Securities Exchange Act of 1934
Release No. 50704 / November 19, 2004
Accounting And Auditing Enforcement
Release No. 2137 / November 19, 2004
Admin. Proc. File No. 3-11741
In the Matter of ROBOTIC VISION SYSTEMS, INC., Respondent. |
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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Robotic Vision Systems, Inc. ("Robotic" or "Respondent").
II.
In anticipation of the institution of these cease-and-desist proceedings, Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and over the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
III.
On the basis of this Order and the Offer, the Commission finds1 that:
A. SUMMARY
1. This matter involves material overstatements of revenue and income by Robotic in two public filings with the Commission in 2000. On May 21, 2001, Robotic filed an amended annual report with the Commission that revealed that, for fiscal year 2000 (ended September 30), the company had overstated its revenue by 2.1% ($4.74 million) and its net income by 13.5% ($1.45 million). The restatement also revealed that, for the third fiscal quarter of 2000 (ended June 30), Robotic had overstated its revenue by 3.4% ($2.1 million) and its net income by 9.7% ($517,000).
2. The restatement of Robotic's financial results for 2000 was necessitated by the discovery of improper recognition of revenue at the company's Acuity CiMatrix ("ACIM") division. Between December 1999 and September 2000, Robotic negotiated numerous purported sales to its distributors and customers that contained non-standard terms that deferred, conditioned or even negated their obligation to pay for the products.
B. FACTS
3. Robotic is a Delaware corporation currently based in Nashua, New Hampshire. During the relevant time period, Robotic's corporate offices, as well as the offices of its ACIM division, were located in Canton, Massachusetts. Robotic's ACIM division manufactures bar code reading systems and other computer systems that inspect products. At all relevant times, Robotic's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System, and the company was required to file annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act.
4. Between August and December 2000, Robotic materially misstated its revenue and income in its financial statements filed with the Commission and in press releases reporting its financial results. In its annual report on Form 10-K for its fiscal year ended September 30, 2000, Robotic overstated its revenue by $4.74 million, or 2.1%, and its net income by $1.45 million, or 13.5%. In its quarterly report on Form 10-Q for its third quarter ended June 30, 2000, Robotic overstated its revenue by $2.1 million, or 3.4%, and its net income by $517,000, or 9.7%. In May 2001, Robotic announced that it would restate its financial statements.
5. ACIM's senior vice-president of worldwide sales had unchecked authority to negotiate and approve discounts, extended payment periods and other non-standard terms. The senior vice-president also had unchecked authority to authorize product returns. There was no procedure to ensure that non-standard terms were entered into ACIM's computer system.
6. Robotic's misstatements arose because the company improperly booked revenue from non-standard transactions with its distributors and customers. Between December 1999 and September 2000, ACIM entered into approximately 36 purported sales to its distributors and customers which deferred, conditioned or even negated their obligation to pay for the products. For example, the distributors and customers often had no obligation to pay ACIM until they had sold the products to their own end users. Sometimes, the distributors and customers received an absolute right to return the products to ACIM if they were unable to sell them (a right which they frequently exercised). In other instances, the distributors and customers took possession of the products with explicit instructions to deliver them to a designated end user who would actually pay ACIM, and received a "handling fee" or other credit in exchange for their agreement to take the products on an interim basis. ACIM improperly recognized approximately $4.74 million of revenue on the purported sales as soon as the products were shipped to the distributors and customers. This premature recognition of revenue constituted a failure to comply with generally accepted accounting principles ("GAAP").
7. By late July 2000, Robotic's CFO, corporate controller and the ACIM division president knew or should have known about the improper recognition of revenue. In July 2000, ACIM's controller and its collections manager informed Robotic's corporate controller about certain contingent transactions, including that some of ACIM's outstanding accounts receivable reflected amounts due from distributors and customers who claimed they had a right of return, or that they did not have to pay ACIM until they sold the products through to end users. Around this time, the ACIM controller sent to the Robotic corporate controller a list of ACIM's largest accounts receivable, which reflected the contingent transactions; this and subsequent lists came to be known within Robotic as "top 10 lists." The ACIM controller also informed Robotic's corporate controller that one of the transactions was a ship-in-place transaction, and that he had not been informed of these terms, contrary to Robotic's procedure.2 Finally, in late July 2000, a member of Robotic's board of directors informed Robotic's corporate controller that he had heard of a distributor claiming to have a right of return, and that he was concerned that recognizing revenue from the transaction might have been improper. The corporate controller informed the CFO of this transaction. The CFO reviewed the source documents associated with this transaction and confirmed that it involved consignment terms, and that it should not have been recorded as revenue.
8. On August 12, 2000, Robotic filed a quarterly report on Form 10-Q for the third fiscal quarter (ended June 30). The Form 10-Q was signed by Robotic's CFO. The quarterly financial results reported on the Form 10-Q were materially misleading because they included revenue from transactions in which the distributors and customers had no obligation to pay, or only a contingent obligation to pay.
9. On October 12, 2000, November 2, 2000 and November 29, 2000, ACIM's collections manager circulated revised "top 10 lists" to, among others, Robotic's corporate controller. The list included comments disclosing that many of the accounts were overdue because distributors and customers were claiming their obligation to pay was deferred or contingent on reselling the products. During the rest of October and November, Robotic's CFO and corporate controller met often with ACIM's controller and ACIM's collections manager, who discussed in detail the non-standard terms ACIM had with certain distributors and customers. Despite their awareness of the problematic transactions, neither Robotic's CFO nor its corporate controller took steps to correct the improper accounting, or to inform Robotic's auditors.
10. On December 28, 2000, Robotic filed an annual report on Form 10-K for the fiscal year 2000 (ended September 30). The Form 10-K was signed by Robotic's CFO. The financial results reported on the Form 10-K were materially misleading because they included revenue from transactions in which the distributors' and customers' obligations to pay were contingent, deferred or did not exist.
11. In late January 2001, Robotic's outside auditors reviewed a distributor confirmation that indicated transactions that may have had contingent terms, which precipitated an inquiry by the auditors and Robotic's management into the matter. Based on the inquiry, Robotic's audit committee undertook an internal investigation that revealed the breadth of the non-standard deals on which revenue was improperly recognized.
12. On May 15, 2001, Robotic announced its intention to restate its financial results for its fiscal year ended September 30, 2000.
C. VIOLATIONS
Robotic Violated Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder
13. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit materially false or misleading statements or omissions made in connection with purchase or sale of any security. Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in registration statements or periodic reports filed with the Commission, including financial statements, and trading occurs thereafter in the issuer's securities. Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988).
14. Materiality is established if a reasonable investor would have considered the misrepresented or omitted fact important when deciding whether to buy, sell or hold the securities in question. Id. at 231-232. Information regarding the financial condition of an issuer is presumptively material. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985).
15. As set forth above, Robotic filed a materially misleading Form 10-Q for its third fiscal quarter ended June 30, 2000 and a materially misleading Form 10-K for the fiscal year ended September 30, 2000. In addition, as set forth above, Robotic's CFO and corporate controller knew or were reckless in not knowing that Robotic's financial results were materially overstated, and their scienter can be attributed to the company. Accordingly, Robotic violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Robotic Violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 Thereunder
16. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers of registered securities to file annual and quarterly reports with the Commission. It is implicit in this requirement that the information provided be accurate. See United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. Denied, 502 U.S. 813 (1991); SEC v. Kalvex, Inc., 425 F.Supp. 310, 316 (S.D.N.Y. 1975). Regulation S-X requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with GAAP or such statements will be presumed to be misleading or inaccurate. In addition, Exchange Act Rule 12b-20 requires that these periodic reports contain all further material information necessary to make the required statements, in light of the circumstances under which they are made, not misleading. The issuer reporting provisions are violated when false and misleading reports are filed.
17. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 are violated when an issuer files false and misleading reports with the Commission. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). No showing of scienter is necessary to establish a violation of these provisions. SEC v. McNulty, 137 F.3d 732, 740-41 (2nd Cir. 1998); SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978); SEC v. Wills, 472 F.Supp.1250, 1268 (D.D.C. 1978).
18. As set forth above, Robotic filed a Form 10-Q for the third fiscal quarter of 2000 and a Form 10-K for the fiscal year 2000 that materially misstated the company's revenue and net income. Accordingly, Robotic violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
Robotic Violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
19. Section 13(b)(2) of the Exchange Act provides, in pertinent part, that every reporting company must: (A) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer; and (B) devise and maintain a system of internal controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP. These provisions require an issuer to employ and supervise reliable personnel, to maintain reasonable assurances that transactions are executed as authorized, to properly record transactions on an issuer's books and, at reasonable intervals, to compare accounting records with physical assets. SEC v. World-Wide Coin Investments, Ltd., 567 F.Supp. 724, 750 (N.D.Ga. 1983).
20. As set forth above, Robotic maintained false and misleading books, records and accounts which, among other things, materially overstated the company's revenue and net income for the third fiscal quarter of 2000 and the fiscal year 2000. Accordingly, Robotic violated Section 13(b)(2)(A) of the Exchange Act.
21. In addition, as set forth above, Robotic's system of internal accounting controls was not sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP. Accordingly, Robotic violated Section 13(b)(2)(B) of the Exchange Act.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Robotic's Offer.
Accordingly, it is hereby ORDERED that Robotic cease and desist from committing or causing any violations and any future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
Secretary