<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 27, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from Commission File Number
to 0-24934
------ ------
PRI AUTOMATION, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2495703
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
805 MIDDLESEX TURNPIKE 01821-3986
BILLERICA, MA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (978) 670-4270
-----------------
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 .
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock as of July 30, 1999:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $.01 par value 21,999,531
<PAGE>
PRI AUTOMATION, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 27, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended June 27, 1999 and
June 28, 1998 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended June 27, 1999 and
June 28, 1998 5
Condensed Consolidated Statements of Comprehensive
Loss for the Three and Nine Months Ended June 27,
1999 and June 28, 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
Exhibit Index 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 30,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 60,008 $ 57,047
Trade accounts receivable, net ........................................... 27,756 34,443
Contracts in progress .................................................... 4,744 9,017
Inventories .............................................................. 22,279 27,494
Deferred income taxes .................................................... -- 7,832
Other current assets ..................................................... 7,133 7,254
--------- ---------
Total current assets .................................................... 121,920 143,087
Property and equipment, net ............................................... 18,832 20,306
Deferred income taxes ..................................................... -- 559
Other assets .............................................................. 2,866 3,526
--------- ---------
Total assets ............................................................ $ 143,618 $ 167,478
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 11,431 $ 12,281
Accrued expenses and other liabilities ................................... 16,487 14,823
Line of credit ........................................................... 29 11
Current portion of obligations under capital lease ....................... 670 798
Billings in excess of revenue and customer advances ...................... 14,344 14,726
--------- ---------
Total current liabilities ............................................... 42,961 42,639
Obligations under capital lease ........................................... 528 734
Other non-current liabilities ............................................. 816 965
Minority interest ......................................................... 170 --
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 21,924,323 and
21,231,418 issued and outstanding at June 27, 1999 and
September 30, 1998, respectively ........................................ 219 212
Additional paid-in capital ............................................... 136,009 129,035
Accumulated deficit ...................................................... (37,085) (6,107)
--------- ---------
Total stockholders' equity .............................................. 99,143 123,140
--------- ---------
Total liabilities and stockholders' equity .............................. $ 143,618 $ 167,478
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue ............................. $ 34,494 $ 43,458 $ 94,420 $ 171,084
Cost of revenue ......................... 19,875 30,531 58,793 95,425
--------- --------- --------- ---------
Gross profit ............................ 14,619 12,927 35,627 75,659
Operating expenses:
Research and development ............. 11,507 11,485 32,796 33,976
Selling, general and administrative .. 9,809 12,608 28,532 37,667
Acquired in-process research and
development ...................... -- -- -- 8,417
Merger costs and special charges ..... -- 1,640 6,450 8,453
--------- --------- --------- ---------
Operating loss .......................... (6,697) (12,806) (32,151) (12,854)
Other income, net ....................... 877 214 2,158 386
--------- --------- --------- ---------
Loss before income taxes ................ (5,820) (12,592) (29,993) (12,468)
Provision for (benefit from) income taxes 7,301 (4,189) 985 (1,860)
--------- --------- --------- ---------
Net loss ................................ $ (13,121) $ (8,403) $ (30,978) $ (10,608)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per common share:
Basic ................................ ($0.60) ($0.40) ($1.44) ($0.51)
Diluted .............................. ($0.60) ($0.40) ($1.44) ($0.51)
Weighted average shares outstanding:
Basic ................................ 21,736 21,045 21,491 20,938
Diluted .............................. 21,736 21,045 21,491 20,938
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(30,978) $(10,608)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expense ................. 6,430 6,044
Provision for write-downs of inventories .............. 400 5,563
Provision for bad debts ............................... 407 1,563
Net loss on disposal of assets ........................ 54 481
Deferred income taxes ................................. 8,391 (14)
Translation (gains) losses, net ....................... (758) 834
Minority interest in losses of subsidiaries ........... (29) --
Acquired in-process research and development .......... -- 8,417
Changes in operating assets and liabilities:
Trade accounts receivable ........................... 6,356 36,972
Contracts in progress ............................... 4,273 (2,635)
Inventories ......................................... 4,815 (8,592)
Other assets ........................................ 74 (5,408)
Accounts payable .................................... (735) (7,111)
Accrued expenses and other liabilities .............. 2,074 (1,356)
Billings in excess of revenue and customer
advances ........................................... (382) 1,788
-------- --------
Net cash provided by operating activities ............... 392 25,938
-------- --------
Cash flows from investing activities:
Proceeds from the sale of marketable securities ........ -- 2,331
Proceeds from maturities of marketable securities ...... -- 1,685
Purchases of marketable securities ..................... -- (5,547)
Proceeds from sale of property and equipment ........... 9 20
Purchases of property and equipment .................... (4,036) (11,027)
Purchases of intangible assets ......................... (275) (112)
Net effect on cash balances from Chiptronix acquisition -- 246
Payment for MASE acquisition ........................... -- (1,533)
Reduction in paid-in capital for contingent
consideration ......................................... (216) (1,301)
-------- --------
Net cash used in investing activities ................... (4,518) (15,238)
-------- --------
</TABLE>
5
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds (repayments) of short-term borrowings, net ........................ 18 (1,871)
(Repayments) proceeds of capital lease obligations, net .................... (334) 305
Distributions to shareholders of Equipe .................................... -- (4,507)
Investment from minority interest shareholders ............................. 199 --
Proceeds from exercise of stock options and Employee Stock
Purchase Plan ............................................................. 7,197 1,558
-------- --------
Net cash provided by (used in) financing activities ......................... 7,080 (4,515)
-------- --------
Adjustment to conform fiscal period of Promis ............................... -- (50)
Effect of exchange rate changes on cash ..................................... 7 (673)
-------- --------
Net increase in cash and cash equivalents ................................... 2,961 5,462
Cash and cash equivalents at beginning of period ............................ 57,047 36,752
-------- --------
Cash and cash equivalents at end of period .................................. $ 60,008 $ 42,214
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................................. $ 100 $ 88
Taxes ..................................................................... 827 8,684
Significant non-cash transactions:
Acquisition of Interval Logic Corporation
Acquisition of Chiptronix Handling Systems GmbH
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- --------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ..................................... $(13,121) $ (8,403) $(30,978) $(10,608)
Other comprehensive income, net of tax:
Change in unrealized gain or loss on
available-for-sale securities, net of tax .. -- 4 -- 6
-------- -------- -------- --------
Total other comprehensive income, net of tax -- 4 -- 6
-------- -------- -------- --------
Comprehensive loss ........................... $(13,121) $ (8,399) $(30,978) $(10,602)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
7
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of PRI
Automation, Inc., its wholly-owned domestic subsidiaries and its wholly-owned
and majority-owned foreign subsidiaries (collectively, the "Company"). All
significant intercompany transactions and balances have been eliminated.
The interim financial data as of June 27, 1999 and for the three and nine
months ended June 27, 1999 and June 28, 1998 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in connection with the audited
consolidated financial statements of PRI Automation, Inc. for the year ended
September 30, 1998 included in its Annual Report on Form 10-K filed with the
Securities and Exchange Commission, as amended.
In March 1999, the Company acquired Promis Systems Corporation Ltd.
("Promis"). The acquisition of Promis was accounted for using the pooling-of-
interests method of accounting. In May 1998, the Company acquired Chiptronix
Handling Systems GmbH ("Chiptronix"), the European distributor of Equipe
products. In January 1998, the Company acquired Equipe Technologies, Inc.,
E-Machine, Inc., and Equipe Japan Ltd. (collectively, "Equipe"). The
acquisitions of Equipe and Chiptronix both were accounted for using the
pooling-of-interests method of accounting. All prior period historical
condensed consolidated financial statements presented herein have been
restated to include the financial position, results of operations, and cash
flows of Promis and Equipe. The Company has not restated its financial
statements for the acquisition of Chiptronix because the effect of
restatement is immaterial.
For interim reporting purposes, the Company closes its first three fiscal
quarters on the Sunday nearest the last day of December, March and June in each
year. The Company's fiscal year ends on the last day of September.
B. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
Raw materials...................... $14,952 $19,072
Work-in-process.................... 4,790 5,242
Finished goods..................... 2,537 3,180
------- -------
$22,279 $27,494
------- -------
------- -------
</TABLE>
8
<PAGE>
C. ACCRUED EXPENSES AND OTHER LIABILITIES
The significant components of accrued expenses and other liabilities consist
of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
Accrued expenses.................... $ 6,575 $ 6,699
Accrued compensation................ 5,295 3,086
Warranty reserves................... 4,617 5,038
------- -------
$16,487 $14,823
------- -------
------- -------
</TABLE>
D. NET LOSS PER SHARE
Basic net loss per common share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share gives effect to all dilutive potential common shares outstanding
during the period. A reconciliation between basic and diluted net loss per share
is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ---------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ...................................... $(13,121) $ (8,403) $(30,978) $(10,608)
Shares used in computation:
Weighted average common shares outstanding
used in computation of basic net loss
per common share ............................ 21,736 21,045 21,491 20,938
Dilutive effect of stock options and
warrants .................................... -- -- -- --
-------- -------- -------- --------
Shares used in computation of diluted net loss
per common share ............................ 21,736 21,045 21,491 20,938
-------- -------- -------- --------
-------- -------- -------- --------
Basic net loss per common share ............... $ (0.60) $ (0.40) $ (1.44) $ (0.51)
Diluted net loss per common share ............. $ (0.60) $ (0.40) $ (1.44) $ (0.51)
</TABLE>
Weighted average options to purchase 1,385,373 and 1,346,986 shares of
common stock were outstanding for the three and nine month periods ended June
27, 1999, respectively, but were not included in the computation of diluted net
loss per common share because the Company was in a loss position and, the
inclusion of such shares would be anti-dilutive. Additionally, weighted average
options to purchase 792,996 and 360,317 shares of common stock were outstanding
for the three and nine month periods ended June 27, 1999, respectively, but were
not included in the computation of diluted net loss per common share because the
options' exercise prices were greater than the average market price of the
common shares, and therefore, would be anti-dilutive under the treasury stock
method.
Weighted average options to purchase 730,165 and 952,740 shares of common
stock were outstanding for the three and nine month periods ended June 28, 1998,
respectively, but were not included in the computation of diluted net loss per
common share because the Company was in a loss position and, the inclusion of
such shares would be anti-dilutive. Additionally, weighted average options to
purchase 1,660,324 and 635,819 shares of common stock were outstanding for the
three and nine month periods ended June 28, 1998, respectively, but were not
included in the computation of diluted net
9
<PAGE>
loss per common share because the options' exercise prices were greater than the
average market price of the common shares, and therefore, would be anti-dilutive
under the treasury stock method.
E. ACQUISITION OF PROMIS
On March 2, 1999, the Company acquired Promis, a Canadian corporation, in a
transaction accounted for as a pooling of interests. Promis is a developer of
manufacturing execution systems ("MES") software solutions for semiconductor and
precision electronics manufacturers. In connection with the acquisition, the
Company issued 0.1353 exchangeable shares for each outstanding Promis share, or
an aggregate of 1,389,974 exchangeable shares. Each exchangeable share may be
exchanged at any time for one share of common stock of the Company. The Company
assumed options to purchase 270,336 shares of the Company's common stock and a
warrant to purchase 13,530 shares of common stock, converted at the common stock
exchange ratio, under this acquisition agreement.
Prior to the acquisition, Promis prepared its financial statements based on
a December 31 fiscal year-end. Promis' results of operations and cash flows for
the three months ended December 31, 1997 are included in the Company's condensed
consolidated statements of operations and cash flows for both fiscal 1998,
presented herein, and fiscal 1997 in order to conform Promis' fiscal period to
the Company's. Promis' results of operations and cash flows for the three and
nine months ended June 28, 1998 have been combined with the Company's results of
operations and statement of cash flows for the three and nine months ended June
28, 1998. To conform fiscal periods, Promis' $50,000 increase in cash and cash
equivalents for the three months ended December 31, 1997 has been eliminated in
the Company's condensed consolidated statement of cash flows for the nine months
ended June 28, 1998, because this increase has been included in the beginning
cash and cash equivalents at October 1, 1997. Promis' results of operations and
cash flows for the three and nine months ended June 27, 1999 have been combined
with the Company's results of operations and statement of cash flows for the
corresponding periods.
The following information presents certain statements of operations data of
the Company and Promis for the period prior to the Promis acquisition:
<TABLE>
<CAPTION>
PRI COMBINED
AUTOMATION PROMIS COMPANIES
---------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenue for:
Three months ended December 27, 1998 .............. $25,316 $ 4,319 $29,635
Net loss for:
Three months ended December 27, 1998 .............. (5,608) (2,047) (7,655)
</TABLE>
F. ACQUISITION OF EQUIPE
On January 22, 1998, the Company acquired Equipe Technologies, Inc.,
E-Machine, Inc. and Equipe Japan Ltd., (collectively, "Equipe" or the "Equipe
Combined Companies"). Equipe is a worldwide developer, manufacturer, and
supplier of wafer and substrate handling robots, pre-aligners and controllers
for semiconductor process tool manufacturers. The Company issued 4,088,016
shares of common stock in exchange for all of the outstanding stock of Equipe
Technologies, Inc., using an exchange ratio of 0.760372 of one share of the
Company's common stock for each share of Equipe Technologies, Inc, and the
Company issued 36,000 and 240,000 shares of the Company's common stock for the
common stock of E-Machine, Inc. and Equipe Japan Ltd., respectively. In
addition, all outstanding Equipe stock options were converted, at the common
stock exchange ratio, into options to purchase the Company's common
10
<PAGE>
stock. The business combination was accounted for as a pooling of interests. The
consolidated financial statements of the Company for periods prior to the
acquisition have been restated to include the financial position, results of
operations and cash flows of Equipe. Significant intercompany transactions among
the Equipe Combined Companies prior to the period in which the business
combination occurred have been eliminated from the accompanying financial
statements.
Equipe Technologies, Inc. and E-Machine, Inc. were S-corporations for income
tax purposes prior to the acquisition. The following pro forma net loss and net
loss per common share give effect to adjustments that provide for income taxes
as if Equipe Technologies, Inc. and E-Machine, Inc. had been treated as
C-corporations for the period presented. The pro forma information is shown for
comparative purposes only.
UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE
---------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 28, 1998
-------------
<S> <C>
Historical consolidated net loss .............................. $(10,608)
Adjustment to Equipe income tax expense ....................... (1,156)
--------
Unaudited pro forma net loss .................................. $(11,764)
--------
--------
Unaudited pro forma diluted net loss per common share ......... $ (0.56)
--------
--------
</TABLE>
G. ACQUISITION OF INTERVAL LOGIC CORPORATION
On October 29, 1997 the Company acquired Interval Logic Corporation ("ILC"),
a California corporation, for aggregate consideration of 111,258 shares of the
Company's common stock. In addition, the Company assumed options to purchase an
aggregate of 199,170 shares of the Company's common stock. ILC was formed in
1995 to develop advanced, high-performance planning and scheduling software
solutions for the semiconductor industry. The value of the transaction was
$8,523,000, including approximately $600,000 of expenses related to the
acquisition. The Company accounted for the transaction as a purchase.
At the time of the acquisition, the purchase price was allocated to the
tangible and intangible assets of ILC. Management is aware that it is
responsible for estimating the fair value of purchased in-process research and
development. The value assigned to the intangible assets, primarily the acquired
technology, was based on the fair market value using a risk-adjusted discounted
cash flow approach. ILC's sole product at the time of the acquisition was the
Leverage product, which was under development. ILC had no product revenues
during its prior existence and was a development stage enterprise. Specifically,
the purchased technology was evaluated through extensive interviews and analysis
of data concerning the state of the technology and needed developments. This
evaluation of underlying technology acquired considered the inherent
difficulties and uncertainties in completing the development, and thereby
achieving technological feasibility, and the risks related to the viability of
and potential changes in future target markets. The significant assumptions that
affected the valuation of ILC concerned potential revenue and cost of
completion, as well as the timing of the product release. In addition, the
selection of an appropriate discount rate was a major factor in the valuation
analysis.
The revenue assumptions for this product were a key variable in the
Company's valuation analysis. The Company developed revenue projections based on
management's expected release date of March 1999 for the beta version of the
Leverage product. Given that ILC had no historical revenue to rely on as
11
<PAGE>
a guide, the Company based its projections on revenues from a population of
comparable companies. The revenue growth rates projected for the Leverage
product were comparable to the 3-year cumulative average growth rate for the
comparable companies. The costs of completion assumptions for the Leverage
product were a second key variable in the Company's valuation analysis. These
assumptions were based on detailed cost analysis provided by the head of
research and development for ILC, and included assumptions regarding completion
dates for development milestones. The total effort was estimated to take
approximately 225 engineering man-months at a cost of approximately $2,800,000.
This project included completion of the software requirement definition, data
integration and validation, completion of the graphics user interface,
development of alpha and beta versions for customer testing, and integration and
adaptation with customer systems. The significant further investments in
development required to meet expected customer requirements were substantially
completed in the third quarter of fiscal 1999. The actual development costs have
approximated the cost estimates used in the valuation model. No key assumptions
to date have been invalidated with the passage of time.
The acquired technology had not reached technological feasibility at the
time of the acquisition. The Company defines technological feasibility as the
point at which a working model is functioning to designed specifications and has
been placed at a beta test site. The Leverage product was first released to a
beta test site in March 1999. In addition, the technology had no alternative
future use to the Company in other research and development projects or
otherwise. Accordingly, the acquired technology was expensed as in-process
research and development. Based on the methodology described above, the Company
assigned a fair value of $8,417,000 to the technology.
H. ACQUISITION OF MASE
Effective October 2, 1997, the Company's Promis subsidiary purchased certain
business assets and assumed liabilities of MASE Systems, Inc. of San Jose,
California for $1.5 million in cash. The business acquisition was accounted for
as a purchase. The following net assets (in thousands) were acquired:
<TABLE>
<S> <C>
Net non-cash working capital ........ $ 170
Capital assets ...................... 26
Intellectual property ............... 1,337
------
Total consideration ................. $1,533
------
------
</TABLE>
I. MERGER COSTS AND SPECIAL CHARGES
In connection with the acquisition of Equipe, direct acquisition costs of
$4,490,000 for legal, investment banking and accounting fees were recorded in
fiscal 1998. Approximately $100,000 remained in accrued expenses at June 27,
1999 in connection with these direct acquisition costs and are expected to
be paid by the end of calendar 1999.
During the entire fiscal year 1998, the Company restructured its
operations by consolidating its business unit structure in response to market
conditions and the Equipe acquisition. In connection with the restructuring,
the Company recorded special charges of $5,601,000. The major components of
the special charges included: provisions for severance compensation of
$1,910,000 resulting from terminations of 244 personnel in manufacturing,
engineering, and selling, general and administrative functions; costs of
$2,943,000 relating to reductions in leased facilities; and a non-cash
write-down of $528,000 for specialized demonstration equipment associated
with the closure of a customer training site for a particular customer that
was not usable elsewhere. Of the total $4,853,000 severance and lease
reduction charges recorded in connection with the restructuring, $86,000
remained in accrued expenses at June 27, 1999. The Company expects these
remaining costs to be paid by the end of fiscal 1999.
During the quarter ended December 27, 1998, the Company recorded additional
special charges of $650,000. These charges represent provisions for severance
compensation relating to the termination of 62 personnel, approximately 6% of
the workforce, completed in the first quarter of fiscal 1999. These personnel
reductions were approximately 65% in manufacturing and customer support, 15% in
12
<PAGE>
engineering, and 20% in selling, general and administrative functions. The
reduction in force occurred in response to the continued downturn in the
semiconductor equipment industry. As of June 27, 1999, all of these special
charges had been paid.
During the quarter ended March 28, 1999, the Company recorded merger costs
of $3,950,000 related to the acquisition of Promis, primarily consisting of
legal, accounting and investment banking fees. As of June 27, 1999, all of these
merger costs had been paid. Additionally, during the quarter the Company
recorded special charges of $1,850,000. The special charges consisted of
$1,406,000 for severance and other compensation costs related to personnel in
the selling, general, and administrative functions; $196,000 of costs associated
with the reductions of leased facilities; and $248,000 for other legal issues.
At June 27, 1999, $609,000 of these charges remained in accrued expenses and are
expected to be paid by the end of calendar year 2000.
J. INCOME TAXES
The income tax provision for the three and nine months ended June 27,
1999 was $7,301,000 and $985,000, respectively, as compared to a benefit of
$4,189,000 and $1,860,000 for the corresponding periods in fiscal 1998.
During the quarter ended June 27, 1999 management concluded that a full
valuation allowance against its net deferred tax assets is required, under
applicable accounting criteria, due to uncertainties surrounding their
realization. Accordingly, a valuation allowance in an amount equal to the net
deferred tax assets as of March 28, 1999, reduced by current quarter
adjustments to the net deferred tax assets, has been established to reflect
these uncertainties in the amount of $7,061,000. For the nine months ended
June 27, 1999 the Company has recorded a tax provision of $240,000 primarily
for foreign taxes. The effective tax benefit for the nine months ended June
28, 1998 was unfavorably affected by the charges for acquired in-process
research and development and merger and other special charges which are not
fully deductible for income tax purposes. This unfavorable impact was
partially offset by the effect of the acquisition of Equipe Technologies,
Inc. and E-Machine, Inc., which were both subchapter S-corporations for
federal income tax purposes for the three months ended December 28, 1997. The
effective tax rate exclusive of the charges for acquired in-process research
and development and merger and special charges would have been (31.4%) and
14.8% for the three and nine month periods ending June 28, 1998, respectively.
K. CONTINGENT LIABILITY
At June 27, 1999, the Company had a contingent liability of $1.0 million.
In 1993, the Company's Promis subsidiary purchased the business assets and
assumed selected liabilities of Palette Systems, Inc., a Canadian company.
The purchase price of approximately $9.9 million consisted of $5.5 million in
cash and 59,889 exchangeable common shares of the Company, valued at $73.91
per common share. At that time, Promis agreed that on April 7, 1998 it would
pay additional cash consideration to the sellers of an amount equal to the
amount by which approximately $4.0 million exceeded the market value of the
common shares owned by the sellers on April 7, 1998.
On March 29, 1996, Promis made a formal claim against the sellers
pursuant to the dispute resolution provisions of the original purchase and
sale agreements. The sellers filed certain counterclaims against Promis. In
1997, Promis and the sellers reached a settlement of the dispute. The
settlement provided that commencing on April 7, 1998 Promis would pay
additional cash to the sellers in an amount equal to the amount by which the
market value of 59,889 exchangeable common shares, on each of the agreed-upon
payment dates, is less than $73.91 per common share. As part of the
settlement, half the additional cash consideration was payable on April 7,
1998, with the remaining half due in 20 quarterly installments commencing on
July 7, 1998 through April 7, 2003. Under the terms of the settlement
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agreement, the sellers are restricted as to the number of shares of the
Company's common stock which can be sold in any quarter prior to April 7,
2003.
Since the payment of additional consideration is determined based on the
Company's share price at various future dates, any consideration in addition
to that paid to date will be recorded as a reduction in additional paid-in
capital of the Company as the amounts become determinable. The Company's
contingent liability as of June 27, 1999, calculated based on the market
value of the Company's common stock at June 25, 1999, is approximately $1.0
million.
L. JOINT VENTURE
Effective June 1, 1998, the Company entered into a joint venture with
Shinsung Engineering Co. Ltd. ("SEC") and Chung Song Systems Co., Ltd.
("CSSC") to distribute the Company's products and services in Korea. SEC and
CSSC are in the business of developing and marketing of products and services
for the semiconductor industry. Under the terms of the agreement, the Company
owns 80% of the joint venture and SEC and CSSC each own 10% of the joint
venture. The Company, SEC and CSSC have committed to invest on a pro rata
basis 2.6 billion Korean won, or approximately $2.3 million, in the joint
venture over a two-year period through June 2000. As of June 27, 1999, the
Company had outstanding commitments under this agreement of 1.0 billion
Korean won, or approximately $0.9 million.
M. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." This
statement includes requirements to report selected segment information including
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
Company will comply with the disclosure requirements of this statement in its
Annual Report on Form 10-K for fiscal 1999.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, "Accounting for the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 requires all costs of start-up activities, as
defined, to be expensed as incurred. The Company does not expect the statement
to have a material impact on its financial condition and results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 by fiscal
2001. The Company is evaluating SFAS No. 133 to determine its impact on its
consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward-looking statements" involving risks and uncertainties. The
words "expect," "anticipate," "internal," "plan," "believe," "seek," "estimate"
and similar expressions are intended to identify such forward-looking
statements. In particular, statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations relating to the Company's expected
shipment levels and profitability and the sufficiency of capital to meet working
capital and capital expenditure requirements may be forward-looking statements.
This Report also contains other forward-looking statements. Such statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that could cause the Company's future results to differ materially
from those expressed in any forward-looking statements made by or on behalf of
the Company. Many of such factors are beyond the Company's ability to control or
predict. Readers are accordingly cautioned not to place undue reliance on
forward-looking statements. The Company disclaims any intent or obligation to
update publicly any forward-looking statements, whether in response to new
information or future events or otherwise. Important factors that may cause the
Company's actual results to differ from such forward-looking statements include,
but are not limited to, the factors discussed below.
The Company's business and results of operations depend in significant part
upon capital expenditures of manufacturers of semiconductors, which in turn
depend upon the current and anticipated market demand for semiconductors and
products incorporating semiconductors. Historically, the semiconductor industry
has been highly cyclical, with recurring periods of over-supply. This recurring
over-supply often has had a severe effect on the semiconductor industry's
capital expenditures and, consequently, on demand for systems manufactured and
marketed by the Company. The recent downturn in the semiconductor industry has
materially adversely affected the Company's business, and could continue to do
so in the future. The Company believes that the markets for newer generations of
semiconductors will be subject to similar fluctuations. Also, the recent high
rate of technical innovation and resulting improvements in the performance and
price of semiconductor devices, which have driven much of the demand for the
Company's products, could slow, or encounter limits, in the future. In addition,
any other factor adversely affecting the semiconductor industry or particular
segments within the semiconductor industry may adversely effect the Company's
business, financial condition and operating results.
In addition to the risks and uncertainties posed generally by the
cyclicality of the semiconductor industry and the effects of the continued
downturn throughout the industry, the Company faces the following risks and
uncertainties: continuation of the semiconductor industry downturn and expense
reduction measures the Company might take in response could interfere with the
Company's product development efforts and jeopardize its ability to respond
rapidly to an industry recovery; the Company's restructuring costs have
adversely affected its financial position; the Company's lengthy sales cycle
makes it difficult to anticipate sales; the Company's operating results
fluctuate significantly and are affected by the high price and relatively small
number of systems it sells, variations in its gross margins, its significant
fixed costs and lack of backlog; the Company depends on a limited number of
customers; the Company's future revenue sources are uncertain; the downturn in
Asia could continue to adversely affect the Company's business; the Company's
planned investments in Asia may not be successful; the Company has invested
heavily in 300mm wafer technology, which is being adopted more slowly than the
Company expected; the Company needs employees who because of their skills and
experience may be
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difficult to hire and retain; the Company may have difficulty managing growth in
light of fluctuating demand; the Company's recent acquisitions may disrupt its
operations; acquisitions may dilute the equity interests of the Company's
stockholders and reduce the Company's liquidity; the Company's international
operations create special risks and uncertainties over which the Company has
substantially less control than those relating to its domestic operations; the
Company faces significant competition from other automation companies; the
Company must continually improve its technology to remain competitive; the
Company may experience delays in product development and technical difficulties;
the Company depends on one or a few suppliers for some materials; the Company
may be unable to protect its proprietary technology; claims by others that the
Company infringes their proprietary technology could harm the Company's
business; the Company uses small quantities of toxic and hazardous substances
that could expose it to liability; the Company depends on Mordechai Weisler, its
chairman, and Mitchell G. Tyson, its President and Chief Executive Officer; Year
2000 problems may disrupt the Company's operations; the market price of the
Company's common stock is volatile; future sales by existing stockholders could
depress the market price of the Company's common stock; and certain provisions
of the Company's charter and by-laws and Massachusetts law make a takeover of
the Company more difficult. As a result of the foregoing and other factors, the
Company may experience material fluctuations in its future operating results on
a quarterly or annual basis which could materially adversely affect its
business, financial condition, operating results and stock price.
RESULTS OF OPERATIONS
On March 2, 1999, the Company acquired Promis Systems Corporation Ltd., a
Canadian corporation ("Promis"). Promis is a leading developer of manufacturing
execution systems ("MES") software solutions for semiconductor and precision
electronics manufacturers. On January 22, 1998 the Company acquired Equipe
Technologies, Inc., E-Machine, Inc. and Equipe Japan Ltd. (collectively,
"Equipe"). Equipe is a leading worldwide developer, manufacturer, and supplier
of wafer handling robots, pre-aligners and controllers to semiconductor process
tool manufacturers. Each of these business combinations was accounted for as a
pooling of interests. The financial results of the Company have been restated to
reflect the results of operations for the combined entities. On May 19, 1998,
the Company acquired Chiptronix Handling Systems GmbH ("Chiptronix"), a
Switzerland corporation, which is the European distributor of Equipe products.
The business combination was accounted for as a pooling of interests; however,
as the financial position and results of operations of Chiptronix are immaterial
to the financial position and results of operations of the Company on a
consolidated basis, no prior period financial amounts have been restated.
NET REVENUE: In the quarter ended June 27, 1999, the Company experienced its
second consecutive quarter of revenue growth. Net revenue for the three and nine
months ended June 27, 1999 was $34.5 million and $94.4 million, a decrease of
20.6% and 44.8% over the corresponding periods in fiscal 1998, respectively. Net
revenue continues to be adversely affected by the decline in capital equipment
spending in the semiconductor industry during 1998. Net export sales outside
of North America for the three and nine months ended June 27, 1999 were $11.3
million and $28.0 million, respectively, compared to $18.0 million and $62.3
million, respectively, for the corresponding periods in fiscal 1998. Net
export revenue to European and Asian customers for the three and nine months
ended June 27, 1999 accounted for 32.9% and 29.7% of net revenue,
respectively, as compared to 41.4% and 36.4%, respectively, of net revenue
for the corresponding periods in fiscal 1998.
GROSS PROFIT: The gross profit margin for the three and nine months ended
June 27, 1999 was 42.4% and 37.8%, respectively, as compared to 29.7% and 44.2%
for the corresponding periods in fiscal 1998. Excluding an inventory provision
of $4.9 million, to reduce inventories to their net realizable values, recorded
by the Company in the third quarter of fiscal 1998, the gross profit margin for
the three and nine
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months ended June 28, 1998 was 41.0% and 47.1%. In the quarter ended June 27,
1999, the gross profit margin was favorably affected by $2.0 million of
revenue arising from a single order cancellation for which there were few
associated costs. The decline in margins for the nine months ended June 27,
1999, as compared with the corresponding period of fiscal 1998, is the result
of fixed costs and lower unit volume, change in product mix and price
competition primarily in the first two quarters of fiscal 1999.
RESEARCH AND DEVELOPMENT: Research and development expenses for the three
and nine months ended June 27, 1999 were $11.5 million and $32.8 million,
respectively, representing 33.3% and 34.7% of net revenue, respectively,
compared to $11.5 million and $34.0 million, representing 26.4% and 19.9% of net
revenue for the corresponding periods in fiscal 1998. The consistent spending
levels reflect the Company's continued investment in research and development
during the industry downturn.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses for the three and nine months ended June 27, 1999 were $9.8 million and
$28.5 million, respectively, representing 28.4% and 30.2% of net revenue,
compared to $12.6 million and $37.7 million, representing 29.0% and 22.0% of net
revenue for the corresponding periods in fiscal 1998. During fiscal 1999, the
Company has continued to reduce its costs in these areas in response to the
reduction in net revenue.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT: On October 29, 1997 the
Company acquired Interval Logic Corporation ("ILC"), a California corporation,
for aggregate consideration of 111,258 shares of the Company's common stock. In
addition, the Company assumed options to purchase an aggregate of 199,170 shares
of the Company's common stock. ILC was formed in 1995 to develop advanced,
high-performance planning and scheduling software solutions for the
semiconductor industry. The value of the transaction was $8,523,000, including
approximately $600,000 of expenses related to the acquisition. The Company
accounted for the transaction as a purchase.
At the time of the acquisition, the purchase price was allocated to the
tangible and intangible assets of ILC. Management is aware that it is
responsible for estimating the fair value of purchased in-process research and
development. The value assigned to the intangible assets, primarily the acquired
technology, was based on the fair market value using a risk-adjusted discounted
cash flow approach. ILC's sole product at the time of the acquisition was the
Leverage product, which was under development. ILC had no product revenues
during its prior existence and was a development stage enterprise. The total
effort was estimated to take approximately 225 engineering man-months at a cost
of approximately $2,800,000. This project included completion of the software
requirement definition, data integration and validation, completion of the
graphics user interface, development of alpha and beta versions for customer
testing, and integration and adaptation with customer systems. The significant
further investments in development required to meet expected customer
requirements were substantially completed in the third quarter of fiscal 1999.
The actual development costs have approximated the cost estimates used in the
valuation model. No key assumptions to date have been invalidated with the
passage of time.
The acquired technology had not reached technological feasibility at the
time of the acquisition. The Company defines technological feasibility as the
point at which a working model is functioning to designed specifications and has
been placed at a beta test site. The Leverage product was first released to a
beta test site in March 1999. In addition, the technology had no alternative
future use to the Company in other research and development projects or
otherwise. Accordingly, the acquired technology was expensed as in-process
research and development. Based on the methodology described above, the Company
assigned a fair value of $8,417,000 to the technology.
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MERGER COSTS AND SPECIAL CHARGES: In connection with the acquisition of
Equipe, direct acquisition costs of $4,490,000 for legal, investment banking
and accounting fees were recorded in fiscal 1998. Approximately $100,000
remained in accrued expenses at June 27, 1999 in connection with these direct
acquisition costs and are expected to be paid by the end of calendar 1999.
During the entire fiscal year 1998, the Company restructured its
operations by consolidating its business unit structure in response to market
conditions and the Equipe acquisition. In connection with the restructuring,
the Company recorded special charges of $5,601,000. The major components of
the special charges included: provisions for severance compensation of
$1,910,000 resulting from terminations of 244 personnel in manufacturing,
engineering, and selling, general and administrative functions; costs of
$2,943,000 relating to reductions in leased facilities; and a non-cash
write-down of $528,000 for specialized demonstration equipment associated
with the closure of a customer training site for a particular customer that
was not usable elsewhere. Of the total $4,853,000 severance and lease
reduction charges recorded in connection with the restructuring, $86,000
remained in accrued expenses at June 27, 1999. The Company expects these
remaining costs to be paid by the end of fiscal 1999.
During the quarter ended December 27, 1998, the Company recorded additional
special charges of $650,000. These charges represent provisions for severance
compensation relating to the termination of 62 personnel, approximately 6% of
the workforce, completed in the first quarter of fiscal 1999. These personnel
reductions were approximately 65% in manufacturing and customer support, 15% in
engineering, and 20% in selling, general and administrative functions. The
reduction in force occurred in response to the continued downturn in the
semiconductor equipment industry. As of June 27, 1999, all of these special
charges had been paid.
During the quarter ended March 28, 1999, the Company recorded merger costs
of $3,950,000 related to the acquisition of Promis, primarily consisting of
legal, accounting and investment banking fees. As of June 27, 1999, all of these
merger costs had been paid. Additionally, during the quarter the Company
recorded special charges of $1,850,000. The special charges consisted of
$1,406,000 for severance and other compensation costs related to personnel in
the selling, general, and administrative functions; $196,000 of costs associated
with the reductions of leased facilities; and $248,000 for other legal issues.
At June 27, 1999, $609,000 of these charges remained in accrued expenses and are
expected to be paid by the end of calendar year 2000.
The actions that resulted in the special charges recorded by the Company
during the first and second quarters of fiscal 1999, as well as the special
charges recorded in fiscal 1998, are estimated to have reduced operating
expenses, primarily for payroll and facility costs, by approximately $3.0
million per quarter during fiscal 1999. The Company's objective, in
implementing these cost savings, has been to bring its cost structure more in
line with business requirements without sacrificing future growth prospects.
OTHER INCOME, NET: Other income, net, for the three and nine months ended
June 27, 1999 was $877,000 and $2,158,000, respectively, compared to $214,000
and $386,000 for the corresponding periods in fiscal 1998. Interest income for
the three and nine months ended June 27, 1999 was $550,000 and $1,586,000,
respectively, compared to $451,000 and $1,389,000 for the corresponding periods
in fiscal 1998. Interest expense for the three and nine months ended June 27,
1999 was $48,000 and $101,000, respectively, compared to $37,000 and $79,000 for
the corresponding periods in fiscal 1998. Interest income increased in the three
and nine months ended June 27, 1999 primarily due to higher average cash and
investment balances as compared with the same periods in fiscal 1998. The
fluctuation in other income, net, is primarily due to a net foreign exchange
gain of $374,000 and $758,000, respectively, for the three and nine months ended
June 27, 1999 and a net foreign exchange loss of $300,000 and $834,000 for the
corresponding periods in fiscal 1998.
PROVISION FOR (BENEFIT FROM) INCOME TAXES: The income tax provision for the
three and nine months ended June 27, 1999 was $7,301,000 and $985,000,
respectively, as compared to a benefit of $4,189,000 and $1,860,000 for the
corresponding periods in fiscal 1998. During the quarter ended June 27, 1999
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management concluded that a full valuation allowance against its net deferred
tax assets is required, under applicable accounting standards, due to
uncertainties surrounding their realization. Accordingly, a valuation
allowance in an amount equal to the net deferred tax assets as of March 28,
1999, reduced by current quarter adjustments to net deferred tax assets, has
been established to reflect these uncertainties in the amount of $7,061,000.
For the nine months ended June 27, 1999 the Company has recorded a tax
provision of $240,000 primarily for foreign taxes. The effective tax benefit
for the nine months ended June 28, 1998 was unfavorably affected by the
charges for acquired in-process research and development and merger and other
special charges which are not fully deductible for income tax purposes. This
unfavorable impact was partially offset by the effect of the acquisition of
Equipe Technologies, Inc. and E-Machine, Inc., which were both subchapter
S-corporations for federal income tax purposes for the three months ended
December 28, 1997. The effective tax rate exclusive of the charges for
acquired in-process research and development and merger and special charges
would have been (31.4%) and 14.8% for the three and nine month periods ending
June 28, 1998, respectively.
NET LOSS: The net loss for the three and nine months ended June 27, 1999 was
$13.1 million and $31.0 million, respectively, as compared with a net loss of
$8.4 million and $10.6 million for the corresponding periods in fiscal 1998.
Excluding inventory provisions, special charges, the deferred tax valuation
allowance and the termination of third quarter fiscal 1999 income tax benefits,
the net loss for the three months ended June 27, 1999 would have been $3.8
million as compared to $4.2 million in the same period in fiscal 1998. Diluted
net loss per common share excluding these items would have been $0.17 for the
three months ended June 27, 1999 as compared to $0.20 for the corresponding
period in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through private equity
financing, bank lines of credit, public stock offerings in October 1994 and July
1995 and cash generated from operations. As of June 27, 1999 the Company had
working capital of $79.0 million, including cash and cash equivalents of $60.0
million, compared to working capital of $100.4 million and cash and cash
equivalents of $57.0 million as of September 30, 1998.
Net cash provided by operating activities for the nine months ended June 27,
1999 was $0.4 million, compared to $25.9 million for the corresponding period in
fiscal 1998. Net cash provided by the changes in operating assets and
liabilities was primarily offset by the net loss, after adjusting for non-cash
items, for the nine months ended June 27, 1999. Net cash provided by operating
activities for the nine months ended June 28, 1998 was primarily attributable to
a decrease in accounts receivable of $37.0 million, and the net loss, which
after adjusting for non-cash items, provided $12.3 million. This was slightly
offset by cash used in operating activities related to an increase in contracts
in progress of $2.6 million, an increase in inventories of $8.6 million, an
increase in other assets of $5.4 million, and a decrease in accounts payable of
$7.1 million.
Net cash used in investing activities for the nine months ended June 27,
1999 was $4.5 million, compared to $15.2 million for the corresponding period
in fiscal 1998. This fluctuation is primarily attributable to reductions of
$7.0 million in capital equipment purchases by the Company in fiscal 1999 as
compared with the same period in fiscal 1998. Additionally, in the same
period of fiscal 1998, net cash was also invested in marketable securities of
$1.5 million, in a payment of contingent consideration of $1.3 million
related to the Promis acquisition of Palette Systems, Inc. and in the $1.5
million Promis acquisition of MASE.
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Net cash provided by financing activities for the nine months ended June 27,
1999 was $7.1 million, compared to net cash used in financing activities for the
corresponding period of fiscal 1998 of $4.5 million. The net cash provided by
financing activities for the nine months ended June 27, 1999 was primarily
attributable to proceeds from the exercise of stock options and the Company's
Employee Stock Purchase Plan. The net cash used in financing activities for the
same period of fiscal 1998 was primarily due to repayments of Equipe's bank
overdraft borrowings of $1.9 million and distributions to Equipe shareholders of
$4.5 million. These were partially offset by $1.6 million in proceeds from the
exercise of stock options and the Company's Employee Stock Purchase Plan.
At June 27, 1999, the Company had a revolving credit facility agreement with
Chase Manhattan Bank (the "Bank"). The revolving credit facility enables the
Company to borrow up to $20,000,000 on an unsecured basis. Outstanding revolving
credit loans bear interest, at the Company's option, at the 30, 60 or 90 day
LIBOR rate plus a credit spread or at the effective prime rate. At June 27,
1999, the LIBOR borrowing rate would have been 6.34%. The ability of the Company
to effect borrowings under the revolving credit facility is conditioned upon
meeting certain financial criteria. The revolving credit agreement expires on
June 16, 2000. The Company had outstanding letters of credit with the Bank in
the aggregate amount of $2,015,000 at June 27, 1999, and therefore, the
available balance under this credit agreement was $17,985,000 at June 27, 1999.
At June 27, 1999, the Company was not in compliance with certain of the required
covenants but subsequently obtained a waiver from the Bank. The Company was in
default of the minimum consolidated net worth requirement, the minimum fixed
charge coverage ratio, and the minimum consolidated net income requirements of
the revolving credit agreement for the three months ended June 27, 1999. The
Company expects to seek future waivers as necessary from the Bank, on the next
measurement date of September 30, 1999. However, there can be no assurance that
such waivers will be obtained.
Promis' operating line of credit of $2.9 million with the Bank of Nova
Scotia expired on April 30, 1999 and was not renewed. There were no
borrowings against this operating facility while in effect. The Company, as
of June 27, 1999, also had two forward exchange contract facilities up to a
maximum of $20.0 million for contract periods expiring monthly through
December 1999 with the Bank of Nova Scotia. Open forward contracts of
$3,831,000 existed as of June 27, 1999. The Company has entered into these
foreign currency contracts to purchase Canadian dollars forward as a hedge
against currency fluctuations. The Company does not purchase or hold any
derivative financial instruments for trading or speculative purposes. Based
on the Company's overall evaluation of its market risk exposures from its
financial instruments at June 27, 1999, a short-term change in exchange rates
would not materially affect the consolidated financial position, results of
operations or cash flows of the Company.
The Company believes its existing cash balances and access to financing will
be sufficient for the next twelve months. The Company also believes its existing
cash balances and access to financing will be sufficient for the foreseeable
future beyond the next twelve months. However, there can be no assurance that
adequate financing will be available or at terms acceptable to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement includes requirements to report selected segment
information including entity-wide disclosures about products and services,
major customers, and the material
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countries in which the entity holds assets and reports revenues. The Company
will comply with the disclosure requirements of this statement in its Annual
Report on Form 10-K for fiscal 1999.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-5, "Accounting for the Costs of Start-Up Activities" ("SOP 98-5").
SOP 98-5 requires all costs of start-up activities, as defined, to be expensed
as incurred. The Company does not expect the statement to have a material impact
on its financial condition and results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 in fiscal
2001. The Company is evaluating SFAS No. 133 to determine its impact on its
consolidated financial statements.
YEAR 2000
GENERAL
Many computer systems and software products are expected to experience
problems handling dates beyond the year 1999 because the systems are coded to
accept only two-digit entries in the date code fields. Inability of the
Company's products, or of products and systems on which the Company relies, to
process these dates could have a material adverse effect on the Company's
business. The Company has implemented a company-wide Year 2000 Project (the
"Project") with the objective of minimizing the impact of Year 2000 issues on
its products, services, infrastructure, and internal business support
applications. The Project's goals are to ensure Year 2000 readiness and
compliance for: (i) all of the Company's products; (ii) all business systems
that are used by the Company; and (iii) all critical business services or
products provided to the Company by its vendors.
PROJECT
The Company is implementing a plan intended to ensure that all of the
Company's processes and systems have been assessed, tested and made Year 2000
compliant. The Company engaged the services of an information technology
consulting firm to assist in the program management of the Project and created a
Project Team which includes representatives from each of the Company's
divisions. The Year 2000 Project has been in operation since 1997 and is
proceeding on schedule.
The Project is addressing the impact of Year 2000 on Company products,
internal IT systems, internal non-IT systems, and systems and products of the
Company's suppliers and other third parties. The steps in completing the project
are to: (1) identify software systems and products that pose potential Year 2000
issues; (2) assess the Year 2000 readiness of each item identified; (3) develop
and implement programs that will achieve Year 2000 readiness; (4) test to verify
readiness; and (5) develop contingency plans as required.
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At June 27, 1999, the Project is in various stages of progress as discussed
below:
- PRI PRODUCTS: The Company has completed all of the testing, evaluation
and verification portion of the project for all of its current
products. New products not yet released to customers are being designed
and tested to achieve Year 2000 readiness prior to the Company's sale
of these products. The Company does not foresee any issues with Year
2000 compliance of its products.
- INTERNAL IT SYSTEMS: The Company has assessed its internal information
technology, or IT, systems, including business information systems,
systems utilized in its manufacturing and service operations, and
systems providing electronic interfaces between the Company and its
customers, to determine whether the Company's operations will be
interrupted by Year 2000 issues. The Company has completed
approximately 90% of testing and verifying Year 2000 compliance of its
internal IT systems. This segment of the Project is expected to be
completed by September 1999.
- INTERNAL NON-IT SYSTEMS: Internal non-IT systems include
telecommunications systems, security systems, HVAC systems and
utilities. Testing and verification of these systems is approximately
90% complete and is expected to be completed by September 1999.
- SUPPLY CHAIN: The Company has been working with suppliers and other
third parties upon which it is dependent to determine the extent of
their Year 2000 compliance. The Company's inquiry and assessment of
their Year 2000 readiness is approximately 90% complete and is expected
to be completed by September 1999.
COSTS
Based on its investigation to date, the Company does not expect the total
cost of its Year 2000 Project to have a material adverse effect on the Company's
business or financial results. The estimated total cost of the Year 2000 Project
is approximately $400,000. The total amount charged to expense through June 27,
1999 was approximately $280,000. The remaining amounts are expected to be spent
during the balance of calendar 1999.
RISKS
The Project is intended to reduce the Company's risk of experiencing
significant Year 2000 problems. Based on the progress that the Company has made
to date in addressing its Year 2000 issues, and its plan and timetable to
complete the Project, the Company does not anticipate significant interruption
of its normal operations or significant liability resulting from Year 2000
non-compliance of the Company's products. However, the risk posed by Year 2000
issues depends substantially on the number and type of any instances of
non-compliance that have not yet been discovered by the Company. To the extent
that the Company's internal systems, or products and services obtained from
third parties, are found not to be Year 2000 compliant, the Company could face
disruptions in its business which could, in turn, cause delays in meeting
production and shipping goals and could divert significant management resources.
To minimize potential disruptions, the Company has begun contingency
planning to address any issues raised during the completion of the assessment
and testing phases of the Project. The Company's contingency plan identifies
potential issues and contingency actions to be taken in case of Year 2000
non-readiness. The contingency plan addresses actions such as disaster recovery,
emergency notification systems, employee staffing, suitability of alternate
suppliers, and critical data backups in the key areas of
22
<PAGE>
manufacturing and services, supply chain management, marketing, sales and
customer support, facilities, finance, legal and human resources. This plan will
be modified as necessary during the final stages of the Project.
If the Company identifies any significant Year 2000 problems late in the
testing schedule, it is possible that the Company may not have sufficient time,
resources or ability to remedy the problems. Any unexpected Year 2000 problem
could require the Company to spend significant amounts of money to try to
correct the problem. If any of the Company's products demonstrate previously
undetected Year 2000 non-compliance that the Company cannot quickly correct,
then the Company could lose customer goodwill and could face customer lawsuits.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
*3.4 Amended and Restated By-Laws of the Company
*3.5 Restated Articles of Organization of the Company
**3.6 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on April 22, 1997
***3.7 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on January 16, 1998
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference to the similarly-numbered Exhibit to the Company's
Registration Statement on Form S-1, File No. 33-81836.
** Incorporated by reference to the similarly-numbered Exhibit to the Company's
Quarterly Report Form 10-Q for the period ended March 30, 1997.
*** Incorporated by reference to the similarly-numbered Exhibit to the Company's
Quarterly Report Form 10-Q for the period ended December 28, 1997.
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K ("Form 8-K") with the
Securities and Exchange Commission on April 1, 1999. The Form 8-K amended Item 2
of the Company's Current Report on Form 8-K dated March 16, 1999 to revise the
number of exchangeable shares issued in connection with the registrant's
acquisition of Promis Systems Corporation Ltd. from 1,139,874 to 1,356,136.
The Company also filed a Form 8-K with the Securities and Exchange
Commission on May 19, 1999. The Form 8-K included unaudited financial results
for the combined results of operations from December 28, 1998 to April 25,
1999 for the Company and Promis Systems Corporation Ltd. ("Promis") related
to the Company's acquisition of Promis. These results were presented to
satisfy publication of combined results requirements with respect to
affiliate trading restrictions because of the pooling accounting treatment of
the acquisition and, accordingly, included at least 30 days of post-merger
combined operations. The results included therein are not necessarily
indicative of results to be expected for a full year of operations.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRI AUTOMATION, INC.
Date: August 9, 1999 By: /s/ Stephen D. Allison
----------------------------
Stephen D. Allison
Duly Authorized Officer and
Principal Financial Officer
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
*3.4 Amended and Restated By-Laws of the Company
*3.5 Restated Articles of Organization of the Company
**3.6 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on April 22, 1997
***3.7 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on January 16, 1998
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference to the similarly-numbered Exhibit to the Company's
Registration Statement on Form S-1, File No. 33-81836.
** Incorporated by reference to the similarly-numbered Exhibit to the Company's
Quarterly Report Form 10-Q for the period ended March 30, 1997.
*** Incorporated by reference to the similarly-numbered Exhibit to the Company's
Quarterly Report Form 10-Q for the period ended December 28, 1997.
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-27-1999
<CASH> 60,008
<SECURITIES> 0
<RECEIVABLES> 31,415
<ALLOWANCES> (3,659)
<INVENTORY> 22,279
<CURRENT-ASSETS> 121,920
<PP&E> 41,858
<DEPRECIATION> (23,026)
<TOTAL-ASSETS> 143,618
<CURRENT-LIABILITIES> 42,961
<BONDS> 0
0
0
<COMMON> 219
<OTHER-SE> 98,924
<TOTAL-LIABILITY-AND-EQUITY> 143,618
<SALES> 94,420
<TOTAL-REVENUES> 94,420
<CGS> 58,793
<TOTAL-COSTS> 58,793
<OTHER-EXPENSES> 67,778<F1>
<LOSS-PROVISION> 407
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> (29,993)
<INCOME-TAX> 985
<INCOME-CONTINUING> (30,978)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,978)
<EPS-BASIC> (1.44)
<EPS-DILUTED> (1.44)
<FN>
<F1>Includes $6,450 of merger costs and special charges
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-28-1998
<CASH> 42,214
<SECURITIES> 4,647
<RECEIVABLES> 46,970
<ALLOWANCES> (3,092)
<INVENTORY> 37,173
<CURRENT-ASSETS> 151,357
<PP&E> 37,519
<DEPRECIATION> (16,515)
<TOTAL-ASSETS> 179,216
<CURRENT-LIABILITIES> 45,296
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> 131,918
<TOTAL-LIABILITY-AND-EQUITY> 179,216
<SALES> 171,084
<TOTAL-REVENUES> 171,084
<CGS> 95,425
<TOTAL-COSTS> 95,425
<OTHER-EXPENSES> 88,513<F1>
<LOSS-PROVISION> 1,563
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (12,468)
<INCOME-TAX> (1,860)
<INCOME-CONTINUING> (10,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,608)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
<FN>
<F1>Includes $16,870 of merger costs, special charges and in-process R&D
</FN>
</TABLE>
