1,084 4,220
Inventory, net . . . . . . . . . . . . . . . . . 1,007 2,885
Prepaid expenses and other assets. . . . . . . . 33 381
---------- --------
TOTAL CURRENT ASSETS . . . . . . . . . . 5,736 8,460
---------- --------
FIXTURES AND EQUIPMENT, net. . . . . . . . . . . . 1,337 1,754
OTHER ASSETS . . . . . . . . . . . . . . . . . . . 139 7
---------- --------
$ 7,212 $ 10,221
---------- --------
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . 115 825
Accrued expenses . . . . . . . . . . . . . . . . 1,626 1,209
Current portion of capital lease obligations . . 447 476
Deferred revenue . . . . . . . . . . . . . . . . 720 67
---------- --------
TOTAL CURRENT LIABILITIES. . . . . . . . 2,908 2,577
---------- --------
CAPITAL LEASE OBLIGATIONS, less current portion. . 259 496
---------- --------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock; no par value. Authorized 5,000 shares
at 1996 and 1995; no shares issued or outstanding
at December 31, 1996 and 1995. . . . . . . . . - -
Common stock, no par value. Authorized 30,000
shares at 1996 and 1995; issued and outstanding
6,961 shares and 6,014 shares at 1996 and 1995,
respectively . . . . . . . . . . . . . . . . . 31,104 28,674
Unearned compensation. . . . . . . . . . . . . . - (17)
Accumulated deficit. . . . . . . . . . . . . . . (27,059) (21,509)
---------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . 4,045 7,148
---------- --------
$ 7,212 $ 10,221
---------- --------
---------- --------
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
ADAPTIVE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
REVENUES:
Net product revenue. . . . . . . . . . . . . . . $ 6,255 $ 9,414 $ 2,370
Research and development revenue . . . . . . . . 1,010 1,354 1,634
Other revenues . . . . . . . . . . . . . . . . . 10 9 43
----------- ---------- -----------
TOTAL REVENUES . . . . . . . . . . . . . . 7,275 10,777 4,047
----------- ---------- -----------
OPERATING COSTS AND EXPENSES:
Cost of product revenue. . . . . . . . . . . . . 5,382 6,132 1,391
Research and development . . . . . . . . . . . . 2,705 3,587 2,825
Sales and marketing. . . . . . . . . . . . . . . 1,888 3,305 3,809
General and administrative . . . . . . . . . . . 2,953 1,138 945
----------- ---------- -----------
TOTAL OPERATING COSTS AND
EXPENSES . . . . . . . . . . . . . . . . 12,928 14,162 8,970
----------- ---------- -----------
OPERATING LOSS . . . . . . . . . . . . . . (5,653) (3,385) (4,923)
Interest income. . . . . . . . . . . . . . . . . . 170 158 168
Interest expense . . . . . . . . . . . . . . . . . (134) (185) (48)
Gain on sale of assets . . . . . . . . . . . . . . 67 - -
----------- ---------- -----------
LOSS BEFORE INCOME TAXES . . . . . . . . . (5,550) (3,412) (4,803)
Income tax expense . . . . . . . . . . . . . . . . - - -
----------- ---------- -----------
NET LOSS . . . . . . . . . . . . . . . . . $ (5,550) $ (3,412) $ (4,803)
----------- ---------- -----------
----------- ---------- -----------
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE . . . . . . . . . . . . . . . . $ (.82) $ (.61) $ (1.23)
----------- ---------- -----------
----------- ---------- -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . 6,791 5,605 3,891
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
ADAPTIVE SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred stock Common stock Total
------------------ ------------------- Unearned Accumulated stockholders'
Shares Amount Shares Amount compensation deficit equity
------------------ ------------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 - $ - 3,749 $ 21,572 $ 101 $ (13,294) $ 8,177
Sale of common stock - - 1,290 3,909 - - 3,909
Amortization of unearned compensation - - - - 42 - 42
Net loss - - - - - (4,803) (4,803)
----- ----- ------- --------- ------- ---------- ---------
BALANCE, December 31, 1994 - - 5,039 25,481 (59) (18,907) 7,325
Sale of common stock - - 975 3,193 - - 3,193
Amortization of unearned compensation - - - - 42 - 42
Net loss - - - - - (3,412) (3,412)
----- ----- ------- --------- ------- ---------- ---------
BALANCE, December 31, 1995 - - 6,014 28,674 (17) (21,509) 7,148
Sale of common stock - - 947 2,430 - - 2,430
Amortization of unearned compensation - - - - 17 - 17
Net loss - - - - - (5,550) (5,550)
----- ----- ------- --------- ------- ---------- ---------
BALANCE, December 31, 1996 - $ - 6,961 $ 31,104 $ - $ (27,059) $ 4,045
----- ----- ------- --------- ------- ---------- ---------
----- ----- ------- --------- ------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ADAPTIVE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,550) $ (3,412) $ (4,803)
Adjustments to reconcile net loss to net cash provided by
(used) in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 654 519 424
Gain on lease buyout . . . . . . . . . . . . . . . . . . . . . . . . - - (17)
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . (67) - -
Amortization of unearned compensation. . . . . . . . . . . . . . . . 17 42 42
Changes in assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . 3,136 (2,997) (714)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,878 (1,720) (783)
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . 348 (253) (87)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (710) 503 (150)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 417 694 (93)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 653 (38) 80
---------- ---------- ----------
Net cash provided by (used in) operating activities. . . . . . . 776 (6,662) (6,101)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . 102 - -
Purchases of fixtures and equipment. . . . . . . . . . . . . . . . . . . (45) (319) (396)
Purchase of long-term investment . . . . . . . . . . . . . . . . . . . . (132) - -
---------- ---------- ----------
Net cash used in investing activities. . . . . . . . . . . . . . (75) (319) (396)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . 2,430 3,193 3,909
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . (493) (229) (422)
---------- ---------- ----------
Net cash provided by financing activities. . . . . . . . . . . . 1,937 2,964 3,487
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 2,638 (4,017) (3,010)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 974 4,991 8,001
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . . . $ 3,612 $ 974 $ 4,991
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . $ 120 $ 185 $ 63
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Adaptive Solutions, Inc. (the Company) designs and markets high performance
image recognition solutions targeted at the transportation, finance and health
care industries.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. Cash equivalents consist of commercial paper, bankers' acceptances
and other highly liquid investments.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of $180 and
$80 at December 31, 1996 and 1995, respectively.
INVENTORY
Inventory is stated at the lower of cost, using the average cost method, or
market.
FIXTURES AND EQUIPMENT
Owned equipment is stated at cost. Equipment and software under capitalized
leases is stated at the present value of the minimum lease payments at the
inception of the lease. Leasehold improvements are stated at cost. Maintenance
and repairs are expensed as incurred.
Depreciation of owned equipment is provided using the straight-line method over
the estimated useful lives of the assets, generally five to seven years.
Amortization of equipment under capitalized leases and leasehold improvements is
provided using the straight-line method over the estimated useful lives of the
assets.
(Continued)
F-5
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
REVENUE RECOGNITION
The Company recognizes research and development contract revenue using the
percentage of completion method. Research and development revenue is generated
from technology development and contract engineering. Revenue for product sales
is recognized upon shipment. Maintenance contract revenue and grant revenue are
recognized ratably over the term of the contract or grant. The Company records
funds received from customers but not yet earned under the terms of the
contracts as deferred revenue.
PRODUCT WARRANTIES
The Company provides a one-year warranty for parts and labor on all hardware
products. Expected future product warranty expense is recorded when a product
is sold.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING
The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was $99 and $25 for the years ended December 31, 1996 and
1995, respectively.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARES
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 anti-dilutive and therefore are assumed not
to be common stock equivalents due to the reported net losses.
(Continued)
F-6
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts as a hedge against
foreign currency purchase commitments. At December 31, 1996, the Company had no
forward contracts outstanding and, at December 31, 1995, the Company had forward
contracts outstanding of $311 to buy Japanese yen. These contracts mature on
the date due of the related invoice. At December 31, 1995, the recorded value
and the fair value of the Company's foreign exchange position related to these
contracts was approximately zero. The fair value of these contracts was
calculated based on dealer quotes. The Company does not anticipate
non-performance by the counterparties to these contracts.
At December 31, 1996, the Company had no letters of credit outstanding to
purchase inventory, compared to $311 outstanding at the end of fiscal 1995. The
contract amount of the letters of credit is a reasonable estimate of the fair
value since the value for each is fixed over the life of the commitment.
The carrying amounts of cash equivalents, trade receivables, accounts payable
and short-term borrowings approximate fair value because of the short-term
nature of these instruments. The fair value of long-term obligations under
capital lease was estimated by discounting the future cash flows using market
interest rates and does not differ significantly from that reflected in the
financial statements.
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(Continued)
F-7
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the 1996 presentation.
NOTE 2: INVENTORY
Inventory, net of reserves for obsolete inventory of $191 and $147 at
December 31, 1996 and 1995, consists of the following:
DECEMBER 31,
------------------------
1996 1995
--------- ---------
Raw materials. . . . . . . . . . . . . $ 1,001 $ 2,339
Work in process. . . . . . . . . . . . - 342
Finished goods . . . . . . . . . . . . 6 204
--------- ---------
$ 1,007 $ 2,885
--------- ---------
--------- ---------
NOTE 3: FIXTURES AND EQUIPMENT
Fixtures and equipment consist of the following:
DECEMBER 31,
------------------------
1996 1995
--------- ---------
Equipment. . . . . . . . . . . . . . . $ 2,600 $ 2,515
Fixtures . . . . . . . . . . . . . . . 131 146
Software . . . . . . . . . . . . . . . 1,096 1,065
Leasehold improvements . . . . . . . . 22 24
--------- ---------
3,849 3,750
Less accumulated
depreciation and amortization. . . . (2,512) (1,996)
--------- ---------
Net fixtures and equipment . . . . $ 1,337 $ 1,754
--------- ---------
--------- ---------
(Continued)
F-8
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
NOTE 4: ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
------------------------
1996 1995
--------- ---------
Accrued vacation and personal leave . . . . $ 102 $ 375
Accrued warranty costs. . . . . . . . . . . 179 244
Accrued sales return reserve. . . . . . . . 188 547
Accrued restructuring expenses. . . . . . . 951 -
Other . . . . . . . . . . . . . . . . . . . 206 43
--------- ---------
Total accrued expenses. . . . . . . . . . $ 1,626 $ 1,209
--------- ---------
--------- ---------
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 write-downs ($1,040).
The employee termination costs related to twenty-seven employees, primarily chip
development and design engineers, manufacturing staff and certain sales and
marketing staff, and were all paid during the year. At December 31, 1996, there
was $951 of accrued restructuring costs relating to lease termination costs
($200) and property and equipment ($751). All other costs had been charged
against the restructuring reserve in fiscal 1996.
NOTE 5: STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has the right to repurchase common stock of former employees within
three years of termination of employment if confidentiality or non-competition
agreements, if any, have been breached by the former employee. The repurchase
price for such shares is the original purchase price.
(Continued)
F-9
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
At December 31, 1996, the Company has reserved shares of common stock for
issuance as follows:
Issuance to employees under employee stock purchase plan. . . . . . 150
Issuance to employees and consultants under option plans. . . . . . 1,800
------
1,950
------
------
WARRANTS
At December 31, 1996, warrants to purchase 1,614 shares of the Company's common
stock were outstanding. Each warrant entitles the registered holder thereof to
purchase 1.26 shares of the Company's common stock for $6.393. The warrant
exercise prices are subject to adjustment under certain circumstances. The
warrants are subject to redemption by the Company at $.05 per warrant on 30
days' prior written notice to the warrant holders (i) if the closing bid price
of the common stock as reported on NASDAQ averages in excess of 150% of the then
current exercise price of the warrants for a period of 20 consecutive trading
days ending within 15 days of the notice of redemption, or (ii) with the prior
written consent of the underwriter.
The following warrants are also outstanding at December 31, 1996:
1) Warrants to purchase 75 shares of the common stock for $3.375 per
share. These warrants expire November 23, 1999.
2) Warrants to purchase 3 shares of common stock which were issued in
conjunction with certain capital lease obligations. These warrants
are exercisable through November 3, 1998 at an exercise price of
$18.00 per share.
3) 67 warrants that entitle the registered holder thereof to purchase,
for $11.40, a "unit" comprised of 2.53 shares of common stock and 1
warrant to purchase 1 share of common stock. These warrants expire
November 3, 1998.
NOTE 6: EMPLOYEE STOCK PURCHASE PLAN
In 1993, the Company adopted an employee stock purchase plan (the Plan) whereby
a total of 150 shares of common stock have been reserved for issuance pursuant
to the Plan. The Plan permits eligible employees to purchase common stock of
the Company through payroll deductions, which may not exceed 10% of an
employee's base compensation, including commissions, bonuses, and overtime, at a
price equal to 85% of the lower of the fair market value of the common stock at
the beginning or end of each six-month offering period as defined in the Plan.
No shares had been issued under the plan as of December 31, 1996.
(Continued)
F-10
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
NOTE 7: STOCK OPTION PLANS
The Company has an incentive stock option plan. Options granted pursuant to
this plan may be either incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, or non-qualified stock options, at
the discretion of the Board. Options granted under the plan must be exercised
within three months of the individual's termination of employment with the
Company and within ten years of the date of the grant. Option prices are
generally not less than the fair market value of the shares at the date of the
grant. At the time of the exercise of the option, all optionees must grant the
Company or its designee a right of first refusal with respect to all transfers.
The Company has computed the value of all options granted during 1996 and 1995
using the Black-Scholes pricing model as prescribed under SFAS No. 123 for pro
forma disclosure purposes. The following weighted average assumptions were used
for the grants made in 1996 and 1995: risk free interest rate of 6%, expected
life of 1.84 years, dividend rate of zero percent, and expected volatility of
85.4%.
The total value of options granted during 1996 and 1995 was computed at $600 and
$518, respectively. The options granted in 1995 have four-year vesting
schedules and compensation would be amortized on a pro forma basis over that
period. The options granted in 1996 have either a four-year or a one-year
vesting schedule and compensation would be amortized on a pro forma basis over
the respective period. The weighted average fair value of options granted
during 1996 and 1995 was $.83 and $4.03 per shares, respectively. If the
Company had accounted for these compensation costs in accordance with SFAS
No. 123, the Company's net loss and pro forma net loss per share would have
increased by the following pro forma amounts:
1996 1995
--------- ---------
Net loss:
As reported . . . . . . . . . . . . . . . . $ (5,550) $ (3,412)
Pro forma . . . . . . . . . . . . . . . . . (5,811) (3,464)
Net loss per share:
As reported . . . . . . . . . . . . . . . . (.82) (.61)
Pro forma . . . . . . . . . . . . . . . . . (.86) (.62)
(Continued)
F-11
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
January 1, 1995, and additional awards are expected in future years. At
December 31, 1996, options for 847 shares were outstanding with exercise prices
of $.30-$6.50, a weighted average exercise price of $1.08 and a remaining
weighted average contractual life of 8.92 years and 447 shares were available
for future grant. At December 31, 1996, options to purchase 406 shares at a
weighted average exercise price of $.87 were exercisable. Stock options
outstanding and transactions involving the stock option plan are summarized as
follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Options outstanding at December 31, 1994. . . . . 972 $ 1.01
Options:
Granted . . . . . . . . . . . . . . . . . . . . 331 5.91
Exercised . . . . . . . . . . . . . . . . . . . (146) .71
Expired . . . . . . . . . . . . . . . . . . . . (39) 3.59
Canceled. . . . . . . . . . . . . . . . . . . . - -
------- -------
Options outstanding at December 31, 1995. . . . . 1,118 1.78
Options:
Granted . . . . . . . . . . . . . . . . . . . . 1,085 2.58
Exercised . . . . . . . . . . . . . . . . . . . (312) .76
Expired . . . . . . . . . . . . . . . . . . . . (714) 4.07
Canceled. . . . . . . . . . . . . . . . . . . . (330) 4.19
------- -------
Options outstanding at December 31, 1996. . . . . 847 $ 1.08
------- -------
------- -------
The options outstanding and exercisable consist of two primary exercise price
pools. There are 222 options outstanding with weighted average exercise prices
of $.40 and remaining contractual lives of 5.73 years and there are 625 options
outstanding with a weighted average exercise price of $1.38 and remaining
contractual lives of 9.40 years. There are 213 options exercisable with a
weighted average exercise price of $.40 and there are 193 options exercisable
with a weighted average exercise price of $1.44.
(Continued)
F-12
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
NOTE 8: 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."
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. The Company's deferred tax position at December 31, 1996 and 1995
is as follows:
1996 1995
-------- -------
Current deferred tax assets . . . . . . . . . . . $ 797 $ 798
Valuation allowance . . . . . . . . . . . . . . . (797) (798)
Non-current deferred tax assets . . . . . . . . . 9,430 6,860
Valuation allowance . . . . . . . . . . . . . . . (9,267) (6,751)
Non-current deferred tax liabilities. . . . . . . (163) (109)
------- -------
Net deferred taxes. . . . . . . . . . . . . . . . $ - $ -
(Continued)
F-13
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
The total valuation allowance for deferred tax assets as of December 31, 1996
and 1995 was $10,064 and $7,549, respectively. The net change in the total
valuation allowance for the years ended December 31, 1996 and 1995 was an
increase of $2,515 and $1,221, respectively.
NOTE 9: COMMITMENTS
LEASES
The present value of future minimum capital lease payments as of December 31,
1996 and future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) are:
CAPITAL OPERATING
LEASES LEASES
------- ---------
Year ending December 31:
1997. . . . . . . . . . . . . . . . . . . . . . . $ 503 $ 193
1998. . . . . . . . . . . . . . . . . . . . . . . 257 134
1999. . . . . . . . . . . . . . . . . . . . . . . 15 50
2000. . . . . . . . . . . . . . . . . . . . . . . - -
2001 and thereafter . . . . . . . . . . . . . . . - -
------- ------
Total minimum lease payments . . . . . . . . 775 $ 377
------
------
Less amount representing interest (at rates
ranging from 6% to 15%) . . . . . . . . . . . . 69
-------
Present value of net minimum capital
lease payments . . . . . . . . . . 706
Less current portion. . . . . . . . . . . . . . . 447
-----
Capital lease obligations, less current
portion . . . . . . . . . . . . . $ 259
-----
-----
Total rental expense for operating leases was $227, $380 and $290 for 1996, 1995
and 1994, respectively.
(Continued)
F-14
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
The amount of equipment which is secured by capital leases as of December 31,
1996 and 1995 was $2,060 and $1,833 less accumulated amortization of $1,061 and
$819, respectively.
The Company subleases a facility to a non-affiliated private company for $6 per
month. Total sublease rentals to be received are $73, $74 and $50 for the years
ending December 31, 1997, 1998 and 1999, respectively.
INVENTORY
Certain component's of the Company's products are available from only a limited
number of sources. Although to date the Company has generally been able to
obtain adequate supplies of these components, the Company obtains these
components on a purchase order basis and does not have long-term contracts with
any of its suppliers. The Company's inability in the future to obtain
sufficient sole or limited-source components, or to develop alternative sources,
could result in delays in product introduction or shipments, and increased
component prices could negatively affect the gross margins, either of which
could have a material adverse effect on the Company's results of operations.
NOTE 10: SUMMARY OF NON-CASH TRANSACTIONS
During the years ended December 31, 1996, 1995 and 1994, the Company entered
into capital lease obligations amounting to approximately $227, $1,006 and $192,
respectively, to acquire fixtures and equipment.
NOTE 11: GEOGRAPHIC INFORMATION
Net product and other revenues, by geographic region, were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
United States . . . . . . . . . . . $ 4,898 $ 6,095 $ 2,267
Europe. . . . . . . . . . . . . . . 434 4,519 1,268
Asia and Pacific Rim. . . . . . . . 1,943 163 512
-------- --------- --------
Total revenues. . . . . . $ 7,275 $ 10,777 $ 4,047
-------- --------- --------
-------- --------- --------
(Continued)
F-15
<PAGE>
ADAPTIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE OR PER UNIT DATA)
NOTE 12: MAJOR CUSTOMERS
Aggregate revenues for two significant customers were 31%, 75% and 35% of total
revenues for the years ended December 31, 1996, 1995 and 1994, respectively.
Related receivables from such customers were 7% and 68% of trade accounts
receivable at December 31, 1996 and 1995, respectively.
NOTE 13: RELATED PARTIES
A letter agreement between the Company and an entity owned by the Chairman of
the Company's Board of Directors entered into in December 1992 provides that the
Company is to pay $4 per month in connection with business consulting services
provided to the Company by the Chairman.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Adaptive Solutions, Inc.:
We have audited the accompanying balance sheets of Adaptive Solutions, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Adaptive Solutions, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 7, 1997
F-17
<PAGE>
ADAPTIVE SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES DEDUCTIONS BALANCE
----------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Accrued warranty and upgrade costs. . . . . . $ 372 $ 101 $ 385 $ 88
Reserve for obsolete inventory. . . . . . . . 10 95 5 100
Allowance for doubtful accounts . . . . . . . - 116 41 75
YEAR ENDED DECEMBER 31, 1995:
Accrued sales return reserve. . . . . . . . . $ - $ 607 $ 60 $ 547
Accrued warranty costs. . . . . . . . . . . . 88 403 247 244
Reserve for obsolete inventory. . . . . . . . 100 143 96 147
Allowance for doubtful accounts . . . . . . . 75 60 55 80
YEAR ENDED DECEMBER 31, 1996:
Accrued sales return reserve. . . . . . . . . $ 547 $ 188 $ 547 $ 188
Accrued warranty costs. . . . . . . . . . . . 244 179 244 179
Reserve for obsolete inventory. . . . . . . . 147 1,059 1,015 191
Allowance for doubtful accounts . . . . . . . 80 100 - 180
</TABLE>
S-1
<PAGE>
ADAPTIVE SOLUTIONS, INC.
Consent and Independent Auditors' Report
on Financial Statement Schedule for Inclusion
in Form 10-K
December 31, 1996
Dated March 31, 1997
CONSENT AND INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Adaptive Solutions, Inc.:
The audits referred to in our report dated February 7, 1997 included the related
financial statement schedule as of December 31, 1996, and for each of the years
in the three-year period ended December 31, 1996, as listed in Item 14(a)(2) of
this Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
We consent to the incorporation by reference in the Registration Statements Nos.
33-86890, 33-67882 and 33-94586 on Form S-3 and No. 33-80040 on Form S-8 of
Adaptive Solutions, Inc. of our reports dated February 7, 1997 relating to the
balance sheets of Adaptive Solutions, Inc. as of December 31, 1996 and 1995, and
the related statements of operations, shareholders' equity, and cash flows and
related schedule for each of the years in the three-year period ended
December 31, 1996, which report appears in the December 31, 1996 annual report
on Form 10-K of Adaptive Solutions, Inc.
KPMG PEAT MARWICK LLP
Portland, Oregon
March 26, 1997
S-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3614
<SECURITIES> 0
<RECEIVABLES> 1254
<ALLOWANCES> 180
<INVENTORY> 1007
<CURRENT-ASSETS> 5736
<PP&E> 3849
<DEPRECIATION> 2512
<TOTAL-ASSETS> 7212
<CURRENT-LIABILITIES> 2908
<BONDS> 0
0
0
<COMMON> 31104
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7212
<SALES> 6255
<TOTAL-REVENUES> 7275
<CGS> 5382
<TOTAL-COSTS> 5382
<OTHER-EXPENSES> 7546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> (5550)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5550)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5550)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
</TABLE>
