<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE;
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0-24934
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
------------------------
PRI AUTOMATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2495703
(State of other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
805 MIDDLESEX TURNPIKE
BILLERICA, MA 01821-3986
(Address of principal (Zip Code)
executive offices)
</TABLE>
Registrant's telephone number: (978) 670-4270
------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
------------------------
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. /X/
The aggregate market value of the Registrant's common stock, $0.01 par value
per share ("Common Stock") held by non-affiliates of the Registrant, based on
the closing price of the Common Stock on December 3, 1999 as reported by the
Nasdaq National Market, was approximately $1,091,299,458. Shares of Common Stock
held by officers and directors and by persons who own of record 5% or more of
the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of December 3, 1999 the Registrant had outstanding 22,612,092 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders, expected to be filed with the Securities and Exchange
Commission on or before January 28, 2000 are incorporated by reference into
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
PRI Automation, Inc. ("PRI" or the "Company"), founded in 1982, is a leading
global supplier of factory automation systems for semiconductor manufacturers
and original equipment manufacturers ("OEMs") whose mission is to improve the
productivity of semiconductor manufacturing. The Company offers a broad range of
integrated solutions consisting of factory automation hardware and software that
optimize the flow of materials and data throughout the semiconductor fabrication
facility, or fab. The Company also provides automation services including
equipment layout and design; simulation; project management; installation; and,
on-site support. The Company has thousands of systems installed at over one
hundred locations throughout the world.
The Company has expanded its product offerings through the acquisition of
several companies during the past two years. The Company acquired Interval Logic
Corporation ("ILC") in October 1997, Equipe Technologies, Inc. and its
affiliates ("Equipe") in January 1998 and Promis Systems Corporation Ltd.
("Promis") in March 1999.
INDUSTRY BACKGROUND
Semiconductor manufacturing is one of the most complex and logistically
challenging operations in the world. A silicon wafer, upon which integrated
circuits are manufactured, can travel approximately 10 miles and undergo 400-500
individual process steps as it moves throughout the fab during its thirty to
forty-five day manufacturing cycle. State-of-the-art fabs produce from 10,000 to
30,000 or more wafers a month and run 24 hours a day, seven days a week.
The semiconductor industry has grown significantly during the past fifteen
years, driven by the demand for inexpensive electronic products, personal
computers, wireless communications and, more recently, by the Internet. Each of
these products and technologies requires greater semiconductor content that
drives manufacturers to produce greater quantities of more complex and powerful
integrated circuits as well as less expensive and more application specific
integrated circuits. The current renewed growth of the semiconductor industry is
driving semiconductor manufacturers to find ways to remain competitive by
increasing their manufacturing capacity and lowering the cost of their
production. The Company believes this will lead manufacturers to increase their
capital investment in automation systems and software in order to improve the
efficiency of their manufacturing operations, lower costs and increase capacity.
Additionally, the Company believes that the industry is preparing for the
expected transition to 300mm manufacturing over the next two to five years. The
move to the next-generation wafer size, if it occurs as expected, could require
semiconductor manufacturers to increase, their capital spending for full-factory
automation systems.
INTEGRATED PRODUCT STRATEGY
The Company provides its end-user and OEM customers a fully integrated line
of factory automation systems, software and services designed to automate the
semiconductor fabrication process and optimize the flow of products, data,
materials and resources throughout the fab. The Company has organized its
product development, marketing and sales functions to address a wide range of
automation requirements to improve manufacturing efficiency and increase
productivity. Key product areas include:
- FACTORY AUTOMATION SYSTEMS that store, transport, and manage the movement
of work-in-process wafers throughout the fab;
- LITHOGRAPHY AUTOMATION SYSTEMS that store, transport, and manage the use
of reticles in the critical photolithography process;
2
<PAGE>
- TOOL AUTOMATION SYSTEMS that automate the movement of wafers into and out
of the process chamber and provide an integration point between the
factory automation systems and the process tool;
- FACTORY AUTOMATION SOFTWARE that manages and directs manufacturing
operations and optimizes material flow, process equipment and other
production resources; and
- AUTOMATION SERVICES AND SUPPORT that help customers throughout the total
project lifecycle from initial conceptualization and design to the
building of the equipment, the installation of the equipment at the
customer site, and all post-installation services.
PRODUCTS
FACTORY AUTOMATION SYSTEMS
INTERBAY AUTOMATION
The Company is a leading supplier of interbay automation systems. Interbay
systems transport wafers throughout the factory and store them in the bay where
the next process step will occur. The Company's interbay automation products
consist of automated storage and retrieval systems linked by an overhead
monorail transport system, together with the associated controllers, software
and communications capabilities that provide a tightly integrated wafer flow
solution. The majority of new fabs constructed since 1990 have adopted some form
of interbay automation system. The Company's interbay automation systems
include:
- OVERHEAD MONORAIL SYSTEMS--Overhead monorail transport systems provide
clean and fast delivery of material from process bay to process bay.
- AUTOMATED STORAGE AND RETRIEVAL SYSTEMS--Automated storage and retrieval
systems (stockers) are enclosed structures that store work-in-process
wafer carriers in various locations throughout the fab.
- INTERFLOOR AND INTERBUILDING TRANSPORT SYSTEMS--Interfloor and
interbuilding transport systems move wafers between different floors of a
fab, or between two separate fabrication facilities or buildings.
INTRABAY AUTOMATION
The Company's intrabay products move wafers from storage systems to
individual process tools. Manufacturers anticipate that the shift to 300mm
wafers will require the extensive adoption of intrabay automation systems to
automate the movement of work-in-process wafers from one process tool loadport
to another. The Company's intrabay automation systems include:
- MACHINE LOADING ROBOT VEHICLES ("MLRVs")--MLRVs are floor-guided vehicles
that utilize a track system embedded in the floor of the process bay to
transport wafers to and from the process tool.
- OVERHEAD HOIST TRANSPORT SYSTEMS ("OHTs")--OHTs are overhead monorail
transport systems that retrieve wafer pods from a stocker and deliver them
directly to the loadport at the process tool. The Company believes this
will be the preferred method of intrabay automation in 300mm fabs.
- AUTOMATED GUIDED VEHICLES ("AGVs")--AGVs are operator-free, trackless
vehicles that automate the movement of wafers within a process bay from
the stocker directly to the loadport of the process tool. AGVs are ideally
suited for low throughput applications where floor space is less critical.
3
<PAGE>
- PEOPLE GUIDED VEHICLES ("PGVs")--PGVs are manually operated vehicles used
to move materials across the fab and assist the operator in transferring
the wafer pod from the vehicle to the process tool loadport. The PGVs can
be used as a backup to automated systems.
FACTORY SYSTEMS SOFTWARE
The Company designs and develops material control software ("MCS") that
directs the movement of wafers throughout the fab and is integrated with the
Company's interbay and intrabay automation systems.
LITHOGRAPHY AUTOMATION SYSTEMS
The Company is a leading supplier of lithography automation systems. The
Company's lithography material handling systems automate the storage, retrieval,
tracking, and delivery of reticles and wafers within the lithography bay.
Reticles are glass plates containing the device images that are projected onto
wafers during the lithography process. As semiconductor manufacturing technology
advances, the cost of lithography tools (steppers) is increasing. Also, as
device complexity increases, the number of reticles used in the manufacturing
process increases, expanding the need for automation to improve utilization and
productivity. Since the lithography bay typically paces overall fab output,
productivity improvements in the lithography bay directly improve overall fab
throughput and productivity. The Company's lithography automation systems
include:
- BARE RETICLE STOCKERS--Bare reticle stockers provide a high-density
storage and retrieval solution for reticles that are stored without being
placed in a pod or box container. The bare reticle stocker protects the
reticle in an environmentally controlled system and saves expensive floor
space inside the lithography bay.
- RETICLE POD OR BOX STOCKERS--Reticle pod or box stockers provide clean and
safe storage for reticles that are stored in industry standard pods or
boxes. The reticle pod and box stocker interfaces with the Company's wafer
transport system, allowing the pod or box stocker to be placed anywhere in
the fab.
- COMBINATION RETICLE STOCKERS--The combination reticle stocker combines the
speed and convenience of a pod stocker with the high-density storage of a
bare reticle stocker for even greater levels of reticle inventory
management and productivity in the lithography bay.
- RETICLE MANAGEMENT SOFTWARE ("RMS")--Reticle management software manages
the use, kitting and unkitting, delivery and maintenance of reticles for
improved reticle inventory management.
TOOL AUTOMATION SYSTEMS
The Company provides robotic systems that automate the transfer of wafers
into and out of process tools. The primary customers for these solutions are
process tool equipment suppliers, or OEMs. The automation systems are typically
integrated directly into the OEM's product before shipment to the end user. The
Company's tool automation systems include:
- ATMOSPHERIC WAFER-HANDLING SYSTEMS--The Company is a leading supplier of
atmospheric wafer-handling systems. These systems remove wafers from pods
or cassettes and align them prior to placing them into the process tool
chamber or metrology station.
- VACUUM WAFER-HANDLING SYSTEMS--Vacuum wafer-handling systems automate
wafer-handling within the vacuum chamber. The Company's vacuum products
range from individual vacuum robotic components to fully integrated vacuum
cluster platforms.
- SYSTEM CONTROL SOFTWARE--System control software integrates, tracks and
controls the wafer-handling robots with the OEM's process tool.
4
<PAGE>
- INTEGRATED FRONT END SYSTEMS ("IFEs")--Integrated front ends provide the
storage of work-in-process wafer cassettes, standard mechanical interface
(SMIF) pods, or 300mm front opening unified pods (FOUPs) directly at the
process tool front-end. IFEs also unload wafers from the FOUPs, align them
and place them into the process tool. IFE series products include all the
SEMI-compliant interfaces to the factory automation systems.
- 300MM LOADPORTS--The Company's 300mm loadports provide a simple and
economical method for opening and removing wafers from FOUPs.
- SPECIALTY WAFER-HANDLING SYSTEMS--The Company provides other
wafer-handling systems. These specially designed robots are used in a
variety of wafer-handling applications including chemical mechanical
planarization (CMP), copper interconnect processing and other robotic
wafer-handling applications.
MES AND OTHER SYSTEMS
As more of the semiconductor manufacturing process becomes automated, the
Company believes that software will play an increasingly important role in a
manufacturer's ability to improve the productivity of its overall fab
operations. The Company's software products address the most important aspects
of wafer flow logistics to deliver a complete software management solution that
addresses fab-wide operations.
- MANUFACTURING EXECUTION SYSTEM ("MES") SOFTWARE--MES software manages and
directs complex manufacturing operations by automating process
specification and control. MES software bridges business planning systems
and material processing in the factory to optimize the flow of material
and improve process equipment utilization.
- MANUFACTURING INTEGRATION SOFTWARE--Manufacturing integration software
reduces the time required to deploy process tool automation and provides a
flexible solution for distributing and maintaining equipment automation
throughout the fab.
- ADVANCED PLANNING AND SCHEDULING SOFTWARE--Planning and scheduling
software enables customers to develop capacity plans and work-flow
schedules to optimize fab-wide operations and quickly react to changing
business requirements.
AUTOMATION SERVICES AND SUPPORT
The Company provides a variety of automation services and support that are
essential to the success of large-scale factory automation projects. These
include:
- AUTOMATION PLANNING AND DESIGN SERVICES--The Company works with customers
in assessing their automation needs during the design phase of the
project. The Company develops a complete automation plan identifying the
type and configuration of the automation systems and simulates the design
using computer modeling techniques to verify that the design layout meets
customer requirements.
- PROJECT MANAGEMENT SERVICES--The Company provides customers with project
management support during the building and manufacturing of the automation
systems. The customer's order is tracked from manufacturing through
delivery to the customer's site.
- INSTALLATION SERVICES--The Company develops an installation plan and
timetable that meets the customer's manufacturing schedule and installs
the equipment into the customer's fab.
- POST INSTALLATION SERVICE AND SUPPORT--The Company provides a variety of
post installation services to ensure the automation systems continue to
operate at optimum performance levels.
5
<PAGE>
MARKETING, SALES AND CUSTOMER SUPPORT
The Company markets its products worldwide to semiconductor manufacturers
and OEM equipment suppliers. In North America, the Company sells its products
through a direct sales force operating out of its headquarters in Billerica,
Massachusetts and regional offices located in California and Texas. In Europe,
the Company's products are sold through a direct sales force with offices in the
United Kingdom, France, Germany, Ireland, Israel, and Switzerland. In Asia, the
Company's products are sold through a direct sales force with offices in Taiwan,
South Korea, Singapore and Japan. For additional information regarding revenues
for the Company's business segments, as well as information regarding export
sales, see Note M to the Notes to Consolidated Financial Statements included in
this Report, entitled "Segment Reporting and Geographic Information."
The Company offers a variety of service programs to meet a broad range of
customer requirements. These services can range from telephone hot-line support
to full-time on-site customer service provided by Company personnel based at the
customer's facility. The Company maintains a fully staffed and equipped training
center at its Billerica, Massachusetts headquarters to support the training
requirements of its customers.
COMPETITION
Rapid technological change and intense competition characterize the
semiconductor capital equipment market. The Company believes that the market for
its products is characterized by manufacturers' need to increase productivity
and reduce manufacturing costs. The Company competes on the basis of product
performance, quality, track record, customer service and support, delivery
capability and price. The Company believes it has a competitive advantage in the
factory automation market for the following reasons:
- a broad range of flexible products;
- technological leadership;
- experience in managing large scale factory automation projects;
- knowledge of automation applications;
- specialized manufacturing skills; and
- worldwide customer support infrastructure.
However, existing or future competitors, particularly those with greater
resources than the Company, or who are able to bring technologically superior
products to market could overcome these competitive advantages. The Company's
factory automation products face intense competition from a number of foreign
and domestic companies who market and sell their automation systems and software
to semiconductor manufacturers throughout the world. The Company's tool
automation products compete with a number of foreign and domestic wafer-handling
robotics companies, including in-house organizations of process tool
manufacturers that develop their own automation. The Company's software products
compete with a number of suppliers of MES and automated scheduling and planning
software.
RESEARCH AND DEVELOPMENT
The Company is continuously investing in the development of new products to
improve performance, reliability, and to introduce new functionality in order to
maintain the Company's leading position in providing fully integrated factory
automation systems and software. Research and development of promising
technologies and products is vital to the success of the Company. The Company's
expenses for research and development were $45,480,000, $44,509,000 and
$36,198,000 in fiscal years 1999, 1998 and 1997, representing 33%, 22% and 15%
of its total net revenue for such periods, respectively.
6
<PAGE>
CUSTOMERS
The Company's customers include most of the leading manufacturers of ASICs,
microprocessors and DRAMs as well as foundries and OEM equipment suppliers in
the U.S., Europe and Asia. Historically, a significant portion of the Company's
total net revenue in any particular period has been attributable to sales to a
limited number of customers. Sales to the Company's top ten customers accounted
for 54%, 60% and 67% of total net revenue for fiscal year 1999, 1998 and 1997,
respectively. The Company continues to expand its global operations and broaden
its growing worldwide customer base.
The Company's largest customers change from year to year, as large projects
are completed and new projects are initiated. Sales to Intel accounted for 21%,
19% and 32% of the Company's total net revenue for fiscal year 1999, 1998 and
1997, respectively. At September 30, 1999, Intel and Texas Instruments accounted
for 13% and 10% of the Company's backlog, respectively.
ORDER BACKLOG
The Company's backlog at September 30, 1999 was $86,398,000, compared to
$52,120,000 at September 30, 1998. The Company includes in its backlog only
those customer orders for products, spare parts and services for which it has
accepted signed purchase orders with assigned delivery dates within twelve
months. OEM and software products typically have shorter lead times than do
factory automation products and thus, backlog is not as relevant an indicator of
business levels.
MANUFACTURING
The Company's manufacturing operations take place in Billerica,
Massachusetts and in Mountain View, California. The Company's manufactured
products consist of standard components that can be customized to meet unique
customer requirements. Primary manufacturing operations include assembly and
test functions with most fabrication outsourced to key suppliers. Completed
subassemblies are tested for functionality prior to their assembly into
completed systems. Completed systems are subjected to functional testing prior
to shipment.
The Company's manufacturing department is responsible for managing the
transition of new products from engineering to production, and for improving
manufacturing efficiency. The Company operates a "concurrent engineering"
process to provide an effective integration of disciplines from design through
manufacturing, acceptance testing and installation. The Company's objective is
not only to meet customers' tight delivery deadlines, but to ensure that
products are designed so they can be manufactured at the lowest cost while
meeting the reliability, serviceability and support required by customers.
The Company has implemented quality control ("QC") and quality assurance
("QA") processes based on total quality management principles. QC is maintained
through incoming inspections of components and in-process inspection and testing
of subassemblies. After all manufacturing operations are completed through final
assembly, the Company's QA personnel perform final test and acceptance of each
system to make sure that it meets product specifications and quality standards
before it is shipped to the customer.
The Company has implemented a Supplier Excellence Program to assist
management in qualifying and selecting external suppliers. By more effectively
managing its external supplier base, the Company can maximize the suppliers'
technical capabilities to provide the Company with the flexibility and capacity
utilization it needs to meet production requirements and lower the Company's
costs. Our commodity management group works closely with the design and
manufacturing engineering groups to provide multiple sources for most
components.
7
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
At September 30, 1999, the Company holds seven patents relating to certain
key elements of its wafer-handling systems. The Company also has fourteen patent
applications pending and intends to file additional patent applications as
appropriate. The Company's patents expire at various times from 2007 to 2019.
The Company believes, however, that its success will depend more upon its
technological expertise and the capabilities of its employees than upon
protection through the legal system of its intellectual property rights. The
Company seeks to protect its trade secrets and other proprietary technology
through confidentiality agreements with employees, consultants and other
parties.
EMPLOYEES
At September 30, 1999, the Company had 1,174 full-time employees. In
addition, the Company utilizes the services of temporary or contract personnel
within certain functional areas to assist on project related activities. The
number of such personnel varies depending on specific project activity. At
September 30, 1999, the Company employed 116 temporary or contract personnel.
Substantially all employees have stock options that provide for vesting over
five years. The Company believes that its future success will depend in large
part on its ability to attract and retain highly skilled employees. None of the
employees of the Company is covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
FACILITIES
The Company's corporate headquarters are located in a 122,342-square foot
leased building in Billerica, Massachusetts. The lease on this facility expires
in 2001, and provides for average annual lease payments of approximately
$563,000. The Company also leases three additional facilities, with lease
expiration dates in 2000 and 2001, in Billerica, Massachusetts, with a total of
117,100 square feet and average annual lease payments of approximately $466,000.
The Billerica, Massachusetts facilities are primarily used by the Company's
Factory Automation Systems group for engineering and manufacturing. The Company
also leases facilities in Dallas and Austin, Texas; Mesa, Arizona; Menlo Park
and Mountain View, California; Toronto, Canada; as well as South Korea, Taiwan,
Singapore, France, Germany, United Kingdom, Switzerland and Japan, under leases
with expiration dates ranging from February 2000 to November 2006. The Company
believes that its existing facilities will be adequate to meet its currently
anticipated requirements and that suitable additional or substitute facilities
will be available as required.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be involved in certain legal proceedings
incidental to its normal business activities. There are no pending legal
proceedings to which the Company is a party or to which any of its properties
are subject which, either individually or in the aggregate, are expected by the
Company to have a material adverse effect on its business, financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the National Market System of the
Nasdaq Stock Market under the trading symbol PRIA. There were 283 holders of
record of the Company's common stock as of December 3, 1999. The Company
believes that there are a substantial number of additional beneficial owners
that hold stock in nominee or "street name" through brokerage firms. The
following table sets forth the high and low sales prices for the Company's
common stock as reported on the Nasdaq Stock Market for each quarter during the
two-year period ended September 30, 1999.
<TABLE>
<CAPTION>
1(ST) QUARTER 2(ND) QUARTER 3(RD) QUARTER 4(TH) QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fiscal 1999............................ $ 9.57-27.75 $24.06-44.31 $20.75-39.00 $24.75-39.75
Fiscal 1998............................ $27.25-55.81 $23.62-37.00 $14.06-28.38 $10.44-17.88
</TABLE>
The Company has never paid cash dividends on its common stock. The current
policy of the Board of Directors is to retain all earnings to reinvest for the
continued growth of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data,
which should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's consolidated
financial statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Total net revenue....................... $136,296 $203,545 $236,100 $166,256 $106,278
Gross profit(1)......................... 52,542 78,790 115,128 89,970 57,281
Operating (loss) profit(1)(2)(3)(6)..... (37,955) (31,014) 35,316 31,973 7,599
Net (loss) income(1)(2)(3)(4)(6)........ (36,085) (22,623) 27,497 27,279 5,186
Net (loss) income per common
share:(1)(2)(3)(4)(5)(6)
Basic................................. (1.67) (1.08) 1.35 1.40 0.32
Diluted............................... (1.67) (1.08) 1.27 1.33 0.29
BALANCE SHEET:
Total assets............................ $146,552 $167,478 $195,315 $147,797 $114,915
Long-term obligations, less current
portions.............................. 411 734 823 735 204
</TABLE>
- ------------------------
(1) For the year ended September 30, 1998, reflects charges of $13,987,000 for
inventory and warranty provisions.
(2) For the year ended September 30, 1999, reflects charges of $3,950,000 for
merger costs related to the acquisition of Promis and for other special
charges of $2,425,000 for workforce reductions, lease abandonments, and
other charges related to the integration of Promis with the Company. See
Note S of Notes to Consolidated Financial Statements.
(3) For the year ended September 30, 1998, reflects charges of $8,417,000 for
the purchase of incomplete technology from the acquisition of Interval Logic
Corporation, merger costs of $4,490,000 related to the acquisition of Equipe
and other special charges of $5,601,000 related to workforce reductions,
lease abandonments and other charges incurred in consolidating the Company's
business unit structure. See Notes Q and S of Notes to Consolidated
Financial Statements.
9
<PAGE>
(4) For the year ended September 30, 1999 reflects a charge to establish a full
valuation allowance against the Company's net deferred tax assets. See
Note J of Notes to Consolidated Financial Statements.
(5) Reflects a two-for-one stock split effective May 2, 1997 for shareholders of
record as of April 22, 1997.
(6) For the year ended September 30, 1995, reflects charges of $7,025,000 by
Promis for the write-off of goodwill and intellectual property due to
impairment in value, and special charges of $1,750,000 related to workforce
reductions and lease abandonments.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides an analysis of the Company's financial
condition and results of operations and includes Promis Systems Inc. ("Promis"),
acquired in fiscal 1999, and the Equipe Combined Companies ("Equipe"), acquired
in fiscal 1998, each accounted for as a pooling-of-interests.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, certain
income and expense items as a percentage of net revenue:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
Product and equipment..................................... 73.4% 84.4% 92.1%
Services and maintenance.................................. 26.6 15.6 7.9
----- ----- -----
Total net revenue......................................... 100.0 100.0 100.0
Cost of revenue:
Product and equipment....................................... 46.9 51.8 44.7
Services and maintenance.................................... 14.6 9.5 6.5
----- ----- -----
Total cost of revenue....................................... 61.5 61.3 51.2
----- ----- -----
Gross profit................................................ 38.5 38.7 48.8
Operating expenses:
Research and development.................................. 33.3 21.9 15.3
Selling, general and administrative....................... 28.3 23.0 18.5
Acquired in-process research and development.............. -- 4.1 --
Merger costs and special charges.......................... 4.7 4.9 --
----- ----- -----
Operating (loss) profit..................................... (27.8) (15.2) 15.0
Other income, net........................................... 2.1 0.3 0.5
----- ----- -----
(Loss) income before income taxes........................... (25.7) (14.9) 15.5
Provision for (benefit from) income taxes................... 0.8 (3.8) 3.9
----- ----- -----
Net (loss) income....................................... (26.5)% (11.1)% 11.6%
===== ===== =====
</TABLE>
FISCAL 1999 VS. FISCAL 1998
TOTAL NET REVENUE: Total net revenue for fiscal year 1999 decreased 33.0%
to $136,296,000, compared to $203,545,000 for fiscal year 1998. This overall
decrease in the Company's total net revenue is attributable to the downturn in
the worldwide semiconductor industry, which resulted in a significant slowdown
in the construction or expansion of semiconductor fabs. The total net revenue
decline occurred primarily in the Factory Automation Systems and Tool Automation
Systems segments, which
10
<PAGE>
declined by 34.7% and 41.1% in fiscal 1999, respectively. While product and
equipment revenue decreased, the Company gained market share in fiscal 1999 and
experienced a 14.1% increase in its service and maintenance revenue. Net export
sales to customers outside of North America were $44,155,000 or 32.4% of revenue
for fiscal year 1999, compared to $72,238,000 or 35.5% of total net revenue for
the prior fiscal year.
GROSS PROFIT: The Company's gross profit margin was 38.5% for fiscal year
1999, compared to 38.7% for the prior fiscal year. In fiscal year 1998, there
were $13,987,000 in charges to cost of sales related to inventory and warranty
provisions. Excluding these charges, fiscal year 1998 gross profit margins would
have been 45.6%. The decline in gross profit margin in fiscal year 1999 occurred
principally in the Factory Automation Systems segment which decreased to 20.4%
from 23.7%. The deterioration in margin was the result of fixed capacity and
related manufacturing costs, which could not be reduced proportionally with the
reduction in production volume, and a decline in product pricing during the
industry downturn. This decline was partially offset by favorable changes in
product mix. Gross margins for service and maintenance increased in fiscal year
1999 to 45.0% from 38.9% in fiscal 1998 and was primarily related to increased
growth in software maintenance contracts.
RESEARCH AND DEVELOPMENT: Research and development expenses increased
slightly to $45,480,000 or approximately 33.3% of total net revenue for fiscal
year 1999, compared to $44,509,000 or 21.9% of total net revenue for the prior
fiscal year. The increase in the dollar amount of research and development
spending reflects the Company's continued investment in new product development
and enhancements of existing product lines. The Company continued to invest in
the development of 200mm and 300mm products throughout its factory automation
and tool automation product lines as well as the manufacturing execution, and
advanced planning and scheduling software product lines. The Company believes
that these investments are critical to maintaining and improving its
technological and market leadership.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses decreased to $38,642,000 or 28.3% of total net revenue for fiscal year
1999, compared to $46,787,000 or 23.0% of total net revenue for the prior fiscal
year. The Company reduced its expenses in the current fiscal year in response to
the industry downturn and through the consolidation of common activities and
functions of acquired companies. In 1999, the Company reduced its work force by
62 personnel, including 14 in sales, general and administrative functions, in
addition to a reduction in force of 244 personnel, including 56 in sales,
general and administrative functions, in 1998. See "Merger costs and special
charges" for discussion of severance and reductions of leased facilities.
ACQUIRED IN PROCESS RESEARCH AND DEVELOPMENT: In fiscal 1998, the Company
recorded a charge of $8,417,000 in relation to the purchase of incomplete
technology acquired in the ILC acquisition.
MERGER COSTS AND SPECIAL CHARGES: During fiscal year 1999 the Company
incurred certain special charges. In the first quarter of fiscal year 1999, the
Company recorded special charges of $650,000 representing provisions for
severance compensation relating to the termination of 62 personnel. The
personnel reductions included 40 in manufacturing and customer support, 8 in
engineering and 14 in sales, general and administrative functions. In the second
fiscal quarter the Company acquired Promis, in a pooling-of-interest
transaction, and recorded merger costs of $3,950,000 consisting primarily of
investment banking, legal and accounting fees. In addition, during the second
quarter, the Company recorded special charges of $1,850,000. The special charges
consisted of $1,406,000 for compensation-related costs for five management
personnel in sales, general and administrative functions to satisfy existing
contractual obligations related to acquired companies; $196,000 of costs
associated with the reduction of leased facilities; and $248,000 for other legal
costs. In the fourth fiscal quarter, the Company recognized a credit of $75,000,
to adjust the estimated costs to reflect actual costs. At September 30, 1999,
$424,000 of these charges remained in accrued expenses and are expected to be
paid by December 2000.
11
<PAGE>
During fiscal year 1998 the Company incurred certain special charges. In the
second quarter of fiscal year 1998, the Company acquired Equipe in a transaction
accounted for as a pooling of interests. Direct acquisition costs, primarily
related to legal, investment banking, and accounting fees, amounted to
$4,490,000 and were charged against the results of operations in the quarter.
Additionally, during the second, third and fourth quarters of fiscal 1998, the
Company recorded restructuring and other special charges of $5,601,000 in
response to market conditions and to integrate the Equipe operations. The
special charges included provisions for severance compensation of $1,910,000
resulting from terminations of approximately 244 personnel completed in 1998.
The personnel reductions consisted of 123 in manufacturing and customer support,
65 in engineering and 56 in sales, general and administrative functions. In
addition, the special charges included costs of $2,943,000 relating to
reductions of leased facilities space and a non-cash write-down of specialized
demonstration equipment for a particular customer of $748,000 and other assets
that are not usable elsewhere. Of the total $4,853,000 severance and lease
reduction charges recorded in fiscal 1998, all of these special charges had been
paid as of September 30, 1999.
OPERATING (LOSS) PROFIT: As a result of the decline in revenue and the
other foregoing factors, for fiscal year 1999 the Company experienced an
operating loss of $37,955,000, or negative 27.8% of total net revenue, compared
to an operating loss of $31,014,000, or negative 15.2% of total net revenue for
the prior fiscal year.
OTHER INCOME, NET: Other income, net, in fiscal 1999 was $2,935,000 or 2.1%
of total net revenue, compared to $625,000 or 0.3% of total net revenue for the
prior fiscal year. Interest income was $2,233,000 and $1,991,000 and interest
expense was $123,000 and $137,000, for fiscal 1999 and 1998, respectively. Net
translation and foreign exchange gains of $854,000 were recorded in fiscal year
1999 and net translation and foreign exchange losses of $1,086,000 were incurred
in fiscal year 1998.
PROVISION FOR (BENEFIT FROM) INCOME TAXES: The income tax provision for
fiscal year 1999 was $1,065,000, compared to a benefit of $7,766,000 for the
previous fiscal year. The effective tax rate in fiscal year 1999 was 3.0% as
compared to 25.6% for the previous fiscal year. In fiscal year 1999, the
effective tax rate was unfavorably affected by the provision for foreign taxes
and the increase in the valuation allowance as a result of management's
conclusion that a full valuation allowance against its net deferred tax asset
was required, under applicable accounting criteria. The effect of the provision
for foreign taxes and the increase in the valuation allowance was partially
offset by the Company's ability to carryback tax losses generated in fiscal year
1999 to a prior profitable period. The fiscal 1998 effective tax rate reflects
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.
FISCAL 1998 VS. FISCAL 1997
TOTAL NET REVENUE: Total net revenue for fiscal year 1998 decreased 13.8%
to $203,545,000, compared to $236,100,000 for fiscal year 1997. This decrease is
attributable to the downturn in the worldwide semiconductor industry which began
in fiscal year 1998, and which resulted in a significant slowdown in the
construction and expansion of semiconductor fabs. The decline in total net
revenue in fiscal 1998 occurred in the Factory Automation Systems segment which
declined 36.7%. This was partially offset by increases in the Tool Automation
Systems and MES and Other Systems segments of 61.3% and 12.8%, respectively. The
Company's service and maintenance revenue grew by 70.1% in fiscal 1998 while
product and equipment revenue declined by 21.0%. Net export sales outside of
North America were $72,238,000 or 35.5% of total net revenue for fiscal year
1998, compared to $110,055,000 or 46.6% of total net revenue for fiscal year
1997.
12
<PAGE>
GROSS PROFIT: The Company's gross profit margin decreased to 38.7% for
fiscal year 1998, compared to 48.8% for the fiscal year 1997. In fiscal year
1998, there were $13,987,000 in charges to cost of sales related to inventory
and warranty provisions. Excluding these charges, the fiscal year 1998 gross
profit margin would have been 45.6%. The decrease in gross margin is
attributable to the industry downturn during which fixed capacity and the
related manufacturing costs could not be reduced proportionally with the decline
in production volume, and to declines in competitive pricing. The decline in
gross profit margin in fiscal 1998 was principally in the Factory Automation
Systems segment which declined to 25.1% from 43.6% in the prior year. The Tool
Automation Systems segment gross profit margin declined in fiscal year 1999 to
43.6% from 48.2%, while the MES and Other Systems segment gross margin remained
flat.
RESEARCH AND DEVELOPMENT: Research and development expenses increased to
$44,509,000 or 21.9% of total net revenue for fiscal year 1998, compared to
$36,198,000 or 15.3% of total net revenue for the prior fiscal year. The
increase in dollar amount reflects the company's investment in new product
development and enhancement to existing products. The Company continued to
invest in the development of 200mm and 300mm products throughout the factory
automation and tool automation product lines as well as the manufacturing
execution, advanced planning and scheduling software products.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses increased to $46,787,000 or 23.0% of net revenue for fiscal year 1998,
compared to $43,614,000 or 18.5% of total net revenue for the prior fiscal year.
The increase in dollar amount primarily reflects the increase in personnel, and
related expenses associated with expansion of the Company's marketing, market
research and communications programs and increased sales and marketing efforts
worldwide. See "Merger costs and special charges" for discussion of severance
and reductions of leased facilities.
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 issued or 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 transaction
was accounted for 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-TM- product, which was under development. ILC had no product revenues
during its prior existence and was a development stage enterprise. The total
development effort was estimated to take approximately 225 engineering
man-months at a cost of approximately $2,800,000. The 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 year 1999. The actual development costs have approximated the cost
estimates used in the valuation model.
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 specification 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
13
<PAGE>
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.
MERGER COSTS AND SPECIAL CHARGES: During fiscal year 1998 the Company
incurred certain special charges. In the second quarter of fiscal year 1998, the
Company acquired Equipe in a transaction accounted for as a pooling of
interests. Direct acquisition costs, primarily related to legal, investment
banking, and accounting fees, amounted to $4,490,000 and were charged against
the results of operations in the quarter. Additionally, during the second, third
and fourth quarters of fiscal 1998, the Company recorded restructuring and other
special charges of $5,601,000 in response to market conditions and to integrate
the Equipe operations. The special charges included provisions for severance
compensation of $1,910,000 resulting from terminations of approximately 244
personnel completed in 1998. The personnel reductions consisted of 123 in
manufacturing and customer support, 65 in engineering and 56 in sales, general
and administrative functions. In addition, the special charges included costs of
$2,943,000 relating to reductions of leased facilities space and a non-cash
write-down of specialized demonstration equipment for a particular customer of
$748,000 and other assets that are not usable elsewhere. Of the total $4,853,000
severance and lease reduction charges recorded in fiscal 1998, all of these
special charges had been paid as of September 30, 1999.
OPERATING (LOSS) PROFIT: As a result of the foregoing factors, the
operating loss for fiscal year 1998 was $31,014,000 or negative 15.2% of total
net revenue, compared to the operating profit of $35,316,000 or 15.0% of total
net revenue for the prior fiscal year.
OTHER INCOME, NET: Other income, net, decreased to $625,000 or 0.3% of
total net revenue, compared to $1,223,000 or 0.5% of total net revenue for the
prior fiscal year. Interest income was $1,991,000 and $1,523,000 and interest
expense was $137,000 and $116,000 for fiscal 1998 and 1997, respectively. Net
translation and foreign exchange losses were $1,086,000 and $520,000 in fiscal
years 1998 and 1997 respectively.
PROVISION FOR (BENEFIT FROM) INCOME TAXES: The income tax benefit for
fiscal year 1998 was $7,776,000 as compared to a provision of $9,042,000 for the
previous fiscal year. The effective tax rate in fiscal year 1998 was 25.6% as
compared to 24.7% in the previous fiscal year. The effective tax benefit for the
fiscal year 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 fiscal 1997
effective tax rate reflects the fact that Equipe Technologies and a related
company acquired by the Company were not subject to federal income taxes prior
to the acquisition due to S corporation status.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through public stock
offerings in October 1994 and July 1995, cash generated from operations and bank
lines of credit.
At September 30, 1999 the Company had working capital of $78,936,000. During
fiscal year 1999, cash and cash equivalents decreased by $5,182,000 to
$51,865,000. Net cash used in operations was $10,462,000, compared to net cash
provided by operations of $37,837,000 in fiscal 1998. The net cash used by
operating activities in fiscal 1999 was primarily attributable to the net loss.
Additionally, cash used in operations included increases in inventory of
$1,642,000 and decreases in billings in excess of revenues and customer advances
of $2,795,000. These cash outflows were partially offset by the non-cash items
of $19,460,000 consisting primarily of depreciation and amortization and
deferred income taxes. Additionally, increases in accounts payable and accrued
expenses of $6,676,000, decreases in accounts receivable of $3,726,000 and
decreases in contracts in progress of $2,999,000 provided cash
14
<PAGE>
from operations. Net cash used in operations in fiscal 1998 was primarily
attributable to the significant increase in accounts receivable of $46,386,000.
Net cash used in investing activities was $6,823,000 in fiscal year 1999,
compared to $13,300,000 in fiscal year 1998. The net cash used in investing
activities was lower primarily due to reduced purchases of property and
equipment which amounted to $6,249,000 in fiscal 1999 and $13,665,000 in fiscal
1998.
Net cash provided by financing activities was $12,124,000 in fiscal year
1999, compared to cash used in financing activities of $3,550,000 in fiscal year
1998. The net cash provided by financing activities in fiscal 1999 was primarily
attributable to proceeds from the exercise of stock options and the Employee
Stock Purchase Plan of $12,487,000, along with proceeds from minority
shareholders of $199,000. This was offset partially by the repayment of capital
leases and lines of credit of $562,000.
At September 30, 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
September 30, 1999, the LIBOR borrowing rate would have been 6.50%. The ability
of the Company to borrow under the revolving credit facility is conditioned upon
the meeting of certain financial criteria. The revolving credit agreement
expires on June 16, 2000. The Company had outstanding letters of credit with the
Bank of $1,875,000 at September 30, 1999, and therefore, the available balance
under this credit agreement was $18,125,000 at September 30, 1999. At
September 30, 1999, the Company was not in compliance with certain of the
required covenants but has subsequently received a waiver from the Bank through
September 30, 1999, on November 15, 1999. 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 September 30, 1999. The Company
expects to seek future waivers as necessary from the Bank, on the next
measurement date of January 2, 2000. However, there can be no assurance that
such waivers will be obtained.
The Company believes that existing cash and investment balances and funds
available under its existing revolving credit facility will be sufficient to
meet the Company's cash requirements to fund operations and expected capital
expenditures during the next twelve months.
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.
15
<PAGE>
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 products 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 lengthy sales cycle for the
Company's products 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,
and its significant fixed costs; the Company depends on a limited number of
customers; the Company's future revenue sources are uncertain; changes in the
economies of foreign countries in which the Company operates could have an
adverse effect on the Company's business; 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 competition for their
skills and experience, may be 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 of the
Company's common stock 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.
16
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
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, in accordance with SFAS No. 137, which deferred the effective date of SFAS
No. 133. The Company is evaluating SFAS No. 133 to determine the 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. The Project is now complete and
the Company is Year 2000-ready. In addition, we have prepared contingency plans
to monitor and react to unforeseen issues from our suppliers.
PROJECT
The Company has implemented a plan 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 has created a Project Team
which includes representatives from each of the Company's divisions and
locations worldwide.
The Project has addressed the impact of Year 2000 on Company products,
internal information technology (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 were 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 compliance; (4) test to verify compliance; and (5) develop
contingency plans as required.
At December 20, 1999, the Project is in various stages of progress as
discussed below:
- PRI PRODUCTS: The Company has completed all of the testing 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 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
17
<PAGE>
testing and verifying Year 2000 compliance of its internal IT systems. The
Company does not foresee any issues with its Year 2000 compliance of
internal IT systems.
- INTERNAL NON-IT SYSTEMS: Internal non-IT systems include
telecommunications systems, security systems, HVAC systems and utilities.
Testing and verification of these systems are complete. The Company does
not foresee any Year 2000 issues in this area.
- SUPPLY CHAIN: The Company has worked 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 complete and it does not foresee any Year 2000 issues with
its supply chain. However, we have also developed contingency plans to
monitor and react to any unforeseen issues from our suppliers.
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
September 30, 1999 was approximately $360,000. The remaining amounts are
expected to be spent in early fiscal 2000.
RISK
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 normal operations. 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 implemented a contingency
plan to address any unresolved issues affecting Year 2000 compliance, if needed.
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 manufacturing and services, supply chain management,
marketing, sales and customer support, facilities, finance, legal and human
resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY AND EXCHANGE RATE RISK
A portion of the Company's business is conducted outside the United States
through its foreign subsidiaries. The Company has foreign currency exposure
related to its operations in international markets, where certain business is
transacted in foreign currencies and accordingly is subject to exposure from
adverse movements in foreign currency exchange rates. The Company's foreign
subsidiaries maintain their accounting records in their local currencies.
Consequently, changes in currency exchange rates may impact the translation of
foreign statements of operations into U.S. dollars, which may in turn affect the
Company's consolidated statement of operations. The Company's functional
currency is the U.S. dollar for all of its subsidiaries, and therefore,
translation gains and
18
<PAGE>
losses are included as a component of net income or loss. Substantially all of
the Company's revenues are invoiced and collected in U.S. dollars.
The Company has entered into forward contracts in Canadian dollars to hedge
the expected operating expenses of its Canadian subsidiary that are denominated
in Canadian dollars. These contracts are used to mitigate the Company's risk
associated with exchange rate movements, as gains and losses on these contracts
are intended to offset exchange losses and gains on underlying cost exposures.
These contracts, for which the contract periods do not exceed sixteen months,
expire in December 1999 and are not expected to be renewed as part of the
Company's risk management strategies. Realized and unrealized gains and losses
on these contracts, which did not qualify for hedge accounting, are classified
in other income, net.
At September 30, 1999 the notional amount of outstanding forward currency
contracts for Canadian dollars was $1,914,000, which was marked to market and
recognized in the consolidated statement of operations. The potential fair value
loss for a hypothetical 10% adverse change in Canadian currency exchange rates
at September 30, 1999, would be $186,000. The potential loss was estimated
calculating the fair value of the forward exchange contracts at September 30,
1999, and comparing that with the value calculated using the hypothetical
forward currency exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and Financial Statement Schedules as of
September 30, 1999 and 1998 and for each of the three years in the period ended
September 30, 1999 are included in Items 14(a)(1) and (2).
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 with respect to directors and
executive officers of the Company is incorporated herein by reference to the
information set forth under the caption "Directors and Executive Officers"
contained in the Company's Definitive Proxy Statement for its Annual Meeting of
Stockholders expected to be filed with the Securities and Exchange Commission on
or before January 28, 2000 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation
is incorporated herein by reference to the information set forth under the
caption "Remuneration of Executive Officers and Directors" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item with respect to security ownership of
management and certain beneficial owners of the Company is incorporated herein
by reference to the information set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" contained in the Proxy Statement.
19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item with respect to certain relationships
and related transactions is incorporated herein by reference to the information
set forth under the caption "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
Reports of Independent Accountants
Consolidated Balance Sheets as of September 30, 1999 and 1998
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
The following financial statement schedule is incorporated in this report on
page S-1:
Schedule II-Valuation and Qualifying Accounts
Schedules not included herein are omitted because they are not applicable or
the required information appears in the consolidated financial statements or
notes thereto.
20
<PAGE>
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
2.1 Combination Agreement dated as of November 24, 1998 between
PRI Automation, Inc., 1325949 Ontario Inc. and Promis
Systems Corporation Ltd. (filed as Exhibit 2.1 to the
Company's Registration Statement S-3 filed on December 24,
1998 and incorporated herein by reference).
3.1 Amended and Restated By-Laws of the Company (filed as
Exhibit 3.4 to the Company's Registration Statement on Form
S-1, File No. 33-81836 and incorporated herein by
reference).
3.2 Restated Articles of Organization (filed as Exhibit 3.5 to
the Company's Registration Statement on Form S-1, File No.
33-81836, and incorporated herein by reference).
3.6 Articles of Amendment to the Restated Articles of
Organization (filed as Exhibit 3.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
30, 1997 and incorporated herein by reference).
3.7 Articles of Amendment to the Restated Articles of
Organization of the Company (filed as Exhibit 3.7 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1998 and incorporated herein by reference).
4.1 Specimen certificate for the Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-81836, and incorporated
herein by reference).
4.2 Rights Agreement dated as of December 9, 1998, between PRI
Automation, Inc. and State Street Bank and Trust Company, as
Rights Agent (filed as Exhibit 4.1 to the Company's Form 8-K
filed on November 25, 1998 and incorporated herein by
reference).
4.3 Form of Certificate of Designation of Series A Participating
Cumulative Preferred Stock of PRI Automation, Inc. (filed as
Exhibit 4.2 to the Company's Form 8-K filed on November 25,
1998 and incorporated herein by reference).
4.4 Form of Rights Certificate (filed as Exhibit 4.3 to the
Company's Form 8-K filed on November 25, 1998 and
incorporated herein by reference).
4.5 Promis Systems Corporation Ltd. Amended and Restated Stock
Option Plan dated September 30, 1998 (filed as Exhibit 4.4
to the Company's Form S-8 filed on March 9, 1999 and
incorporated herein by reference).
10.1* 1984 Incentive Stock Option Plan of the Company (filed as
Exhibit 10.4 to the Company's Registration Statement on Form
S-1, File No. 33-81836, and incorporated herein by
reference).
10.2* 1994 Incentive and Non-Qualified Stock Option Plan of the
Company (filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1, File No. 33-81836, and incorporated
herein by reference).
10.10 Lease Agreement dated as of May 5, 1994, by and between the
Company and The Prudential Insurance Company of America
(filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1, File No. 33-81836, and incorporated
herein by reference).
10.11* 1994 Employee Stock Purchase Plan of the Company (filed as
Exhibit 10.16 to the Company's Registration Statement on
Form S-1, File No. 33-81836, and incorporated herein by
reference).
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.12 Agreement and Plan of Reorganization, dated as of October
25, 1997, among PRI Automation, Inc., E-Acquisition Corp.,
Equipe Technologies, Inc. and certain Stockholders of Equipe
Technologies, Inc. (filed as Exhibit 10.19 to the Company's
Current report on form 8-K on November 10, 1997, and
incorporated herein by reference).
10.13 Stock Purchase Agreement, dated as of October 25, 1997 among
PRI Automation, Inc. and the Shareholders of E-Machine, Inc.
(filed as Exhibit 10.20 to the Company's Current Report on
Form 8-K filed on November 10, 1997, and incorporated herein
by reference).
10.14 Stock Purchase Agreement, dated as of October 25, 1997,
among PRI Automation, Inc. and the Shareholders of Equipe
Japan Corporation (filed as Exhibit 10.21 to the Company's
Current Report on Form 8-K filed on November 10, 1997, and
incorporated herein by reference).
10.15* PRI Automation, Inc. 1997 Non-Incentive Stock Option Plan of
the Company, as amended (filed as Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 28, 1997 and incorporated herein by
reference).
10.16 Lease agreement dated as of March 9, 1998 by and between the
Company and Lincoln-Whitehall Realty, L.L.C. (filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1998 and incorporated herein
by reference).
10.17 Sublease agreement dated as of March 18, 1998 by and between
the Company and BAAN USA (filed as Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1998 and incorporated herein by reference).
10.18 Joint Venture Agreement by and between the Company and Chung
Song Systems, Co., Ltd. and Shinsung Engineering Co., Ltd.
(filed as Exhibit 10.26 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1998 and
incorporated herein by reference).
10.19 Stock Purchase Agreement dated as of May 19, 1998 by and
between the Company and the Shareholders of Chiptronix
Handling Systems GmbH and of Chiptronix GmbH (filed as
Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998 and incorporated herein
by reference).
10.20 Revolving Credit Agreement dated as of June 16, 1998 by and
between the Company and The Chase Manhattan Bank (filed as
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998 and incorporated herein
by reference).
10.21 Plan of Arrangement under Section 192 of the Canada Business
Corporations Act of Promis Systems Corporation Ltd. dated
March 2, 1999 (filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-3, File No. 333-69721 and
incorporated herein by reference).
10.22 Voting and Exchange Trust Agreement among the Company,
1325949 Ontario Inc., Promis Systems Corporation Ltd. and
Montreal Trust Company of Canada, as trustee dated March 2,
1999 (filed as Exhibit 99.2 to the Company's Registration
Statement on Form S-3, File No. 333-69721 and incorporated
herein by reference).
10.23 Support Agreement among the Company, 1325949 Ontario Inc.
and Promis Systems Corporation Ltd. dated March 2, 1999
(filed as Exhibit 99.3 to the Company's Registration
Statement on Form S-3, File No. 333-69721 and incorporated
herein by reference).
10.24 Lease Agreement dated as of May 28, 1996 by and between 170
University (Toronto) Partnership and Promis Systems
Corporation Ltd. **
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
21.1 List of Subsidiaries of the Company**
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of Ernst & Young LLP, Independent Auditors**
23.3 Report of Ernst & Young LLP, Independent Auditors, dated
February 27, 1998**
27.1 Financial Data Schedule**
27.2 Financial Data Schedule**
27.3 Financial Data Schedule**
</TABLE>
- ------------------------
* management contracts and compensatory arrangements
** filed herewith
(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 July 20, 1999. The Company attached as an
exhibit to that report a press release announcing its financial results for the
fiscal quarter ended June 27, 1999.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
PRI Automation, Inc.:
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under
Item 14(a)(1), present fairly, in all material respects, the financial position
of PRI Automation, Inc. and its subsidiaries at September 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1999, in conformity with generally accepted
accounting principles in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements and financial statement schedule give
retroactive effect to the merger of Promis Systems Corporation, Ltd. in a
transaction accounted for as a pooling of interests, as described in Note N to
the consolidated financial statements. We did not audit the consolidated
financial statements of Promis Systems Corporation, Ltd., which statements, not
included herein, reflect total revenues of $23,967,000, before conforming
accounting policy adjustments, for the year ended December 31, 1997. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Promis Systems Corporation, Ltd., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 1999
24
<PAGE>
PRI AUTOMATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 51,865 $ 57,047
Trade accounts receivable, less allowance for doubtful
accounts of $2,646 at 1999 and $3,252 at 1998........... 31,436 34,443
Contracts in progress..................................... 6,018 9,017
Inventories............................................... 28,351 27,494
Deferred income taxes..................................... -- 7,832
Other current assets...................................... 7,063 7,254
-------- --------
Total current assets.................................... 124,733 143,087
Property and equipment, net................................. 19,128 20,306
Deferred income taxes....................................... -- 559
Other assets, net........................................... 2,691 3,526
-------- --------
Total assets............................................ $146,552 $167,478
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,900 $ 12,281
Accrued expenses and other liabilities.................... 16,396 14,823
Line of credit............................................ -- 11
Current portion of obligation under capital lease......... 570 798
Billings in excess of revenues and customer advances...... 11,931 14,726
-------- --------
Total current liabilities............................... 45,797 42,639
Obligation under capital lease.............................. 411 734
Other non-current liabilities............................... 788 965
Commitments and contingencies (Notes F, I and U)
Minority interest........................................... 56 --
Stockholders' equity:
Preferred stock, 400,000 shares authorized; none
outstanding............................................. -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 22,265,676 and 21,235,525 issued and
outstanding at September 30, 1999 and 1998,
respectively............................................ 223 212
Additional paid-in capital................................ 141,469 129,035
Accumulated deficit....................................... (42,192) (6,107)
-------- --------
Total stockholders' equity.............................. 99,500 123,140
-------- --------
Total liabilities and stockholders' equity.............. $146,552 $167,478
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
PRI AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
Product and equipment..................................... $100,074 $171,791 $217,437
Services and maintenance.................................. 36,222 31,754 18,663
-------- -------- --------
Total net revenue..................................... 136,296 203,545 236,100
Cost of revenue:
Product and equipment..................................... 63,850 105,342 105,616
Services and maintenance.................................. 19,904 19,413 15,356
-------- -------- --------
Total cost of revenue:................................ 83,754 124,755 120,972
-------- -------- --------
Gross profit................................................ 52,542 78,790 115,128
Operating expenses:
Research and development.................................. 45,480 44,509 36,198
Selling, general and administrative....................... 38,642 46,787 43,614
Acquired in-process research and development.............. -- 8,417 --
Merger costs and special charges.......................... 6,375 10,091 --
-------- -------- --------
Operating (loss) profit..................................... (37,955) (31,014) 35,316
Other income, net........................................... 2,935 625 1,223
-------- -------- --------
(Loss) income before income taxes........................... (35,020) (30,389) 36,539
Provision for (benefit from) income taxes................... 1,065 (7,766) 9,042
-------- -------- --------
Net (loss) income........................................... $(36,085) $(22,623) $ 27,497
======== ======== ========
Net (loss) income per common share:
Basic..................................................... $ (1.67) $ (1.08) $ 1.35
Diluted................................................... $ (1.67) $ (1.08) $ 1.27
Weighted average number of shares outstanding:
Basic..................................................... 21,628 20,988 20,408
Diluted................................................... 21,628 20,988 21,570
UNAUDITED PRO FORMA NET (LOSS) INCOME PER COMMON SHARE:
Historical net (loss) income:............................... $(36,085) $(22,623) $ 27,497
Adjustment to Equipe income tax expense to convert from
S-corporation to C-corporation status................... -- (1,156) (3,639)
-------- -------- --------
Unaudited pro forma net (loss) income....................... $(36,085) $(23,779) $ 23,858
======== ======== ========
Unaudited pro forma net (loss) income per common share:
Basic..................................................... $ (1.67) $ (1.13) $ 1.17
Diluted................................................... $ (1.67) $ (1.13) $ 1.11
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
PRI AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS/ OTHER TOTAL
------------------- PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) INCOME/(LOSS) EQUITY
-------- -------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996................. 20,039 $200 $100,525 $ 5,702 $106,427
Exercise of stock options................... 371 4 2,396 2,400
Tax benefit on exercise of stock options.... 2,065 2,065
Proceeds from warrants offering............. 5,990 5,990
Conversion of warrants to common shares..... 271 3 (3) --
Stock-based compensation.................... 140 140
Issuance of common stock in connection with
the Employee Stock Purchase Plan.......... 49 812 812
Distributions to shareholders of Equipe..... (8,011) (8,011)
Adjustment to conform fiscal year of
Equipe.................................... 3,705 3,705
Comprehensive income:
Net income.............................. 27,497 27,497
Other comprehensive income:
Change in unrealized gain on
securities.......................... $ 2 2
--------
Total comprehensive income................ 27,499
------ ---- -------- -------- ---- --------
Balance, September 30, 1997................. 20,730 207 111,925 28,893 2 141,027
Exercise of stock options................... 178 2 1,050 1,052
Tax benefit on exercise of stock options.... 439 439
Issuance of common stock in connection with
the Employee Stock Purchase Plan.......... 115 1 1,574 1,575
Distributions to shareholders of Equipe..... (4,507) (4,507)
Adjustment of retained earnings for S-
corporation earnings of Equipe............ 5,911 (5,911) --
Issuance of common stock in connection with
the acquisition of ILC.................... 111 1 5,915 5,916
Stock options assumed in connection with the
acquisition of ILC........................ 2,015 2,015
Reduction in paid-in-capital for contingent
consideration............................. (1,364) (1,364)
Issuance of common stock in connection with
the pooling of interests with
Chiptronix................................ 105 1 12 13
Acquired accumulated deficit from
Chiptronix................................ (1,556) (1,556)
Tax benefit from Chiptronix acquisition..... 1,591 1,591
Adjustment to conform fiscal year of
Promis.................................... (3) (33) (403) (436)
Comprehensive loss:
Net loss................................ (22,623) (22,623)
Other comprehensive loss:
Change in unrealized gain on
securities.......................... (2) (2)
--------
Total comprehensive loss.................. (22,625)
------ ---- -------- -------- ---- --------
Balance, September 30, 1998................. 21,236 212 129,035 (6,107) -- 123,140
Exercise of stock options................... 859 9 10,091 10,100
Issuance of common stock in connection with
the Employee Stock Purchase Plan.......... 171 2 2,385 2,387
Stock-based compensation.................... 236 236
Reduction in paid-in-capital for contingent
consideration............................. (278) (278)
Comprehensive loss:
Net loss................................ (36,085) (36,085)
------ ---- -------- -------- ---- --------
Balance, September 30, 1999................. 22,266 $223 $141,469 $(42,192) -- $ 99,500
====== ==== ======== ======== ==== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
PRI AUTOMATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(36,085) $(22,623) $ 27,497
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization expense................... 8,679 8,307 5,396
Provisions for write-downs of inventories............... 785 12,389 5,024
Provision for bad debts................................. (523) 1,724 956
Deferred income taxes................................... 8,391 (5,329) (2,674)
Tax benefit from disqualified dispositions.............. -- 439 2,065
Net loss on disposal of assets.......................... 54 2,042 125
Stock-based compensation................................ 236 -- 140
Amortization of premiums or discounts on marketable
securities............................................. -- 42 64
Translation (gains) losses, net......................... (854) 1,086 520
Minority interests in losses of subsidiaries............ (143) -- --
Write-off of acquired in-process research and
development............................................ -- 8,417 --
Changes in operating assets and liabilities:
Trade accounts receivable............................. 3,726 46,386 (40,805)
Contracts in progress................................. 2,999 6,446 6,361
Inventories........................................... (1,642) (5,739) (16,075)
Other assets.......................................... 34 (5,984) (1,630)
Accounts payable...................................... 4,760 (12,050) 3,186
Accrued expenses and other liabilities................ 1,916 (4,605) 9,981
Billings in excess of revenues and customer
advances............................................. (2,795) 6,889 3,000
-------- -------- --------
Net cash (used in) provided by operating activities......... (10,462) 37,837 3,131
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of marketable securities........... -- 6,867 9,079
Proceeds from maturities of marketable securities......... -- 2,035 5,390
Purchases of marketable securities........................ -- (5,798) (5,431)
Purchases of intangible assets............................ (305) (112) --
Proceeds from sale of property and equipment.............. 9 24 --
Purchases of property and equipment....................... (6,249) (13,665) (7,677)
Cash paid for contingent consideration.................... (278) (1,364) --
Net effect on cash balances from Chiptronix acquisition... -- 246 --
Net effect on cash balances from MASE acquisition......... -- (1,533) (1,533)
-------- -------- --------
Net cash used in investing activities....................... (6,823) (13,300) (172)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings.................................. -- -- 1,769
Repayments of borrowings.................................. -- (1,913) (1,702)
Proceeds from borrowings under capital lease
obligations............................................. -- 1,001 510
Repayment of capital lease obligations.................... (551) (758) (461)
Proceeds from issuance of warrants........................ -- -- 5,990
Proceeds from minority shareholders....................... 199 -- --
Distributions to shareholders of Equipe................... -- (4,507) (8,011)
Repayments under line of credit........................... (11) -- --
Proceeds from exercise of stock options and Employee Stock
Purchase Plan........................................... 12,487 2,627 3,212
-------- -------- --------
Net cash provided by (used in) financing activities......... 12,124 (3,550) 1,307
-------- -------- --------
Adjustment to conform fiscal years of Promis and Equipe..... -- (50) 218
Effect of changes in exchange rates on cash................. (21) (642) (283)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (5,182) 20,295 4,201
Cash and cash equivalents at beginning of year.............. 57,047 36,752 32,551
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 51,865 $ 57,047 $ 36,752
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 125 $ 155 $ 113
Income taxes............................................ 908 8,730 5,314
Non-cash transactions:
Property and equipment acquired under capital leases.... -- -- 265
Acquisition of Interval Logic Corporation (see Note Q)
Acquisition of Chiptronix Handling Systems GmbH (see
Note P)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS:
PRI Automation, Inc. (the "Company") designs, develops, manufactures and
markets factory automation systems, process tool wafer-handling systems and
related software used by semiconductor and precision electronics manufacturers
and OEM equipment suppliers to automate the fabrication of integrated circuits
in cleanroom manufacturing operations. The Company also provides a broad range
of integrated solutions, including system integration of hardware and software,
factory simulation, project management, and on-site support. The Company is
subject to risks and uncertainties common to companies in the semiconductor
industry including, but not limited to, the highly cyclical nature of the
semiconductor industry leading to recurring periods of over-supply, rapid
technological change and the development by the Company or its competitors of
new technological innovations, dependence on key personnel, the protection of
proprietary technology, management of inventory and manufacturing capacity,
fluctuations in operating results, doing business in Asian and European markets
and related currency risks, competitive pressure on selling prices, the timing
and cancellation of customer orders, the effects of the Year 2000 and the
Company's ability to absorb and manage acquisitions.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The 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. Certain
reclassifications have been made to prior years' financial statements to conform
to the current presentation.
In March 1999, the Company acquired Promis Systems Corporation Ltd.
("Promis"). In January 1998, the Company acquired Equipe Technologies, Inc.,
E-Machine, Inc., and Equipe Japan Ltd. (collectively, "Equipe"). In May 1998,
the Company acquired Chiptronix Handling Systems GmbH ("Chiptronix"), the
European distributor of Equipe products. The acquisitions of Promis, Equipe and
Chiptronix were accounted for using the pooling-of-interests method of
accounting. All prior period historical 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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 and would
impact future results of operations and cash flows. Significant estimates are
inherent in determining revenue recognition and associated profits under the
percentage-of-completion method.
29
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of commercial paper, Eurodollars, money market
mutual funds, short-term guaranteed investment certificates and other highly
liquid investments with original maturities of three months or less.
MARKETABLE SECURITIES
Current marketable securities include all investments with remaining
maturities of twelve months or less. Non-current marketable securities include
all investments with remaining maturities greater than twelve months. The
Company classifies all securities as available-for-sale. These securities are
reported at fair value as of the balance sheet date with net unrealized holding
gains and losses included in stockholders' equity. Gains and losses on sales of
securities are calculated using the specific identification method. The Company
did not hold any marketable securities as of September 30, 1999 and 1998. Gross
realized gains and losses from marketable securities for the year ended
September 30, 1998 were $6,000 and $1,000, respectively. Gross realized gains
and losses for the year ended September 30, 1997 were $9,000 and $7,000,
respectively. Gross unrealized gains and losses at September 30, 1997 were
$3,000 and $1,000, respectively. Interest income included in other income, net
was $2,233,000, $1,991,000 and $1,523,000 for the years ended September 30,
1999, 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of financial or credit risk consist principally of cash and cash
equivalents, current and non-current marketable securities, trade accounts
receivable, accounts payable and debt. The Company generally invests its cash
and investments in investment-grade securities. The carrying value of financial
instruments approximates their related fair values.
The Company's customers are primarily concentrated in one industry, the
semiconductor manufacturing and related capital goods industry. Historically,
significant portions of the Company's sales have been to a limited number of
customers within this industry. The Company performs ongoing credit evaluations
of its customers' financial condition, and may require deposits on large orders
but does not require collateral or other security to support customer
receivables.
OFF-BALANCE SHEET RISK
The Company has entered into forward contracts in Canadian dollars to hedge
the expected operating expenses of its Canadian subsidiary that are denominated
in Canadian dollars. These contracts are used to mitigate the Company's risk
associated with exchange rate movements, as gains and losses on these contracts
are intended to offset exchange losses and gains on underlying cost exposures.
These contracts do not qualify for hedge accounting. The contract periods which
do not exceed sixteen months expire monthly through December 1999. The Company
does not enter into forward currency contracts for speculative purposes. Both
realized and unrealized gains and losses on the contracts are classified as
components of other income, net, in the consolidated statement of operations. At
September 30, 1999 the notional amount of outstanding forward currency contracts
was $1,914,000, which was marked to market and recognized in the consolidated
statements of operations.
30
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The fair value of these contracts as of September 30, 1999 and 1998,
determined by applying fiscal year end currency exchange rates to the notional
contract amounts, represented a net unrealized gain of $131,000 and net
unrealized loss of $60,000, respectively.
RETAINAGES
Accounts receivable include certain amounts which are not due until final
customer acceptance or until contract provisions allow for billing. Such
retainages were approximately $9,605,000 and $13,832,000 at September 30, 1999
and 1998, respectively. The retainages are expected to be collected within the
next twelve months.
CONTRACTS IN PROGRESS
Contracts in progress include costs and estimated profits under incomplete
contracts accounted for using the percentage-of-completion method, net of
amounts billed. These amounts are expected to be collected within the next
twelve months as units are delivered. Amounts billed at September 30, 1999 and
1998 were $7,701,000 and $24,757,000, respectively.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
temporary differences between the financial statement and tax bases of assets
and liabilities using the expected tax rates in the year in which the
differences are expected to reverse. The Company provides a valuation allowance
against net deferred tax assets if, based on the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. Equipe Technologies, Inc. and one of the related companies,
E-Machine, Inc., elected to be treated as an S-corporation under the provisions
of the Internal Revenue Code, prior to their acquisition by the Company, and as
such, the shareholders of Equipe Technologies, Inc. and E-Machine, Inc. were
liable for individual federal and certain state income taxes on their allocated
portions of the respective company's taxable income. Accordingly, U.S. income
tax expense related to Equipe Technologies, Inc. and E-Machine, Inc. was not
recorded by the Company for all periods through January 22, 1998, the date of
consummation of the merger with the Company (see Note O) except that Equipe
Technologies, Inc. and E-Machine, Inc. were subject to California franchise tax
based on 1.5% of taxable income.
INVENTORIES
Inventories, consisting of raw materials, work-in-process and finished
goods, are stated at the lower of cost (determined principally on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Betterments and major renewals
are capitalized and included in property and equipment, while repairs and
maintenance are charged to expense as incurred. Depreciation and amortization of
property and equipment are primarily provided using the straight-line method
over the estimated useful lives of the assets. The amortization of assets
recorded under capital leases is included in depreciation and amortization
expense. Upon retirement or sale, the cost of the
31
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
assets disposed and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is credited or charged to operations.
OTHER ASSETS
Goodwill, included in other assets, represents the excess of the purchase
price over the fair value of net assets acquired and is amortized on a straight
line basis over ten years. Goodwill was fully amortized as of September 30,
1999. Additionally, other intangible assets, including intellectual property
acquired in Promis' MASE acquisition and capitalized software licenses are
amortized on a straight line basis over the estimated useful lives of the assets
ranging from two to five years. The Company periodically reviews the value of
intangible assets in relation to the expected associated undiscounted cash flows
in order to assess whether there has been a permanent impairment in carrying
value. The Company believes that no significant impairment has occurred.
BILLINGS IN EXCESS OF REVENUES
Billings in excess of revenues include amounts billed on incomplete
contracts, accounted for using the percentage-of-completion method net of costs
and estimated profits recognized.
REVENUE RECOGNITION
For certain contracts eligible under American Institute of Certified Public
Accountants ("AICPA") Statement of Position No. 81-1, revenue on product sales
is recognized using the percentage-of-completion accounting method based upon an
efforts-expended method. In all cases, changes to total estimated costs and
anticipated losses, if any, are recognized in the period in which determined.
Revenue recognized under the percentage-of-completion accounting method was
approximately $23,383,000, $54,999,000 and $100,699,000 during fiscal years
1999, 1998 and 1997, respectively. Revenue from product sales not recognized
under the percentage-of-completion method is generally recorded upon shipment to
the customer, provided that no significant vendor obligations remain outstanding
and that collection of the related receivable is deemed probable by management.
Software license revenue is recognized upon delivery of the software and receipt
of a written agreement from the customer, provided that acceptance is not
uncertain, fees are fixed and determinable and collectibility of the related
receivable is deemed probable by management. Revenues from training and
consulting are recognized as services are performed. Service revenue is
recognized ratably over applicable contract periods or as the services are
performed. Additionally, the Company accrues for warranty costs upon shipment.
Product and equipment net revenue includes revenue from all equipment sales,
installation, project management and software licenses. Service and maintenance
net revenue consists of service contracts, spare part sales, repairs and
upgrades, software maintenance contracts and consulting and training services.
COMMISSIONS
The Company pays certain commissions to agents and distributors under
certain agreements in return for obtaining orders; and, in certain cases,
providing installation and warranty services. Commissions that are due upon the
Company receiving payment in full from the customers are charged against the
related revenues. These amounts totaled approximately $98,000 and $2,381,000 for
fiscal years 1998 and 1997, respectively. No such commissions were paid in
fiscal 1999.
32
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all engineering, research and development costs as
incurred. Expenses subject to capitalization in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," were insignificant.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries which are denominated in
foreign currencies are remeasured into U.S. dollars at rates of exchange in
effect at the end of the fiscal year, except for nonmonetary assets and
liabilities, which are remeasured using historical exchange rates. Revenue and
expense amounts are remeasured using an average of exchange rates in effect
during the period, except those amounts related to nonmonetary assets and
liabilities, which are remeasured at historical exchange rates. The Company's
functional currency is the U.S. dollar for all of its subsidiaries. Net realized
and unrealized gains and losses resulting from foreign currency remeasurement
are included in the consolidated statements of operations as other income or
expense.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company continues to apply the accounting provisions of Accounting
Principles Board ("APB") Opinion 25 and has elected the disclosure-only
alternative permitted under Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." The Company has disclosed
pro forma net (loss) income and pro forma net (loss) income per share in the
footnotes using the fair value based method.
NET (LOSS) INCOME PER COMMON SHARE
Basic net (loss) income per common share is based upon the weighted average
number of common shares outstanding during each period. Diluted net (loss)
income per common share gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted net (loss) income per
common share does not assume the issuance of potential common shares that have
an anti-dilutive effect.
NEW ACCOUNTING PRONOUNCEMENTS
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, in accordance with SFAS No. 137, which deferred the effective date of SFAS
No. 133. The Company is evaluating SFAS No. 133 to determine the impact on its
consolidated financial statements.
33
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash on hand.............................................. $ 11 $ 21
Cash deposited with banks................................. 4,660 5,924
Eurodollars............................................... 10,967 32,088
Money market funds........................................ 36,179 11,014
Time deposits............................................. 48 8,000
------- -------
$51,865 $57,047
======= =======
</TABLE>
D. INVENTORIES:
Inventories consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................. $16,492 $19,072
Work-in-process........................................... 5,804 5,242
Finished goods............................................ 6,055 3,180
------- -------
$28,351 $27,494
======= =======
</TABLE>
E. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
DEPRECIABLE 1999 1998
--------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Machinery and equipment............... 2-7 years $ 31,259 $ 27,058
Furniture and fixtures................ 5-7 years 6,479 6,025
Leasehold improvements................ Shorter of life of lease or useful life 5,883 5,475
-------- --------
43,621 38,558
Accumulated depreciation and
amortization........................ (24,493) (18,252)
-------- --------
$ 19,128 $ 20,306
======== ========
</TABLE>
Depreciation expense was $7,364,000, $6,691,000 and $4,733,000 for the years
ended September 30, 1999, 1998 and 1997, respectively. Assets capitalized under
leases totaled $3,415,000 and $3,083,000 as of September 30, 1999 and 1998,
respectively. Accumulated amortization of these assets was $1,822,000 and
$1,148,000 as of September 30, 1999 and 1998, respectively.
F. LEASE COMMITMENTS:
The Company leases manufacturing and office facilities and equipment under
noncancelable operating and capital leases expiring through the year 2006 (see
Notes E and K). Rent expense under
34
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. LEASE COMMITMENTS: (CONTINUED)
operating leases was $4,418,000, $4,343,000 and $2,680,000 for fiscal years
1999, 1998 and 1997, respectively.
At September 30, 1999, future minimum payments, net of sub-lease proceeds,
required under all noncancelable operating and capital leases were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
2000...................................................... $ 4,373 $ 594
2001...................................................... 3,555 368
2002...................................................... 2,642 87
2003...................................................... 1,469 --
2004...................................................... 603 --
2005 and thereafter....................................... 601 --
------- ------
Total minimum lease payments.............................. $13,243 $1,049
======= ------
Less: amount representing interest........................ 68
======
Present value of minimum lease payments................... $ 981
------
</TABLE>
G. ACCRUED EXPENSES AND OTHER LIABILITIES:
The significant components of accrued expenses and other liabilities
consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses.......................................... $ 7,295 $ 6,699
Accrued compensation...................................... 4,718 3,086
Warranty reserves......................................... 4,383 5,038
------- -------
$16,396 $14,823
======= =======
</TABLE>
H. STOCKHOLDERS' EQUITY:
STOCK OPTIONS
During 1984, the Board of Directors voted to adopt the 1984 Incentive Stock
Option Plan (the "1984 Option Plan") and subsequently reserved 1,050,000 shares
of its authorized common stock for issuance under this plan. On March 17, 1994,
the Board of Directors approved the 1994 Incentive and Nonqualified Stock Option
Plan (the "1994 Option Plan") and reserved 810,000 shares of common stock for
issuance under this plan. At the Company's annual stockholder meeting held on
January 26, 1996, the shareholders voted to increase the number of shares
authorized for issuance under the 1994 Option Plan to 1,810,000 shares. In 1997
the Board of Directors voted to adopt the 1997 Non-Incentive Stock Option Plan
(the "1997 Option Plan") which authorizes the issuance of non-qualified options
to purchase up to an aggregate of 1,400,000 shares of common stock. The Board of
Directors has also granted non-qualified options to directors of the Company.
Incentive stock options generally vest over
35
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. STOCKHOLDERS' EQUITY: (CONTINUED)
five years and expire six years after issuance. Non-qualified stock options
generally vest between zero and five years and expire between five and ten years
after issuance. Additionally, the Company assumed Promis obligations under its
Amended and Restated Stock Options Plan dated September 30, 1998. The Promis
plan reserved 290,895 options, as converted, for available grants by the
Company's Board of Directors.
On July 1, 1998 the Compensation Committee of the Board of Directors, in an
effort to restore the long-term incentive feature of employee stock options that
were significantly out of the money, voted to provide employees with the
opportunity to exchange options dated April 1, 1997 and thereafter for new
options with an exercise price of $14.75, the then fair market value of the
Company's common stock. Options to purchase 1,637,300 shares of common stock
with an average exercise price of $27.98 were canceled and replaced with an
equal number of stock options effective July 17, 1998. The vesting period
started over again on repriced options.
Information with respect to option activity for the fiscal years 1997, 1998
and 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at September 30, 1996................. 1,609,087 $ 7.94
Granted........................................... 877,248 20.52
Canceled.......................................... (260,573) 11.98
Exercised......................................... (371,474) 6.64
----------
Outstanding at September 30, 1997................. 1,854,288 13.62
----------
Granted........................................... 3,759,160 20.24
Canceled.......................................... (1,894,464) 27.26
Exercised......................................... (173,314) 5.80
----------
Outstanding at September 30, 1998................. 3,545,670 13.78
----------
Granted........................................... 1,532,805 32.37
Canceled.......................................... (460,354) 17.24
Exercised......................................... (858,734) 11.76
----------
Outstanding at September 30, 1999................. 3,759,387 $19.17
==========
</TABLE>
Summarized information about stock options outstanding at September 30, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE ($) EXERCISABLE EXERCISE PRICE ($)
- -------------------- ----------- ---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
$ 3.33-$13.63 676,705 3.52 10.66 520,402 10.24
13.74- 14.75 1,179,350 4.84 14.75 203,712 14.74
15.13- 25.50 1,000,575 5.10 21.98 237,714 19.66
25.88- 41.44 902,757 5.50 28.22 63,326 27.81
--------- ---------
$ 3.33-$41.44 3,759,387 4.83 19.17 1,025,154 14.40
</TABLE>
36
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. STOCKHOLDERS' EQUITY: (CONTINUED)
At September 30, 1998 and 1997 options exercisable were 822,914 and 523,696,
respectively.
On October 29, 1997, the Company granted Interval Logic Corporation common
stock options ("ILC options") in accordance with the Board of Directors'
adoption of the 1997 Interval Logic Corporation Incentive and Non-Qualified
Stock Option Plan. ILC is a subsidiary of the Company engaged in the development
of the Leverage advanced planning and scheduling software product for
semiconductor fabs. These options give ILC employees the option to purchase ILC
common shares at exercise prices of $0.10 through $1.00. The options vest over
four years and expire after ten years.
Information with respect to the ILC options activity for fiscal years 1998
and 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Granted............................................ 2,445,250 $0.10
Canceled........................................... (430,000) 0.10
Exercised.......................................... -- --
---------
Outstanding at September 30, 1998.................. 2,015,250 0.10
---------
Granted............................................ 391,750 0.19
Canceled........................................... (154,765) 0.11
Exercised.......................................... (24,018) --
---------
Outstanding at September 30, 1999.................. 2,228,217 $0.11
=========
</TABLE>
Summarized information about ILC stock options outstanding at September 30,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE ($) EXERCISABLE EXERCISE PRICE ($)
- ------------------ ----------- ---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
$0.10 2,192,817 8.30 0.10 938,632 0.10
1.00 35,400 6.42 1.00 -- --
---------
$0.10-$1.00 2,228,217 8.27 0.11 938,632 0.10
</TABLE>
There were no ILC options exercisable as of September 30, 1998 and 1997.
EMPLOYEE STOCK PURCHASE PLAN
Since May 1994, the Company has offered an Employee Stock Purchase Plan
("ESPP") under which rights are granted to purchase shares of common stock at
85% of the lesser of the market value of such shares at either the beginning or
the end of each six month offering period. The plan permits employees to
purchase common stock through payroll deductions, which may not exceed 10% of an
employee's compensation as defined in the plan. The Company, in 1994, had
reserved 450,000 shares of common stock for issuance to eligible employees.
Shares purchased during fiscal years 1999, 1998 and 1997, were 171,436, 114,996
and 49,044, respectively, at average prices ranging from $9.78 to $22.26 per
share. Shares available for future purchase under the ESPP totaled 9,320 at
September 30, 1999.
37
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK-BASED COMPENSATION PLANS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plan and accordingly, no
compensation expense has been recognized for options granted to employees and
shares purchased under these plans. Had compensation expense for the stock-based
compensation plans been determined based on the fair value at the grant dates
for options granted and shares purchased under the plans consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation," the net
(loss) income and net (loss) income per diluted share for the years ended
September 30 would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income:
As Reported.................................. $(36,085) $(22,623) $27,497
Pro Forma.................................... (50,304) (28,816) 25,018
Net (loss) income per share:
Basic
As Reported................................ (1.67) (1.08) 1.35
Pro Forma.................................. (2.33) (1.37) 1.23
Diluted
As Reported................................ (1.67) (1.08) 1.27
Pro Forma.................................. (2.33) (1.37) 1.16
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for future
years, because SFAS 123 does not apply to awards granted prior to fiscal year
1996 and additional awards are anticipated in future years.
The estimated weighted average fair value of options granted in fiscal year
1999, 1998 and 1997, to purchase the Company's common stock, were $16.86, $12.78
and $11.87, respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Expected life (years)--stock
options......................... 5 5 5
Expected life (years)--ESPP....... 0.5 0.5 0.5
Risk-free interest rate........... 4.59%-5.86% 5.42%-5.74% 5.51%-6.52%
Volatility........................ 71% 67% 64%
Dividend yield.................... 0 0 0
</TABLE>
The fair value of ILC options at the date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions: expected life
of one year to four years, risk-free interest rate of 4.84% to 5.77%, volatility
of 85% and dividend yield of 0. The estimated weighted average fair value of
options granted in fiscal year 1999 and 1998 was $0.13 and $0.07, respectively.
STOCK WARRANTS
Pursuant to an agreement dated February 26, 1996, prior to the acquisition
of Promis by the Company, Promis issued and sold 270,600 warrants, converted at
the common stock exchange ratio of 0.1353, at $22.09 per warrant for aggregate
proceeds of $6.6 million. Each warrant was convertible into
38
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. STOCKHOLDERS' EQUITY: (CONTINUED)
one common share. The associated costs of the warrants offering were
approximately $0.6 million. On June 16, 1997, the 270,600 warrants were
converted into 270,600 common shares.
On May 1, 1996, Promis granted warrants to a third party to purchase up to
13,530 common shares, as converted at the common stock exchange ratio. These
warrants have an expiration date of April 30, 2000.
Summarized information about warrants outstanding at September 30, 1999 is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WARRANTS EXERCISE
OUTSTANDING PRICE
- --------------------- --------
<S> <C>
10,148 $11.75
3,382 12.27
------
13,530 $11.88
======
</TABLE>
RIGHTS AGREEMENT
The Board of Directors of the Company adopted a Rights Agreement, dated as
of December 9, 1998, between the Company and State Street Bank and Trust
Company, as Rights Agent. In connection with this agreement, the Board
distributed one common share purchase right for each share of common stock then
or thereafter outstanding. The rights will become exercisable only if a person
or group acquires beneficial ownership of 20% or more of the outstanding common
shares of the Company. Each Right, when it becomes exercisable, will entitle the
holder to purchase from the Company one one-hundredth of a share of Series A
Participating Cumulative Preferred Stock, par value $0.01 per share, of the
Company, at a price of $140. Prior to any party acquiring 20% or more of the
outstanding common shares of the Company or prior to the expiration date, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price, in cash or common shares or other securities of the Company
deemed by the Board of Directors to be at least equivalent in value, of $.001
per Right. The rights expire on December 9, 2008 unless otherwise redeemed by
the Company prior to that date.
I. CONTINGENT LIABILITY:
At September 30, 1999, the Company had a contingent liability of
approximately $0.8 million. In 1993, Promis purchased the business assets and
assumed selected liabilities of Palette Systems, Inc., a Canadian company (the
"sellers"). The purchase price of approximately $9.9 million consisted of
$5.5 million in cash and 59,889 exchangeable common shares, as converted at the
common stock exchange ratio, of the Company, valued at $73.91 per common share.
At the time of the acquisition, 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
39
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. CONTINGENT LIABILITY: (CONTINUED)
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 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 September 30, 1999, calculated based on the market value of the
Company's common stock at September 30, 1999, is approximately $0.8 million.
J. INCOME TAXES:
The following summarizes the Company's provision for (benefit from) income
taxes for the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax (benefit) provision:
Federal........................................ $(7,667) $(2,806) $10,871
State.......................................... 21 17 845
Foreign........................................ 320 267 --
------- ------- -------
Total current (benefit) provision................ (7,326) (2,522) 11,716
------- ------- -------
Deferred provision (benefit):
Federal........................................ 4,570 (3,349) (2,324)
State.......................................... 2,643 (1,895) (350)
Foreign........................................ 1,178 -- --
------- ------- -------
Total deferred provision (benefit)............... 8,391 (5,244) (2,674)
------- ------- -------
Total provision for (benefit from) income
taxes.......................................... $ 1,065 $(7,766) $ 9,042
======= ======= =======
</TABLE>
The tax benefit recognized from the Chiptronix acquisition was recorded
directly to stockholders' equity and, therefore, the deferred tax benefit does
not reflect the change in the deferred tax assets in fiscal 1998.
40
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES: (CONTINUED)
The differences between the effective tax rates and the U.S. federal
statutory tax rates were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. federal income tax statutory rate........... (34.0)% (34.0)% 35.0%
Change in valuation allowance.................... 43.4 0.0 0.0
State income taxes, net of federal benefit....... (0.4) (2.6) 2.9
Foreign rate differential........................ (0.1) 0.6 0.3
U.S. and foreign tax credits..................... (9.6) (2.1) (4.1)
Foreign sales corporation tax benefit............ 0.0 0.0 (2.4)
S-corporation income of Equipe................... 0.0 (1.4) (9.3)
Acquisition costs not deductible for tax
purposes....................................... 3.9 14.3 0.0
Other............................................ (0.2) (0.4) 2.3
----- ----- ----
Effective tax rate............................... 3.0% (25.6)% 24.7%
===== ===== ====
</TABLE>
At September 30, the components of net deferred tax assets (liabilities)
were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Bad debts............................................. $ 306 $ 622
Inventory............................................. 3,087 5,599
Compensation.......................................... 322 270
Intangible assets..................................... 2,338 2,477
Tax credits........................................... 6,890 3,178
Canadian R&D and capital cost allowances.............. 9,884 9,572
Net operating losses.................................. 10,715 1,069
Warranty.............................................. 1,332 1,559
Other................................................. 1,815 1,519
-------- --------
Subtotal............................................ 36,689 25,865
-------- --------
Gross deferred tax liabilities:
Long-term contracts................................... (993) (1,753)
Accounts receivable................................... (698) (334)
Depreciation.......................................... (1,650) (1,719)
-------- --------
Subtotal............................................ (3,341) (3,806)
-------- --------
Valuation allowance..................................... (33,348) (13,668)
-------- --------
Net deferred tax assets........................... $ -- $ 8,391
======== ========
</TABLE>
The Company experienced net operating losses during fiscal years 1998 and
1999 and, therefore, believes sufficient uncertainty exists regarding the
realizability of the net deferred tax assets and accordingly has established a
full valuation allowance in fiscal 1999. The net increase in the valuation
allowance during 1999 and 1998 was $19,680,000 and $2,459,000, respectively.
41
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES: (CONTINUED)
At September 30, 1999, the Company had U.S. federal net operating losses
(NOLs) of $43,814,000, of which $19,868,000 is expected to be utilized in full
upon carryback and the remaining amount of $23,946,000 is available to offset
future taxable income. The Company has recorded a tax receivable related to the
NOL carryback claim which is classified in other current assets. Approximately
$8,343,000 of the NOL is attributable to the exercise of stock options for which
the tax benefit and related valuation allowance was recorded directly to
stockholder's equity. The U.S. federal net operating losses are available for
carryforward and expire in fiscal year 2020. The Company also has U.S. federal
credit carryforwards of $1,926,000 that begin to expire in fiscal year 2012. The
Company has available state net operating losses of $39,455,000 that expire in
fiscal year 2004 to fiscal year 2020 and state credit carryforwards of
$2,673,000 that expire beginning in fiscal year 2013. The Company also has
non-U.S. losses of $2,130,000 that expire beginning in fiscal year 2005, and
non-U.S. credits of $3,200,000 that begin to expire in fiscal year 2005.
K. FINANCING ARRANGEMENTS:
REVOLVING CREDIT
On June 16, 1998, the Company entered into 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 September 30, 1999, the LIBOR borrowing rate would have been 6.50%. The
ability of the Company to effect borrowings under the revolving credit facility
is conditioned upon the meeting of certain financial criteria. The revolving
credit agreement expires on June 16, 2000. The Company had outstanding letters
of credit with the Bank of $1,875,000 at September 30, 1999, and therefore, the
available balance under this credit agreement was $18,125,000 at September 30,
1999. At September 30, 1999, the Company was not in compliance with certain of
the required covenants but has subsequently received a waiver from the Bank on
November 15, 1999 for the quarter ended September 30, 1999. 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 September 30, 1999.
The Company expects to seek future waivers as necessary from the Bank, on the
next measurement date of January 2, 2000. 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.
CAPITAL LEASE OBLIGATIONS
The Company holds certain property and equipment under capital leases. The
obligations under capital leases represent the present value of future minimum
lease payments and are secured by certain assets of the Company. The capital
lease obligations bear interest at rates of 7.0% to 9.9% per annum and expire at
various dates through July 2002 (see Note F).
L. DEFINED CONTRIBUTION PLANS:
Eligible employees can participate in the Company's 401(k) Savings and
Retirement Plan by making voluntary contributions to the plan in amounts up to
the statutory limit or 15% of their annual
42
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. DEFINED CONTRIBUTION PLANS: (CONTINUED)
compensation. Currently, the Company has elected to match a portion of the
employee deferral up to certain prescribed limits, and these contributions vest
at a rate of 20% per year. Pursuant to the acquisition of Promis, certain
eligible employees receive Company matching contributions which vest 100% after
one year. The Company's contribution expense under these plans amounted to
$1,118,000, $1,101,000, and $780,000 for fiscal years 1999, 1998 and 1997,
respectively. Employees of Equipe were not eligible under this plan until after
the acquisition (see Note O.)
Canadian employees are eligible to participate in the Registered Retirement
Savings Plan ("RRSP") which allows voluntary contributions up to the statutory
limit. The Company has elected to match a portion of the employee contributions,
up to a maximum of $5,000 per employee per year. These contributions are fully
vested when made. The Company's contribution expenses under the RRSP were
approximately $172,000, $148,000, and $129,000 in fiscal years 1999, 1998 and
1997, respectively.
M. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION:
Effective for fiscal year 1999, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
standard designates the Company's internal organization as used by management
for making operating decisions and assessing performance as the source of
business segments.
The Company operates in three primary segments, all within the semiconductor
manufacturing and OEM equipment supply industry, which serve both domestic and
international markets. These reportable operating segments consist of Factory
Automation Systems, Tool Automation Systems and MES and Other Systems. These
businesses are segregated into their respective reportable segments based on the
Company's management reporting structure and its method of internal resource
allocations. Additionally, the Company's product development processes and
customers were evaluated in determination of the segments.
The Factory Automation Systems segment provides automation products for
interbay, intrabay and lithography automation as well as integration and support
services to semiconductor manufacturers. The Tool Automation Systems segment
provides wafer-handling systems, software and services for process tool
equipment suppliers. The MES and Other Systems segment primarily provides
manufacturing execution system ("MES") software and advanced planning and
scheduling software to semiconductor manufacturers. This segment, however, does
not include all of the Company's software products, as material control software
("MCS") and tool connectivity software are components of the other segments.
The Company's operating segments have no significant intersegment revenues
and expenses, as all segments' revenues are generated from sales to unaffiliated
customers. External revenues and expenses are allocated between the applicable
segments. The Company's segments are evaluated on an operating profit basis, and
other income and expenses and income tax provisions or benefits are not
calculated for the specific segments. Any results of operations or assets not
specifically allocated to these segments are included in the Corporate and Other
category. The Corporate and Other category assets include all non-identifiable
assets, primarily cash and investments, deferred income taxes, and other current
and non-current assets. Activity related to strategic technology development,
corporate marketing, general corporate administrative expenses, merger costs and
special charges, other income and expenses and income taxes are included in the
Corporate and Other segment. Depreciation expense and expenditures
43
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION: (CONTINUED)
for long-lived assets by segment are not presented below as amounts are not used
in measuring segment operating performance by the Company's chief operating
decision maker. The accounting policies of the reportable segments are the same
as those described in Note B, "Summary of Significant Accounting Policies."
SUMMARY OF BUSINESS SEGMENTS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
TOTAL NET REVENUE TO UNAFFILIATED CUSTOMERS
Factory Automation Systems.................... $ 70,046 $107,215 $169,465
Tool Automation Systems....................... 41,496 70,459 43,694
MES and Other Systems......................... 24,754 25,871 22,941
-------- -------- --------
Total net revenue......................... $136,296 $203,545 $236,100
======== ======== ========
SEGMENT OPERATING (LOSS) PROFIT
Factory Automation Systems.................... $(21,454) $ (3,531) $ 33,183
Tool Automation Systems....................... 1,426 9,781 9,715
MES and Other Systems......................... (3,062) (6,785) 965
Other reconciling items:
Corporate and other expenses.................. (14,865) (30,479) (8,547)
-------- -------- --------
Consolidated operating (loss) profit...... $(37,955) $(31,014) $ 35,316
-------- -------- --------
Other income, net............................. 2,935 625 1,223
Consolidated (loss) income before income
taxes................................... $(35,020) $(30,389) $ 36,539
======== ======== ========
IDENTIFIABLE SEGMENT ASSETS
Factory Automation Systems.................... $ 52,094 $ 58,791 $111,804
Tool Automation Systems....................... 19,097 14,543 15,087
MES and Other Systems......................... 9,253 12,858 13,481
-------- -------- --------
Identifiable segment assets............... 80,444 86,192 140,372
-------- -------- --------
Corporate and other........................... 66,108 81,286 56,782
-------- -------- --------
Consolidated total assets................. $146,552 $167,478 $197,154
======== ======== ========
</TABLE>
One customer comprised 10% or more of the Company's total net revenue for
the years ended September 30 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Customer A (1)............................................. 21% 19% 32%
</TABLE>
- ------------------------
(1) Total net revenue for this customer in fiscal years 1999, 1998, and 1997
were recorded by the Factory Automation Systems segment.
44
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION: (CONTINUED)
SUMMARY OF GEOGRAPHIC INFORMATION
Information as to the Company's sales in different geographical areas for
the years ended September 30 were as follows (2):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States................................. $ 91,632 $130,718 $125,895
Taiwan........................................ 6,012 13,274 24,442
Germany....................................... 15,990 23,699 4,011
Rest of world................................. 22,662 35,854 81,752
-------- -------- --------
Total net revenue........................... $136,296 $203,545 $236,100
======== ======== ========
</TABLE>
- ------------------------
(2) Sales are attributable to geographic areas based on location of customer.
Long-lived assets, including property and equipment, goodwill, intellectual
property and other intangible assets by geographical areas as of September 30
were as follows (3):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States.................................... $17,651 $19,149 $14,463
Canada........................................... 3,041 3,711 5,715
Rest of world.................................... 495 514 430
------- ------- -------
Total long-lived assets........................ $21,187 $23,374 $20,608
======= ======= =======
</TABLE>
- ------------------------
(3) Long-lived assets of countries outside of the United States and Canada are
individually not a significant portion of the Company's assets.
N. 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 (see Note H). 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 Promis.
Prior to the acquisition, Promis prepared its financial statements based on
a December 31 fiscal year-end. Accordingly, Promis' results of operations,
statements of stockholders' equity and cash flows for the year ended
December 31, 1997 were combined with the Company's results of operations,
statements of stockholders' equity and cash flows for the year ended
September 30, 1997. The results of operations, statements of stockholders'
equity and cash flows for fiscal 1998 are for the twelve months
45
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. ACQUISITION OF PROMIS: (CONTINUED)
ended September 30, 1998 for both the Company and Promis. Promis' results of
operations for the three months ended December 31, 1997, including net revenue
of $6,457,000 and net income of $403,000, are included in the Company's
consolidated statements of operations, statements of stockholders' equity, and
cash flows for both the years ended September 30, 1998 and 1997. To conform
fiscal periods, an amount equal to Promis' net income and $33,000 of Promis'
additional paid-in capital from the exercise of stock options for the three
months ended December 31, 1997 were eliminated from the consolidated statement
of stockholders' equity for the year ended September 30, 1998. Additionally,
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 year ended September 30, 1998, because this
increase has been included in the beginning cash and cash equivalents at
October 1, 1997.
The following information presents certain statements of operations data of
the Company, after restatement from the Equipe acquisition, and Promis for the
period prior to the Promis acquisition. The Company made certain adjustments, as
shown below, to Promis' accounting policies related to software revenue
recognition under SOP 97-2, "Software Revenue Recognition," and to limit the
life of goodwill in a technology-related acquisition to no more than 10 years:
<TABLE>
<CAPTION>
PRI HISTORICAL ADJUSTED COMBINED
AUTOMATION PROMIS ADJUSTMENT PROMIS COMPANIES
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue for:
Three months ended December 27, 1998..... $ 25,316 $ 4,319 -- $ 4,319 $ 29,635
Fiscal 1998.............................. 178,193 25,352 -- 25,352 203,545
Fiscal 1997.............................. 213,159 23,967 $(1,026) 22,941 236,100
Net (loss) income for:
Three months ended December 27, 1998..... $ (5,608) $(2,047) -- $(2,047) $ (7,655)
Fiscal 1998.............................. (23,942) 1,319 -- 1,319 (22,623)
Fiscal 1997.............................. 26,572 2,073 $(1,148) 925 27,497
</TABLE>
O. ACQUISITION OF EQUIPE:
On January 22, 1998, the Company acquired Equipe, 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 its 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 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.
Prior to the acquisition, Equipe prepared its financial statements based on
a December 31 fiscal year-end. Accordingly, Equipe's results of operations,
statements of stockholders' equity and cash flows
46
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. ACQUISITION OF EQUIPE: (CONTINUED)
for the year ended December 31, 1996 were combined with the Company's results of
operations, statements of stockholders' equity and cash flows for the year ended
September 30, 1996. The results of operations, statements of stockholders'
equity and cash flows for fiscal 1997 are for the twelve months ended
September 30, 1997 for both the Company and Equipe. Equipe's results of
operations for the three months ended December 31, 1996 (including revenues, net
income and distributions to shareholders of $6,906,000, $1,582,000 and
$5,287,000, respectively) are included in the Company's consolidated statements
of operations, statements of stockholders' equity and cash flows for both the
years ended September 30, 1997, as presented herein, and 1996. Therefore, an
amount equal to Equipe's net income and distributions to shareholders for the
three months ended December 31, 1996 was eliminated from the consolidated
statement of stockholders' equity for the year ended September 30, 1997.
Equipe's decrease in cash and cash equivalents for the three months ended
December 31, 1996 of $218,000 is included in the consolidated statement of cash
flows for both the years ended September 30, 1997, as presented herein, and
1996. Therefore, this amount was eliminated from the consolidated statement of
cash flows for the year ended September 30, 1997.
Equipe Technologies, Inc. and E-Machine, Inc. were S corporations for income
tax purposes prior to the acquisition. Pro forma net (loss) income and net
(loss) income per common share, which 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, have been presented on the
consolidated statements of operations. The pro forma information is shown for
comparative purposes only.
The following information presents certain statements of operations data of
the Company and Equipe for the period prior to the Equipe acquisition. The
statements of operations data for Promis is included below so as to reconcile
with the consolidated statements of operations:
<TABLE>
<CAPTION>
PRI COMBINED
AUTOMATION EQUIPE COMPANIES PROMIS CONSOLIDATED
---------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net revenue for:
Three months ended December 28, 1997.... $ 46,830 $18,303 $ 65,133 $ 6,457 $ 71,590
Fiscal 1997............................. 169,465 43,694 213,159 22,941 236,100
Net (loss) income for:
Three months ended December 28, 1997.... $ (3,449) $ 3,042 $ (407) $ 403 $ (4)
Fiscal 1997............................. 17,076 9,496 26,572 925 27,497
</TABLE>
P. ACQUISITION OF CHIPTRONIX:
On May 19, 1998, the Company acquired Chiptronix, a Switzerland corporation,
for aggregate non-cash consideration of 105,000 shares of the Company's common
stock. Chiptronix was 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. In accordance with
this business combination, the Company has acquired the net liabilities of
Chiptronix, in the amount of $1,543,000, including net cash assumed of $246,000.
Additionally, the Company acquired Chiptronix' retained deficit of $1,556,000 as
of March 29, 1998 and this amount is included in the changes to stockholders'
equity for the year ended September 30, 1998. The results of operations of
Chiptronix for the six months ended September 30, 1998 have been included in the
accompanying consolidated financial statements of the Company.
47
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Q. ACQUISITION OF INTERVAL LOGIC CORPORATION:
On October 29, 1997 the Company acquired ILC, a California corporation, for
aggregate non-cash 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. $424,000 of net
liabilities of ILC were acquired under this transaction. The Company accounted
for the transaction as a purchase. Pro forma information for the previous period
has been omitted because the effect of restatement would be immaterial.
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 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 development 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.
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.
48
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
R. ACQUISITION OF MASE:
Effective October 2, 1997, prior to the acquisition of Promis by the
Company, Promis purchased the net assets of MASE Systems, Inc. ("MASE") of San
Jose, California for $1,533,000 in cash. The Company acccounted for the
transaction as a purchase. The net assets of MASE acquired included $170,000 of
net non-cash working capital, $26,000 in net property and equipment, and
$1,337,000 in intellectual property. Pro forma information for the previous
period has been omitted because the effect of restatement on the Company's
results of operations would be immaterial.
S. MERGER COSTS AND SPECIAL CHARGES:
For the year ended September 30, 1999, the Company recorded special charges
of $650,000 in the first quarter. These charges represent provisions for
severance compensation relating to the termination of 62 personnel. The
personnel reductions included 40 in manufacturing and customer support, 8 in
engineering, and 14 in selling, general and administrative functions. The
reduction in force occurred in response to the continued downturn in the
semiconductor equipment industry. As of September 30, 1999, all of the severance
compensation had been paid.
For the year ended September 30, 1999, the Company, in the second quarter,
recorded merger costs of $3,950,000 related to the acquisition of Promis,
primarily consisting of legal, accounting and investment banking fees. As of
September 30, 1999, all of these merger costs had been paid. Additionally,
during the second quarter the Company recorded special charges of $1,850,000.
The special charges consisted of $1,406,000 for compensation-related costs for
five management personnel in the selling, general, and administrative functions
to satisfy existing contractual obligations related to the acquired companies;
$196,000 of costs associated with the reductions of leased facilities; and
$248,000 for other legal issues. In the fourth fiscal quarter, the Company
recognized a special credit of $75,000 to adjust the estimated costs to reflect
actual costs. At September 30, 1999, $424,000 of these charges remained in
accrued expenses and are expected to be paid by December 2000.
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 $35,000 remained in accrued expenses at
September 30, 1999 in connection with these direct acquisition costs and are
expected to be paid by the end of the second fiscal quarter of 2000.
Additionally, during the second, third and fourth quarters of fiscal 1998,
the Company recorded restructuring and other special charges of $5,601,000 in
response to market conditions and to integrate the Equipe operations. The
special charges included provisions for severance compensation of $1,910,000
resulting from terminations of approximately 244 personnel completed in 1998.
The personnel reductions consisted of 123 in manufacturing and customer support,
65 in engineering and 56 in sales, general and administrative functions. In
addition, the special charges included costs of $2,943,000 relating to
reductions of leased facilities space and a non-cash write-down of specialized
demonstration equipment for a particular customer of $748,000 and other assets
that are not usable elsewhere. Of the total $4,853,000 severance and lease
reduction charges recorded in fiscal 1998, all of these special charges had been
paid as of September 30, 1999.
49
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
T. NET (LOSS) INCOME PER SHARE:
A reconciliation between basic and diluted net (loss) income per share for
the years ended September 30 is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income:............................. $(36,085) $(22,623) $27,497
Shares used in computation:
Weighted average common shares outstanding
used in computation of basic net (loss)
income per common share.................... 21,628 20,988 20,408
Dilutive effect of stock options and
warrants................................... -- -- 1,162
-------- -------- -------
Shares used in computation of diluted net
(loss) income per common share............. 21,628 20,988 21,570
======== ======== =======
Basic net (loss) income per common share..... $ (1.67) $ (1.08) $ 1.35
Diluted net (loss) income per common share... $ (1.67) $ (1.08) $ 1.27
</TABLE>
During the years ended September 30, 1999 and 1998, options to purchase
3,759,387 and 3,545,670 shares of common stock were outstanding 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. Options to purchase 55,281 shares of common stock were
outstanding for fiscal year 1997 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.
U. 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 $2.1 million, based on a September 30, 1999
exchange rate of 1216 Korean won per U.S. dollar, in the joint venture over a
two-year period through June 2000. As of September 30, 1999, the Company had
outstanding commitments under this agreement of 1.0 billion Korean won, or
approximately $0.9 million.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of the 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.
<TABLE>
<S> <C>
PRI AUTOMATION, INC.
Date: December 21, 1999 /s/ MITCHELL G. TYSON
--------------------------------------------
Mitchell G. Tyson
President and Chief Executive Officer
Date: December 21, 1999 /s/ STEPHEN D. ALLISON
--------------------------------------------
Stephen D. Allison
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chief Executive Officer,
/s/ MITCHELL G. TYSON President and Director
------------------------------------------- (principal executive December 21, 1999
Mitchell G. Tyson officer)
/s/ MORDECHAI WIESLER
------------------------------------------- Treasurer and Director December 21, 1999
Mordechai Wiesler
/s/ STEPHEN D. ALLISON Chief Financial Officer
------------------------------------------- (principal financial and December 21, 1999
Stephen D. Allison accounting officer)
/s/ ALEXANDER V. D'ARBELOFF
------------------------------------------- Director December 21, 1999
Alexander V. d'Arbeloff
/s/ BORUCH FRUSZTAJER
------------------------------------------- Director December 21, 1999
Boruch Frusztajer
/s/ AMRAM RASIEL
------------------------------------------- Director December 21, 1999
Amram Rasiel
/s/ KENNETH M. THOMPSON
------------------------------------------- Director December 21, 1999
Kenneth M. Thompson
</TABLE>
51
<PAGE>
SCHEDULE II
PRI AUTOMATION, INC.
FOR YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGED TO AMOUNTS AT END
OF PERIOD EXPENSE WRITTEN OFF OF PERIOD
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
September 30, 1999................................... $ 3,252 $ (523) $ 83 $ 2,646
September 30, 1998................................... $ 1,600 $ 1,652 -- $ 3,252
September 30, 1997................................... $ 700 $ 900 -- $ 1,600
INVENTORY RESERVES:
September 30, 1999................................... $15,147 $ 785 $9,677 $ 6,255
September 30, 1998................................... $ 5,125 $12,389 $2,367 $15,147
September 30, 1997................................... $ 1,126 $ 5,024 $1,025 $ 5,125
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Combination Agreement dated as of November 24, 1998 between
PRI Automation, Inc., 1325949 Ontario Inc. and Promis
Systems Corporation Ltd. (filed as Exhibit 2.1 to the
Company's Registration Statement S-3 filed on December 24,
1998 and incorporated herein by reference).
3.1 Amended and Restated By-Laws of the Company (filed as
Exhibit 3.4 to the Company's Registration Statement on Form
S-1, File No. 33-81836 and incorporated herein by
reference).
3.2 Restated Articles of Organization (filed as Exhibit 3.5 to
the Company's Registration Statement on Form S-1, File No.
33-81836, and incorporated herein by reference).
3.6 Articles of Amendment to the Restated Articles of
Organization (filed as Exhibit 3.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
30, 1997 and incorporated herein by reference).
3.7 Articles of Amendment to the Restated Articles of
Organization of the Company (filed as Exhibit 3.7 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1998 and incorporated herein by reference).
4.6 Specimen certificate for the Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-81836, and incorporated
herein by reference).
4.7 Rights Agreement dated as of December 9, 1998, between PRI
Automation, Inc. and State Street Bank and Trust Company, as
Rights Agent (filed as Exhibit 4.1 to the Company's Form 8-K
filed on November 25, 1998 and incorporated herein by
reference).
4.8 Form of Certificate of Designation of Series A Participating
Cumulative Preferred Stock of PRI Automation, Inc. (filed as
Exhibit 4.2 to the Company's Form 8-K filed on November 25,
1998 and incorporated herein by reference).
4.9 Form of Rights Certificate (filed as Exhibit 4.3 to the
Company's Form 8-K filed on November 25, 1998 and
incorporated herein by reference).
4.10 Promis Systems Corporation Ltd. Amended and Restated Stock
Option Plan dated September 30, 1998 (filed as Exhibit 4.4
to the Company's Form S-8 filed on March 9, 1999 and
incorporated herein by reference).
10.1* 1984 Incentive Stock Option Plan of the Company (filed as
Exhibit 10.4 to the Company's Registration Statement on Form
S-1, File No. 33-81836, and incorporated herein by
reference).
10.2* 1994 Incentive and Non-Qualified Stock Option Plan of the
Company (filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1, File No. 33-81836, and incorporated
herein by reference).
10.10 Lease Agreement dated as of May 5, 1994, by and between the
Company and The Prudential Insurance Company of America
(filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1, File No. 33-81836, and incorporated
herein by reference).
10.11* 1994 Employee Stock Purchase Plan of the Company (filed as
Exhibit 10.16 to the Company's Registration Statement on
Form S-1, File No. 33-81836, and incorporated herein by
reference).
10.12 Agreement and Plan of Reorganization, dated as of October
25, 1997, among PRI Automation, Inc., E-Acquisition Corp.,
Equipe Technologies, Inc. and certain Stockholders of Equipe
Technologies, Inc. (filed as Exhibit 10.19 to the Company's
Current report on form 8-K on November 10, 1997, and
incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.13 Stock Purchase Agreement, dated as of October 25, 1997 among
PRI Automation, Inc. and the Shareholders of E-Machine, Inc.
(filed as Exhibit 10.20 to the Company's Current Report on
Form 8-K filed on November 10, 1997, and incorporated herein
by reference).
10.14 Stock Purchase Agreement, dated as of October 25, 1997,
among PRI Automation, Inc. and the Shareholders of Equipe
Japan Corporation (filed as Exhibit 10.21 to the Company's
Current Report on Form 8-K filed on November 10, 1997, and
incorporated herein by reference).
11.15* PRI Automation, Inc. 1997 Non-Incentive Stock Option Plan of
the Company, as amended (filed as Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 28, 1997 and incorporated herein by
reference).
10.16 Lease agreement dated as of March 9, 1998 by and between the
Company and Lincoln-Whitehall Realty, L.L.C. (filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1998 and incorporated herein
by reference).
10.17 Sublease agreement dated as of March 18, 1998 by and between
the Company and BAAN USA (filed as Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1998 and incorporated herein by reference).
10.18 Joint Venture Agreement by and between the Company and Chung
Song Systems, Co., Ltd. and Shinsung Engineering Co., Ltd.
(filed as Exhibit 10.26 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1998 and
incorporated herein by reference).
10.19 Stock Purchase Agreement dated as of May 19, 1998 by and
between the Company and the Shareholders of Chiptronix
Handling Systems GmbH and of Chiptronix GmbH (filed as
Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998 and incorporated herein
by reference).
10.20 Revolving Credit Agreement dated as of June 16, 1998 by and
between the Company and The Chase Manhattan Bank (filed as
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998 and incorporated herein
by reference).
10.21 Plan of Arrangement under Section 192 of the Canada Business
Corporations Act of Promis Systems Corporation Ltd. dated
March 2, 1999 (filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-3, File No. 333-69721 and
incorporated herein by reference).
10.22 Voting and Exchange Trust Agreement among the Company,
1325949 Ontario Inc., Promis Systems Corporation Ltd. and
Montreal Trust Company of Canada, as trustee dated March 2,
1999 (filed as Exhibit 99.2 to the Company's Registration
Statement on Form S-3, File No. 333-69721 and incorporated
herein by reference).
10.23 Support Agreement among the Company, 1325949 Ontario Inc.
and Promis Systems Corporation Ltd. dated March 2, 1999
(filed as Exhibit 99.3 to the Company's Registration
Statement on Form S-3, File No. 333-69721 and incorporated
herein by reference).
10.24 Lease Agreement dated as of May 28, 1996 by and between 170
University (Toronto) Partnership and Promis Systems
Corporation Ltd. **
21.1 List of Subsidiaries of the Company**
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of Ernst & Young LLP, Independent Auditors**
23.3 Report of Ernst & Young LLP, Independent Auditors, dated
February 27, 1998**
27.1 Financial Data Schedule **
27.2 Financial Data Schedule **
27.3 Financial Data Schedule **
</TABLE>
- ------------------------
* management contracts and compensatory arrangements
** filed herewith
<PAGE>
170 UNIVERSITY AVENUE, TORONTO
THIS LEASE, dated May 28, 1996, is made by the Landlord and Tenant
named herein who, in consideration of the rents, covenants and agreements herein
contained covenant and agree as follows:
ARTICLE 1
BASIC TERMS, DEFINITIONS, INTERPRETATION
1.01 SUMMARY OF BASIC TERMS.
(a) (i) Landlord: 170 University (Toronto) Partnership
(ii) Address c/o Gentra Canada Investments Inc.
of Landlord: 70 York Street, Suite 1400
Toronto, Ontario
M5J IS9
Attention: Vice-President, Real Estate
Telecopy: (416) 359-0880
(b) (i) Tenant: Promis Systems Corporation Ltd.
(ii) Address At the Premises
of Tenant:
Attention: President
Telecopy: (416) 960-1222
(c) (i) Indemnifier: N/A
(ii) Address of N/A
Indemnifier:
(d) Premises: All of Floors ten (10), eleven (11),
twelve (12) and thirteen (13)
(e) Rentable Area Approximately 25,086 square feet
of Premises: subject to Section 2.02.
(f) (i) Term: Ten (10) years, subject to Section
3.01 and Section 4.01 of Schedule D
hereto.
(ii) Estimated
Commencement December 1, 1996
Date subject to Article 3
(g) Minimum Rent (Section 4.01):
<TABLE>
<CAPTION>
(i) Per Sq. (ii) (iii)
Lease Year Ft./Year Per Year Per Month
---------- -------- -------- ---------
<S> <C> <C> <C>
1 - 5 $16.00 $401,376.00 $33,448.00
6 - 10 $19.00 $476,634.00 $39,719.50
</TABLE>
(h) Fixturing Period
One Hundred and Twenty (120) days
<PAGE>
(i) Special Provisions: Schedule D
The terms set out above are intended to be only a summary of certain basic terms
of this Lease. In the event of any inconsistency between such terms and the
terms hereinafter set out in this Lease, the latter shall govern.
1.02 DEFINITIONS. In this Lease, unless there is something in the
subject matter or context inconsistent therewith:
(a.) "ACCOUNTING PERIOD" means a calendar year or such
other accounting period, not exceeding sixteen (16)
months, as the Landlord may adopt from time to time
for the Building;
(b.) "ADDITIONAL RENT" means all amounts in addition to
Minimum Rent payable by the Tenant to the Landlord
pursuant to this Lease, including those amounts set
out in Section 4.02, but excluding Goods and Services
Tax;
(c.) "ADMINISTRATIVE CHARGE" means the charge specified as
such in Subsection 4.02(c);
(d.) "APPLICABLE LAWS" means all statutes, laws, by-laws,
regulations, ordinances, orders and requirements of
governmental or other public authorities having
jurisdiction, and all amendments thereto, at any time
and from time to time in force;
(e.) "ARCHITECT" means the architect designated by the
Landlord from time to time, who shall be duly
qualified to practice in Ontario and independent of
the Landlord;
(f.) "BUILDING" means the Lands and the multi-storey
building municipally known as 170 University Avenue,
Toronto and all other structures, improvements,
facilities and appurtenances that have been or are
being constructed on the Lands, including or together
with the Building Systems and the Common Areas and
Facilities, all as may be altered, expanded, reduced
or reconstructed from time to time;
(g.) "BUILDING SYSTEMS" means:
(i) the HVAC System and all other systems,
services, installations and facilities from
time to time installed in or servicing the
Building (or any portion thereof),
including, but not limited to, the elevators
and escalators and the following systems,
services, installations and facilities:
mechanical (including plumbing, sprinkler,
drainage and sewage), electrical and other
utilities, lighting, sprinkler, life safety
(including fire prevention, communications,
security and surveillance), computer
(including environmental, security and
lighting control), ice and snow melting,
refuse removal, window washing, and music;
and
(ii) all machinery, appliances, equipment,
apparatus, components, computer software and
appurtenances forming part of or used for or
in connection with any of such systems,
services, installations and facilities
including, but not limited to, boilers,
motors, generators, fans, pumps, pipes,
conduits, ducts, valves, wiring, meters and
controls, and the structures and shafts
housing and enclosing any of them;
(h) "BUSINESS HOURS" means the hours from 7:30 a.m. to
6:30 p.m. Monday to Friday, inclusive, and from 9:00
a.m. to 5:00 p.m. on Saturday of each
<PAGE>
-3-
week, excepting holidays (as defined in the
Interpretation Act (Ontario));
(i) "BUSINESS TAXES" means all taxes, rates, duties,
levies, assessments, licence fees and other charges
in respect of the use or occupancy of, or any
business carried on, by tenants or other occupants of
the Building and includes, without limitation,
business taxes levied or assessed pursuant to the
Assessment Act (Ontario);
(j) "CHANGE OF CONTROL" means, in the case of any
corporation or partnership, the transfer or issue by
sale, assignment, subscription, transmission on
death, mortgage, charge, security interest, operation
of law or otherwise (including, without limitation,
any change in the constitution of a partnership), of
any shares, voting rights or interest which would
result in any change in the effective control of such
corporation or partnership, unless (i) such change
occurs as a result of trading in the shares of a
corporation listed on The Toronto Stock Exchange or
Montreal Stock Exchange; and (ii) the Landlord
receives assurances reasonably satisfactory to it
that such change will not detrimentally affect the
financial capacity of such corporation or the ability
of such corporation to conduct business;
(k) "COMMENCEMENT DATE" means the date determined
pursuant to Section 3.01;
(l) "COMMON AREAS AND FACILITIES" means (A) those areas,
facilities, improvements, installations and equipment
in or around the Building that (i) are neither rented
nor designated nor intended by the Landlord to be
rented and (ii) are provided or designated from time
to time by the Landlord for the benefit or use of
more than one (1) tenant or component of the Building
including, but not limited to, entrances, lobbies,
access and service corridors, stairways, indoor and
outdoor walkways (both open and enclosed), furniture,
furnishings and fixtures, public sidewalks (to the
extent maintained for the benefit of the Building),
public washrooms, indoor and outdoor landscaping and
landscaped areas, passageways or tunnels leading to
the underground public transportation system and to
other buildings or concourses or elsewhere,
mailrooms, electrical, telephone, meter, valve,
mechanical, storage and janitor rooms, shipping and
receiving areas and loading docks, package or
passenger pick-up areas, waste disposal or recycling
facilities, and driveways, laneways and ramps, and
(B) space, facilities and installations that are made
available for community service, public or other use
pursuant to the Municipal and Operating Agreements,
all as may be altered, expanded, reduced,
reconstructed or relocated from time to time;
(m) "CPI" means the Consumer Price Index (All items) for
the Municipality of Metropolitan Toronto, 1981=100,
published by Statistics Canada or its successor,
adjusted for any change in base year, or, if
Statistics Canada or its successor no longer
publishes such index or is no longer operated by the
Government of Canada, such other price index as the
Landlord may substitute acting reasonably; in the
case of any such substitution the Landlord shall be
entitled to make all necessary conversions for
purposes of comparison;
(n) "EVENT OF DEFAULT" means any event specified as such
in Section 14.01;
(o) "EXPERT" means architect, engineer, chartered
accountant, quantity surveyor, or other professional
consultant, in any case appointed by the
<PAGE>
-4-
Landlord and, in the reasonable opinion of the
Landlord, qualified to perform the function for which
he or she is retained;
(p) "FIXTURING PERIOD" means the number of days, if any,
specified in Subsection 1.01(h) prior to the
Commencement Date allowed the Tenant to perform its
fixturing of the Premises after the Landlord has
delivered the Premises to it for such purpose;
(q) "GOODS AND SERVICES TAX" means all goods and services
taxes, value added, sales, use, consumption or other
similar taxes of whatever name imposed by the
Government of Canada or by any provincial or local
government;
(r) "HVAC SYSTEM" means all interior climate control
(including heating, ventilating and air-conditioning)
systems, installations, equipment and facilities in
or servicing the Building that are provided or
designated from time to time by the Landlord for the
benefit of more than one (1) tenant or component of
the Building;
(s) "INDEMNIFIER" means the Person, if any, named as
Indemnifier in Subsection 1.01(c) and who has
executed or agreed to execute the indemnity agreement
attached to this Lease as Schedule E, if applicable;
(t) "LANDLORD" means the party named in Subsection
1.01(a) and its successors and assigns;
(u) "LARGE CORPORATIONS TAX" means any tax payable under
Part I.3 of the Income Tax Act (Canada) or any
successor provisions thereto of a similar nature;
(v) "LANDS" means the lands more particularly described
in Schedule A hereto, as they may be altered,
expanded or reduced from time to time;
(w) "LEASE" means this lease as it may be amended from
time to time in accordance with the provisions
hereof;
(x) "LEASEHOLD IMPROVEMENTS" means all fixtures,
improvements, installations, alterations and
additions from time to time made, erected or
installed by or on behalf of the Tenant or any former
occupant in the Premises, including internal
stairways, doors, hardware, partitions (including
moveable partitions) and wall-to-wall carpeting with
the exception of such carpeting where laid over
vinyl, tile or other finished floor and removable
without damage to such floor, but excluding trade
fixtures, drapes, and furniture and equipment not of
the nature of fixtures;
(y) "LEASE YEAR" means, in the case of the first Lease
Year, the period beginning on the Commencement Date
and ending on the last day of the 12th consecutive
full month after the expiry of the calendar month in
which the Commencement Date occurs (except that if
the Commencement Date occurs on the first day of a
calendar month, the first Lease Year shall end on the
day prior to the first anniversary of the
Commencement Date) and, in the case of the second and
each subsequent Lease Year, means consecutive periods
each of twelve (12) consecutive full months, with the
second Lease Year commencing immediately after the
first Lease Year;
(z) "MINIMUM RENT" means the rent payable pursuant to
Section 4.01;
<PAGE>
-5-
(aa) "MORTGAGE" means any mortgage, charge or security
instrument (including a deed of trust or mortgage
securing bonds) and all extensions, modifications and
renewals thereof which may now or hereafter affect
the Lands;
(bb) "MORTGAGEE" means the mortgagee, chargee or secured
party or trustee for bondholders, as the case may be,
who from time to time holds a Mortgage;
(cc) "MUNICIPAL AND OPERATING AGREEMENTS" means
collectively (i) any and all agreements made pursuant
to Section 36 or Section 40 of the Planning Act, 1983
(Ontario) and any other similar or successor
provisions, (ii) development, site plan, landscaping,
sidewalk improvement, tunnel, lane closing, building
conservation, restoration or heritage agreements and
(iii) any other agreements with The Corporation of
the City of Toronto, the Municipality of Metropolitan
Toronto and others (including the owners of the
various parts of the development, other real estate
projects and the Toronto Transit Commission) relating
to the development, construction, use and/or
operation and/or shared access to the Building or
other adjacent developments, or any part or parts
thereof, in each case whether now or hereafter
entered into and as the same may be amended from time
to time;
(dd) "OPERATING COSTS" means all costs, expenses, fees,
rentals, disbursements and outlays as specified in
Section 7.07 but excluding or deducting therefrom
such costs, expenses, fees, rentals, disbursements
and outlays specified as exclusions or deductions, as
the case may be, in Sections 7.08 and 7.09;
(ee) "PERSON", according to the context, includes any
person, corporation, firm, partnership or other
entity, any group of persons, corporations, firms,
partnerships or other entities, or any combination
thereof;
(ff) "PREMISES" means that part of the Building identified
in Subsection 1.01(d) and approximately as shown
cross-hatched on the floor plan(s) attached as
Schedule B; notwithstanding the definition of
Rentable Area the boundaries of the Premises are as
follows: (i) the interior face of all exterior walls,
doors and windows; (ii) the interior face of all
interior walls, doors and windows separating the
Premises from Common Areas and Facilities; (iii) the
centre line of all interior walls separating the
Premises from adjoining leasable premises; and (iv)
the top surface of the structural subfloor and the
bottom surface of the structural ceiling; provided
that any Building Systems which are located in the
Premises do not form part of the Premises;
(gg) "PRIME" means the annual rate of interest announced
from time to time by the Landlord's bank (which shall
be a Canadian chartered bank listed in Schedule I to
the Bank Act designated by the Landlord from time to
time) as the daily rate of interest used by such bank
as a reference rate in setting rates of interest for
commercial loans of Canadian dollars and commonly
referred to by such bank as its Canadian "prime
rate";
(hh) "PROPERTY TAXES" means all taxes, rates, duties,
levies, fees, charges (including local improvement
charges) and assessments whatsoever, imposed,
assessed, levied, rated or charged against the
Building or any part thereof from time to time by any
lawful taxing authority whether school, municipal,
regional, provincial, federal, or otherwise and any
taxes or other amounts which are imposed in lieu of,
or in addition to, any of the foregoing whether or
not in existence at the commencement of the Term and
whether of the foregoing character or not and any
such taxes levied
<PAGE>
-6-
against the Landlord or any owner on account of its
ownership of the Building or its interest therein or
the rents payable to any such Person by tenants or
other occupants of the Building but excluding taxes
on the income or profits of the Landlord except to
the extent that they are levied in lieu of the
foregoing and excluding Goods and Services Tax;
(ii) "PROPORTIONATE SHARE" means a fraction which has (i)
as its numerator the Rentable Area of the Premises
and (ii) as its denominator the Rentable Area of the
Building;
(jj) "RENT" means all Minimum Rent and Additional Rent
payable pursuant to this Lease;
(kk) "RENTABLE AREA", in the case of the Premises or any
other premises included in the Rentable Area of the
Building, means the area expressed in square feet, as
verified by the Architect or the Surveyor, of all
floors of such premises, determined as follows:
(i) in the case of premises on a floor above the
street entrance level floor occupied
entirely by one (1) tenant, the Rentable
Area shall be all the floor area within the
exterior walls calculated by measuring from
the inside face of the glass of the exterior
walls, without deduction for columns and
projections, and including elevator lobbies,
service corridors, washrooms, electrical,
telephone, meter, valve, mechanical, storage
and janitor rooms and any internal or
special stairways and/or elevators for the
specific use of the particular tenant but
excluding other stairways, elevator shafts,
flues, pipe shafts and vertical ducts; and
(ii) in the case of premises on a floor above the
street entrance level floor occupied by more
than one (1) tenant, the Rentable Area shall
be the aggregate of (A) all floor area
within the exterior walls of such premises
calculated by measuring from the inside face
of the glass of the exterior walls to the
finished surface of the corridor side of the
corridor partitions and to the centre line
of demising partitions, without deduction
for columns and projections, but excluding
elevator lobbies, service corridors,
washrooms, electrical, telephone, meter,
valve, mechanical, storage and janitor
rooms, stairways and elevator shafts
supplied by the Landlord for use in common
with other tenants within the relevant
floors; and (B) a share of the area of
Common Areas and Facilities located on such
floor, such share to be in the same
proportion to such area that the area of the
space referred to in clause (A) above is to
the total Rentable Area of such floor
determined without reference to this clause
(B); and (C) any service areas or corridors
which are for the exclusive use of the
particular tenant, and including internal or
special stairways and elevators; and
(iii) in the case of premises on or below the
street entrance level floor, the Rentable
Area shall be determined pursuant to clauses
(A) and (C) of paragraph 1.02(kk)(ii) above
without reference to clause (B) thereof;
it being acknowledged that the Rentable Area of the Premises
or the Building or any other space will be adjusted from time
to time to reflect any alteration, expansion, reduction,
construction or relocation;
<PAGE>
-7-
(ll) "RENTABLE AREA OF THE BUILDING" means the aggregate
of the Rentable Area of all premises in the Building
that are rented, or designated or intended by the
Landlord to be rented, for offices or business
purposes (whether actually rented or not) and, for
greater certainty, excludes Storage Areas;
(mm) "RULES AND REGULATIONS" means the rules and
regulations made by the Landlord from time to time
pursuant to Section 8.04; the Rules and Regulations
existing as at the Commencement Date are those
annexed hereto as Schedule C;
(nn) "SALES TAXES" means all sales taxes, Goods and
Services Tax and other taxes, rates, duties, levies,
fees, charges and assessments whatsoever,
whether or not in existence at the commencement of
the Term, imposed, assessed, levied, rated or charged
on the Tenant or the Landlord in respect of the Rent
payable by the Tenant to the Landlord or the rental
of the Premises or the provision of any goods,
services or utilities whatsoever by the Landlord to
the Tenant under this Lease;
(oo) "STORAGE AREAS" means those areas in the Building, if
any, which are designated or intended from time to
time by the Landlord to be rented to tenants or other
occupants for storage purposes;
(pp) "SURVEYOR" means the professional land or quantity
Surveyor for the Building designated by the Landlord
from time to time, who shall be duly qualified to
practice in Ontario and who shall be independent of
the Landlord;
(qq) "TENANT" means the party named in Subsection 1.01(b)
and its heirs, executors, administrators and
permitted successors and assigns;
(rr) "TERM" means the period specified in Section 3.01, as
it may be extended or renewed by the Tenant pursuant
to the options given to the Tenant to extend or renew
this Lease, if any;
(ss) "TRANSFER" means an assignment of this Lease in whole
or in part, a sublease of all or any part of the
Premises, any transaction whereby the rights of the
Tenant under this Lease or to the Premises are
transferred to another Person, any transaction by
which any right of use or occupancy of all or any
part of the Premises is conferred upon any Person,
any mortgage, charge or encumbrance of this Lease or
the Premises or any part thereof or other arrangement
under which either this Lease or the Premises become
security for any indebtedness or other obligations
and includes any transaction or occurrence whatsoever
(including, but not limited to, expropriation,
receivership proceedings, seizure by legal process
and transfer by operation of law), which has changed
or might change the identity of the Person having
lawful use or occupancy of any part of the Premises;
(tt) "TRANSFEREE" means the Person to whom a Transfer is
or is to be made; and
(uu) "UNAVOIDABLE DELAY" means any cause beyond the
control of the party affected thereby which prevents
the performance by such party of any obligation
hereunder and not caused by its default or act of
commission or omission and not avoidable by the
exercise of reasonable care, including, without
limitation, strikes, lockouts or other labour
disputes, the enactment, amendment or repeal of any
Applicable Laws, and shortages or
<PAGE>
-8-
unavailability of labour or materials, but excluding
lack of funds or financial inability.
1.03 NUMBER, GENDER, LIABILITY. The grammatical changes required to
make the provisions of this Lease apply in the plural sense
where the Tenant or Indemnifier comprises more than one Person
and to corporations, firms, partnerships, or individuals, male
or female, will be assumed as though in each case fully
expressed. If the Tenant consists of more than one Person, the
covenants of the Tenant shall be deemed to be joint and
several covenants of each such Person. If the Tenant is a
partnership each Person who is presently a member of such
partnership, and each Person who becomes a member of any
successor partnership, shall be and continue to be liable
jointly and severally for the performance of this Lease,
whether or not such Person ceases to be a member of Such
partnership or successor partnership.
1.04 NO LIMITATION. Whenever a statement or provision in this Lease
is followed by words denoting inclusion or example (such as
"including" or "such as") and then a list of, or reference to,
specific matters or items, such list or reference shall not be
read so as to limit or restrict the generality of such
statement or provision, even though words such as "without
limitation" or "without limiting the generality of the
foregoing" do not precede such list or reference.
1.05 HEADINGS AND CAPTIONS. The table of contents, Article numbers,
Article headings, Section numbers and Section headings are
inserted for convenience of reference only and are not to be
considered when interpreting this Lease.
1.06 OBLIGATIONS AS COVENANTS. Each obligation of the Landlord or
the Tenant expressed in this Lease shall be a covenant for all
purposes.
1.07 ENTIRE AGREEMENT. This Lease contains all the representations,
warranties, covenants, agreements, conditions and
understandings between the parties concerning the Premises and
the subject matter of this Lease and may be amended only by an
agreement in writing signed by the Landlord and the Tenant.
1.08 GOVERNING LAW. This Lease shall be interpreted under and is
governed by the laws of the Province of Ontario.
1.09 CURRENCY. All Rent and other amounts of money in this Lease
are expressed in and refer to Canadian dollars and shall be
paid in the lawful currency of Canada.
1.10 SEVERABILITY. If any provision of this Lease is illegal or
unenforceable it shall be considered severable from the
remaining provisions of this Lease, which shall remain in
force.
1.11 SUCCESSORS AND ASSIGNS. This Lease and everything herein
contained shall benefit and bind the successors and assigns of
the Landlord and the heirs, executors, administrators and
permitted successors and assigns of the Tenant.
1.12 SCHEDULES. The Schedules shall form part of this Lease and are
as follows:
Schedule A - Description of Lands
Schedule B - Floor Plan
Schedule C - Rules and Regulations
Schedule D - Special Provisions
Schedule E - Indemnity Agreement (Intentionally Deleted)
Schedule F - Lease Takeover Provisions
1.13 TIME OF THE ESSENCE. Time is of the essence of this Lease and
every part thereof.
<PAGE>
-9-
ARTICLE 2
GRANT OF LEASE
2.01 DEMISE. The Landlord hereby leases the Premises to the Tenant
to have and to hold during the Term. The Tenant takes the
Premises on lease from the Landlord and covenants to pay the
Rent and to observe and perform all the covenants and
obligations to be observed and performed by the Tenant
pursuant to this Lease.
2.02 RENTABLE AREA. The estimated Rentable Area of the Premises is
set out in Subsection 1.01(e). The Rentable Area of the
Premises shall be conclusively determined by the Architect or
the Surveyor in accordance with the BOMA standard of
measurement and shall be verified by the Architect or the
Surveyor, a copy of which shall be given to the Tenant. Such
determination shall be binding upon both the Landlord and the
Tenant. The Architect or the Surveyor will recalculate the
Rentable Area of the Premises whenever required because of a
rearrangement of partitions or other changed condition on the
floor or floors on which the Premises are located.
2.03 EXAMINATION OF PREMISES. The Tenant shall examine the Premises
before taking possession and notify the Landlord prior to
taking possession of any defect in the condition thereof. The
Tenant agrees that there is no promise, representation and
undertaking by or binding upon the Landlord with respect to
any alteration, remodelling or decoration of the Premises or
with respect to the installation of equipment or fixtures in
the Premises, except as expressly provided in this Lease.
ARTICLE 3
TERM
3.01 TERM. The Term of this Lease shall commence on the
Commencement Date, which will be December 1, 1996, and shall
end on the last day of the calendar month after the expiry of
the period set out in paragraph 1.01(f)(i), unless terminated
earlier pursuant to this Lease.
3.02 CERTIFICATE AS TO COMMENCEMENT DATE. The determination of the
Commencement Date pursuant to Section 3.01 will be made by the
Landlord or, in the event of a dispute, by an Expert. The
Landlord and the Tenant will execute a certificate confirming
the Commencement Date if either party requests such a
certificate.
3.03 EARLY OCCUPANCY. The Tenant shall be permitted to perform the
Tenant's Work (as hereinafter defined) during the Fixturing
Period provided the Tenant shall comply with all of the terms
and conditions contained in this Lease to be performed by the
Tenant save for the payment of Minimum Rent and Additional
Rent during such period.
ARTICLE 4
RENT
4.01 MINIMUM RENT. The Tenant shall pay to the Landlord, in and for
each Lease Year, Minimum Rent in the amount per square foot of
the Rentable Area of the Premises set out in paragraph
1.01(g)(i) for the respective Lease Year, by equal consecutive
monthly instalments in advance on the first day of each month
in the amount set out in paragraph 1.01(g)(iii) for such Lease
Year, subject to the adjustment provisions of Section 4.05. If
the Commencement Date is not the first day of a calendar
month, the Tenant shall pay, on such Commencement Date, as
<PAGE>
-10-
Minimum Rent, for the period from the Commencement Date to the
last day of the relevant calendar month, inclusive, an amount
calculated by multiplying the annual Minimum Rent for the
first Lease Year by the number of days during such period and
dividing by three hundred and sixty-five (365), and the first
regular instalment of Minimum Rent for such first Lease Year
shall be paid on the first day of the calendar month next
following the Commencement Date.
4.02 ADDITIONAL RENT. The Tenant shall also pay to the Landlord
throughout the Term as Additional Rent:
(a) the Tenant's share of Property Taxes and other taxes
payable to the Landlord in accordance with Article 7;
(b) the Tenant's Proportionate Share of Operating Costs,
which Operating Costs shall be as specified in
Article 7; and
(c) the aggregate of:
(i) costs of utilities in accordance
with Sections 6.02 and 6.03;
(ii) costs of any additional services in
accordance with Section 6.05; and
(iii) such other costs, charges, amounts
and expenses as are required to be
paid by the Tenant to the Landlord
under this Lease (other than those
referred to in subsections 4.02(a)
and (b), above);
plus, in respect of each such cost, charge, amount or expense
referred to in this subsection 4.02(c), an administrative
charge of fifteen percent (15%) thereof.
Except as otherwise provided in this Lease, all Additional Rent shall be payable
within fifteen (15) days of receipt by the Tenant of an invoice, statement or
demand therefor from or on behalf of the Landlord.
4.03 PAYMENT OF ADDITIONAL RENT. Before the commencement of each
Accounting Period the Landlord shall notify the Tenant of the
estimated amount for such Accounting Period of:
(a) the Tenant's share of Property Taxes and other taxes
payable to the Landlord;
(b) the Tenant's Proportionate Share of Operating Costs;
and
(c) such other items of Additional Rent as the Landlord
may estimate in advance.
The Tenant shall pay such estimated amount in monthly instalments, as notified
by the Landlord to the Tenant, in advance on the first day of each month during
such Accounting Period. The Landlord may from time to time during an Accounting
Period re-estimate any items of Additional Rent and may fix monthly instalments
for the then remaining balance of the Accounting Period so that such items will
have been entirely paid during such Accounting Period. Within one hundred and
twenty (120) days after the end of such Accounting Period the Landlord shall
determine and provide the Tenant with a statement in reasonable detail for the
relevant Accounting Period of the Tenant's Proportionate Share of Operating
Costs, the Tenant's share of Property Taxes and such other items of Additional
Rent as the Landlord estimated in advance. If the total of the monthly
instalments paid by the Tenant in respect of estimated Additional Rent for such
Accounting Period is less than the amount of Additional Rent payable for such
Accounting Period shown on such statement, the Tenant shall pay the difference
to the
<PAGE>
-11-
Landlord. If the total of such monthly instalments paid is greater than
the amount of the Additional Rent payable for such Accounting Period, the
difference shall either, at the option of the Landlord, be repaid to the Tenant
with such statement, be applied in payment of other amounts owing by the Tenant,
or be applied in reduction of future payments due under this Lease. The Landlord
shall provide the Tenant as soon as reasonably possible following each Lease
year with a certificate of the Landlord's auditor confirming the fairness of the
Landlord's determination of Operating Costs, which shall be binding upon the
parties.
4.04 ACCRUAL OF RENT. Rent shall be considered as accruing from day
to day hereunder from the Commencement Date and where it
becomes necessary for any reason to calculate such Rent for an
irregular period during the relevant Lease Year or Accounting
Period an appropriate apportionment and adjustment shall be
made on a per diem basis based upon the relevant Lease Year or
Accounting Period.
4.05 ADJUSTMENT OF RENT. If and whenever the Rentable Area of the
Premises is revised in accordance with Section 2,02, the
Minimum Rent for any Lease Year or relevant portion thereof,
affected by such revision, shall be recalculated by
multiplying such revised Rentable Area by the amount per
square foot of Rentable Area of the Premises set out in
paragraph 1.0 1 (g)(i) for such Lease Year and the amount of
the annual Minimum Rent for such Lease Year, or relevant
portion thereof, and the equal monthly instalments for such
Lease Year, or relevant portion thereof, shall be amended
accordingly. There shall be a corresponding recalculation of
the Tenant's Proportionate Share and amounts payable as
Additional Rent. Upon any such recalculation, the Landlord and
the Tenant shall make the appropriate adjustments in respect
of earlier payments of Minimum Rent and Additional Rent
affected by any such recalculation.
4.06 PAYMENTS GENERALLY. Payments by the Tenant to the Landlord of
whatsoever nature required or contemplated by this Lease
shall:
(a) be made when due hereunder, without prior demand
therefor and without any abatement, set-off,
compensation or deduction whatsoever (except for any
abatement under Section 11.02), at the office of the
Landlord as set out in Subsection 1. 0 1 (a) or at
such other place as the Landlord may designate from
time to time to the Tenant;
(b) be applied towards amounts then outstanding hereunder
in such manner as the Landlord determines;
(c) bear interest daily from the due date to the date of
payment, calculated daily, at the rate per annum
which is five percent (5%) above Prime;
(d) in addition to all amounts payable by the Tenant
under this Lease as Rent, the Tenant shall pay, at
the earlier of the time provided for in applicable
legislation or at the time such Rent is required to
be paid under this Lease, all Goods and Services
Taxes calculated on or in respect of amounts payable
by the Tenant as Rent under this Lease and,
notwithstanding that Goods and Services Taxes are not
Additional Rent under this Lease, the Landlord shall
have the same rights and remedies for the recovery of
such amounts payable as Goods and Services Tax as it
has for amounts payable as Additional Rent under this
Lease.
4.07 NET LEASE. The Tenant acknowledges and agrees that it is
intended that this Lease shall be a completely carefree net
lease for the Landlord and that the Landlord shall not be
responsible during the Term for any costs, charges, expenses
and outlays of any nature whatsoever arising from or relating
to the Premises, whether foreseen or unforeseen and whether or
not within the contemplation of the parties at the
commencement of the Term, except as shall be otherwise
expressly provided in this Lease
<PAGE>
-12-
4.08 THIRTEENTH FLOOR OPERATING COSTS. The Landlord acknowledges
and agrees that during the Term and any renewals or extensions
thereof, the Tenant shall not be responsible for the Tenant's
share of Property Taxes or the Tenant's Proportionate Share of
Operating Costs in respect of the entire Rentable Area of the
Premises located on the thirteenth floor of the Building,
being approximately 1,817 square feet.
ARTICLES
CONTROL AND OPERATION OF BUILDING BY LANDLORD
5.01 OPERATION OF THE BUILDING BY THE LANDLORD. Subject to the
other provisions of this Lease, the Landlord or its agents
will operate the Building as would a prudent owner of a
comparable development of similar age, size and location in
the City of Toronto and will maintain, clean, light, heat,
ventilate and air condition the Common Areas and Facilities as
may be appropriate during Business Hours or at such other
times as the Landlord may deem necessary or the Landlord may
agree to provide such services to the Tenant in accordance
with Article 6. Subject to Article 11, if there should be an
interruption in any of the Building Systems that are essential
to the effective operation of the Building the Landlord shall
proceed with reasonable diligence to end such interruption
(such repair not to unreasonably interfere with the Tenant's,
permitted use of the Premises) but in no event will the Tenant
be entitled to any compensation or to any abatement or
repayment of Rent,
5.02 RIGHT TO USE COMMON AREAS AND FACILITIES. The Tenant shall be
entitled, subject to the terms of this Lease, to the
non-exclusive benefit or use (as may be appropriate) of the
Common Areas and Facilities, in common with the other tenants
or occupants of the Building and with all others entitled
thereto.
5.03 CONTROL OF THE BUILDING BY THE LANDLORD. The Landlord has at
all times exclusive control of the Building and its management
and operation, but not so as to deny the Tenant access to the
Premises except in an emergency. Without limiting the
generality of the foregoing, at any time and from time to
time, the Landlord may:
(a) close all or part of the Building to the extent
necessary, in the opinion of the Landlord's legal
counsel, to prevent the public or any Person from
obtaining rights therein other than the rights that
would ordinarily accrue to tenants in respect of
their leased premises under a lease such as this;
(b) retain contractors and employ all personnel,
including supervisory personnel and managers, that
the Landlord considers necessary for the effective
maintenance, repair, operation, administration or
management of the Building;
(c) temporarily obstruct or close off all or any part of
the Building (except the Premises) or the Common
Areas and Facilities for the purpose of maintenance,
repair, replacement or construction of any component
or phase of the Building or for the purpose of
integrating components of the Building or integrating
the Building with any other components or phases of
other adjacent developments provided that the
Landlord shall not block or interfere with the
Tenant's means of access to the Premises during
Business Hours except in the event of an emergency as
determined by the Landlord, acting reasonably;
<PAGE>
-13-
(d) make, modify and terminate agreements pertaining to
the use, maintenance, repair, operation,
administration and management of all or any part of
the Building and the Common Areas and Facilities
including the Municipal and Operating Agreements and
other agreements with the owner or owners of any
components of any other developments; and
(e) do and perform such other acts in and to the Building
or its component parts as the Landlord determines to
be advisable for the proper and efficient operation
of the Building.
5.04 LANDLORD'S ALTERATIONS. At any time and from time to time, the
Landlord may:
(a) dedicate or convey portions of the Building to any
governmental or public authority or other Person and
grant easements, rights-of-way, restrictive covenants
or other interests in the Building; and
(b) construct in or adjoining the Building such
improvements as it deems appropriate in its absolute
discretion and make alterations or additions to, or
change the location of, or expand or reduce any part
of any buildings, facilities, improvements and areas
from time to time in the Building, other than the
Premises, but including, without limitation, the
Common Areas and Facilities, or permit any such
action to be taken.
5.05 NO LIABILITY. Neither the exercise by the Landlord of its
rights under this Article 5 nor any noise, dust, vibration or
other consequences of construction, alteration, expansion,
reduction or reconstruction from time to time of the various
parts or components of the Building or of improvements on
adjoining properties shall entitle the Tenant to any reduction
in Rent, result in any liability of the Landlord to the Tenant
or in any other way affect this Lease or the Tenant's
obligations hereunder.
ARTICLE 6
HVAC, UTILITIES AND OTHER SERVICES
6.02 HEATING, VENTILATING AND AIR CONDITIONING.
(a) The Landlord shall provide processed air in
such quantities and at such temperatures as
shall maintain in the Premises conditions of
reasonable temperature and comfort during
Business Hours. If the Tenant requests the
provision of processed air outside Business
Hours, the Landlord shall provide such
processed air at the Tenant's cost
determined in accordance with the Landlord's
standard rate schedule for such additional
service in effect from time to time.
(b) If the Tenant requests interior climate
control services that, in the Landlord's
reasonable opinion, differ in any material
respect from the standard services provided
by the Landlord to office tenants in the
Building (such as, for example, special
requirements for computer installations),
the Landlord will provide such services if
the Landlord determines, in its sole
discretion, that the provision of such
services is within the capacity of the HVAC
System, would not affect the operation,
aesthetics or structure of the Building,
would not reduce the efficiency of the
existing interior climate control services
provided to other tenants or parts of the
Building, and is otherwise feasible. The
Tenant will pay to the Landlord all costs,
both non-recurring and recurring, of
providing such services. Such costs will be
determined by the Landlord in a reasonable
<PAGE>
-14-
manner and the Landlord may use an Expert to
assist it in determining such costs. The
Landlord may discontinue such services if
this becomes necessary to maintain or
provide an equitable standard of service to
all tenants of the Building.
(c) Notwithstanding Subsection 6.01(a) the
Landlord shall not be responsible for
inadequate performance of the HVAC System
(i) if this is attributable to any
construction or installation done by or on
behalf of the Tenant, any arrangement of
partitioning in the Premises or changes
therein, the failure to shade windows which
are exposed to the sun, the production by
the Tenant of smoke, odours or contaminated
air which the HVAC System is not designed to
accommodate, or any use of electrical power
by the Tenant which exceeds the standard of
normal use as determined by the Landlord
acting reasonably, (ii) if the occupancy
level of the Premises exceeds one person to
every two hundred (200) square feet of
Rentable Area of the Premises on an open
floor basis, or (iii) if the Tenant does not
keep the heating, ventilation or air
conditioning vents or air returns free and
clear of all obstructions.
(d) The interior office layout or partitioning
of the Premises shall be modified by the
Tenant, if necessary, in accordance with the
reasonable requirements of the Landlord to
secure maximum efficiency of the HVAC System
serving the Premises. The Tenant shall
comply with all the Rules and Regulations
pertaining to the operation and regulation
of those portions of the HVAC System within
and serving the Premises, failing which the
Landlord shall be entitled to take such
steps as it deems advisable including,
without limitation, entering upon the
Premises and taking the necessary corrective
action, and the Tenant will pay to the
Landlord all costs incurred by the Landlord
in so doing as Additional Rent.
6.02 ELECTRICITY AND OTHER UTILITIES.
(a) The Landlord will provide and permit the
Tenant to use the electricity, domestic
water, sewage disposal and other utility
services serving the Building. Such services
will be provided in such quantities as the
Landlord, acting reasonably, from time to
time determines to constitute normal use for
office tenants in the Building. The Tenant
shall not in any event overload the capacity
of any such service. The Tenant shall not
bring onto the Premises any installations,
appliances or business machines which are
likely to consume significant amounts of
electricity or other utilities or which
require special venting without the prior
written consent of the Landlord, such
consent not to be unreasonably withheld.
(b) The Landlord shall replace building standard
and, at the Landlord's election,
non-standard electric light fixtures,
ballasts, tubes, starters, lamps, light
bulbs and controls in the Premises. In
carrying out its obligation, the Landlord
may adopt a system of periodic group
relamping in accordance with sound building
management practices.
(c) Costs relating to the use by the Tenant of
electricity and other utility services in
quantities which is normal use for office
tenants in the Building, as determined by
the Landlord, acting reasonably, will form
part of Operating Costs or be paid by the
Tenant to the
<PAGE>
-15-
Landlord separately as
Additional Rent, as and to the extent that
the Landlord may elect from time to time.
6.03 SPECIAL UTILITIES AND EXCESS QUANTITIES. If the Tenant
requests electricity, water or other utility services of a
type or in quantities that exceed normal use by office tenants
in the Building, as determined by the Landlord, acting
reasonably, the Landlord shall supply such special utilities
or excess quantities if the Landlord determines, in its sole
discretion, that the provision of such special utilities or
excess quantities is within the capacity of the Building
Systems, would not affect the operation, aesthetics or
structure of the Building would not reduce the efficiency of
the existing utility Services supplied to other tenants or
parts of the Building, and is otherwise feasible. The Tenant
will pay to the Landlord all costs, both non-recurring and
recurring, of providing all such special utilities or excess
quantities. Such cost shall be determined by the Landlord in a
reasonable manner, which may include installation at tile
Tenant's expense of separate meters or other measuring devices
in the Premises or elsewhere and the Landlord may use an
Expert to assist it in determining such costs. The Landlord
may discontinue the provision of any such special utilities or
excess quantities at any time if this becomes necessary to
maintain or provide an equitable standard of service to all
tenants or parts of the Building.
6.04 JANITORIAL SERVICES. The Landlord shall provide janitorial
services as reasonable required to keep the Premises in a
clean and wholesome condition, provided that the Tenant shall
leave the Premises in a reasonably tidy condition at the end
of each business day and provided that all curtains, carpets,
rugs or drapes of any kind in the Premises shall be cleaned
and maintained by the Tenant. In no event will the Landlord be
liable for any act or omission of any Person employed or
engaged by the Landlord to provide such services, or for any
loss thereby sustained by the Tenant, its agents, officers,
employees, customers, invitees, licensees or any other Person
who may be upon the Premises. The Tenant shall not engage any
Person to provide janitorial services to the Premises without
the written approval of the Landlord. The Tenant shall grant
access necessary for the performance of the janitorial
services and shall leave the Premises in a reasonably tidy
condition at the end of each day to permit the performance of
such services.
6.05 ADDITIONAL SERVICES OF THE LANDLORD. The Tenant shall pay to
the Landlord the costs of all services provided by the
Landlord or its agent to the Tenant, other than services
supplied by the Landlord and charged as Operating Costs. Such
services shall include:
(a) services performed at the Tenant's request including,
without limitation, heating, ventilating and
air-conditioning services outside Business Hours
pursuant to Subsection 6. 0 1 (a) or pursuant to
Subsection 6. 01 (b), replacement of non-standard
electric light fixtures, ballasts, tubes, starters,
lamps, light bulbs and controls pursuant to
Subsection 6.02(c), special utilities or excess
quantities of utilities pursuant to Section 6.03,
maintenance, repair, special janitorial or cleaning
services, construction after the Commencement Date of
Leasehold Improvements, and electrical or other
services provided during hours other than Business
Hours;
(b) optional services provided exclusively for the
Tenant's benefit at the Landlord's reasonable
discretion including, without limitation, supervising
and approving any optional work performed pursuant to
Article 10, operating elevators for the sole benefit
of the Tenant and supervising the movement of
furniture, equipment, freight and supplies for the
Tenant; and
<PAGE>
-16-
(c) performance by the Landlord on behalf of the Tenant
of any of the Tenant's obligations set out in this
Lease which the Tenant fails to perform, provided
that nothing herein shall obligate the Landlord to
perform any such obligations.
6.06 SERVICES BY OTHER PERSONS. The Tenant shall be solely
responsible for obtaining all services used or consumed in or
provided to the Premises by Persons other than the Landlord,
including, without limitation, cleaning of curtains, carpets,
rugs or drapes and telephone and other communications
services, and shall pay all costs related thereto. Provided,
however, it is understood and agreed that certain of the
services referred to in the preceding sentence may be provided
by the Landlord at the Tenant's expense. In no event will the
Landlord be responsible for any failure or interruption in the
supply of such services by Persons other than the Landlord.
6.07 SIGNS. In addition to the signage rights granted pursuant to
Section 12.01 of Schedule "D" herein, the Landlord shall at
the request and expense of the Tenant supply and install, on
or near the entrance door of the Premises a sign bearing the
name of the Tenant in accordance with the Landlord's uniform
scheme for the Building. Any tenant occupying at least a full
floor in the Building may, subject to having received the
Landlord's prior written approval as to design, location,
material and method of installation (such approval not to be
unreasonably withheld), supply and install its own sign in the
elevator lobby of each full floor occupied by it.
6.08 DIRECTORY BOARD. The Landlord shall install a directory board
for the Building identifying tenants of space in the Building
and the Tenant shall be entitled to have one name shown upon
such directory board in accordance with the Landlord's uniform
scheme for lettering and space allocation on such directory
board.
6.09 ENERGY CONSERVATION. The Tenant shall comply with any
practices or procedures that the Landlord or any governmental
or public authority may from time to time introduce to
conserve or to reduce consumption of energy or to reduce or
control other Operating Costs and shall pay as Additional Rent
the cost of the additional energy consumed by reason of
non-compliance as determined by the Landlord in a reasonable
manner and the Landlord may use an Expert to assist it in
making such determination. The Tenant shall also convert to
whatever system or units of measurement of energy consumption
the Landlord may from time to time adopt.
ARTICLE 7
TAXES AND OPERATING COSTS
7.01 PROPERTY TAXES PAYABLE BY THE LANDLORD. The Landlord shall pay
all Property Taxes, subject to Section 7.02, but it may defer
such payments or compliance to the fullest extent permitted by
law so long as it pursues in good faith any contest or appeal
of any such Property Taxes with reasonable diligence.
7.02 PROPERTY TAXES PAYABLE BY THE TENANT.
(a) The Tenant shall pay as Additional Rent
directly to the Landlord in each Accounting
Period during the Term the Tenant's share
(as determined pursuant to Subsection
7.02(b)) of Property Taxes.
<PAGE>
-17-
(b) The Tenant's share of the Property Taxes
payable pursuant to Subsection 7.02(a) shall
be the amount which is the aggregate,
without duplication, of:
(i) the amount obtained by multiplying
the appropriate commercial mill
rate or rates for the Accounting
Period by the assessed value of the
Premises as determined by a lawful
public authority; provided that if
for any Accounting Period such
assessed value of the Premises is
not available then the Landlord
shall determine the assessed value
on an equitable basis using such
information and data as is
available; and
(ii) the Tenant's Proportionate Share of
that portion, if any, of the
Property Taxes that is not charged
or chargeable to the Tenant and
other tenants of the Building
pursuant to paragraph (i) of this
Subsection 7.02(b) and similar
provisions in the leases of such
other tenants (provided, however,
that such portion of the Property
Taxes shall not include Property
Taxes allocable to portions of the
Building designated or intended by
the Landlord to be rented for
offices or business purposes
(whether actually rented or not));
provided that if the basis and principles upon which assessed values as of the
date of this Lease are abandoned or varied, or if any Property Taxes are
imposed, assessed, levied, rated or charged which are not based on assessed
values, as such term is applied with respect to Property Taxes as of the date of
this Lease, the Tenant's share shall be its Proportionate Share of the Property
Taxes.
(c) If the Landlord so requests, the Tenant shall provide
the Landlord with a copy of any separate tax bill or
separate assessment notice that it receives for the
Premises or any part thereof'. If, as a result of
change in existing Applicable Laws, in any Accounting
Period the Tenant is prohibited by law from making
payments of Property Taxes directly to the Landlord,
then it shall pay to the appropriate taxing
authorities all Property Taxes payable in respect of
the Premises and promptly deliver to the Landlord
receipts evidencing such payment. In such event, the
Landlord and the Tenant will make an adjustment
within thirty (30) days after the final tax bills are
issued for such Accounting Period and the Tenant will
pay to the Landlord the amount by which the Tenant's
share of Property Taxes for such Accounting Period
exceeds the amount of Property Taxes actually paid by
the Tenant or the Landlord will pay to the Tenant the
amount by which the Property Taxes actually paid
exceed the Tenant's share, as the case may be.
7.03 BUSINESS TAXES AND OTHER TAXES OF THE TENANT. The Tenant shall
pay promptly when due to the taxing authorities or to the
Landlord, if it so directs, as Additional Rent, all taxes,
rates, duties, levies and assessments whatsoever, whether
municipal, parliamentary or otherwise, levied, imposed or
assessed in respect of operations at, occupancy of, or conduct
of business in or from the Premises by the Tenant or any other
permitted occupant, including the Tenant's Business Taxes. The
Tenant shall also pay to the Landlord promptly on demand as
Additional Rent an amount equal to any or all of the following
Property Taxes that the Landlord may determine to recover from
the Tenant, and any amounts so paid by the Tenant to the
Landlord (and by other tenants under similar provisions in
other leases) shall be excluded in the determination of
Property Taxes:
<PAGE>
-18-
(a) all Property Taxes charged in respect of Leasehold
Improvements; and
(b) if the Premises, or any part of them, by reason of
the act, election or religion of the Tenant or any
other occupant shall be assessed for the support of
separate schools, the amount by which the Property
Taxes so payable exceed those which would have been
payable if the Premises had been assessed for the
support of public schools.
If and so long as the Landlord elects not to determine separately and collect
from the tenants of the Building directly amounts which would otherwise be
payable by the Tenant under Subsections 7.03(a) or (b) above (and by other
tenants of the Building under comparable provisions of their leases), then such
amounts shall form part of Property Taxes, without prejudice to the right of the
Landlord to make any such determination in the future, either generally or in
the case of the Tenant or any other tenant.
7.04 APPEAL OF BUSINESS TAXES. The Tenant may appeal the imposition
of any taxes, rates, duties, levies and assessments payable
directly by it to the taxing authorities pursuant to Section
7.03 and may postpone payment thereof to the extent permitted
by law if the Tenant is diligently proceeding with an appeal,
provided that (i) such postponement does not render the
Building, or any part thereof, subject to sale or forfeiture
and does not render the Landlord liable to prosecution,
penalty, fine or other liability and (ii) upon final
determination of such appeal, the Tenant promptly pays the
amount determined to be payable.
7.05 TENANT TO DELIVER RECEIPTS. Whenever requested by the
Landlord, the Tenant shall deliver to the Landlord copies of
receipts for payment of all Business. Taxes and other taxes,
rates, duties, levies and assessments payable by the Tenant
under this Article and furnish such other information in
connection therewith as the Landlord may reasonably require.
7.06 ASSESSMENT APPEALS. The Landlord alone shall be entitled to
appeal any governmental assessment or determination of the
value of the Building or any portion thereof whether or not
the assessment or determination affects the amount of Property
Taxes or other taxes, rates, duties, levies or assessments to
be paid by the Tenant.
7.07 OPERATING COSTS. Subject to the exclusions and deductions
stipulated in Sections 7.08 and 7.09 in this Lease "Operating
Costs" means the total, without duplication, of the costs,
expenses, fees, rentals, disbursements and outlays (in
Sections 7.07, 7.08 and 7.09 referred to collectively as
"costs") of every kind paid, payable or incurred by or on
behalf of the Landlord on an accrual basis (or on a cash basis
to the extent that the Landlord determines is reasonable) in
the maintenance, repair, operation, administration and
management of the Building, together with the total costs of
the type described in this Section 7.07 paid, payable or
incurred pursuant to the Municipal and Operating Agreements
and other agreements with the owners of other adjacent
developments; and without limiting the generality of the
foregoing Operating Costs shall include:
(a) all salaries, wages, fringe benefits, severance pay
and termination payments paid to or for all
personnel, including supervisory personnel and
managers, and all costs of obtaining such personnel,
to the extent that they are employed by the Landlord
(or a Person with which it does not deal at arm's
length) in connection with the maintenance, repair,
operation, administration or management of the
Building or any part of it, and amounts paid to
professionals and independent contractors, including
any management companies, for any services provided
in connection with the
<PAGE>
-19-
maintenance, repair, operation, administration or
management of the Building or any part of it;
(b) costs of providing security, supervision, traffic
control, janitorial, landscaping, window cleaning,
waste collection, disposal and recycling, and snow
removal services and the costs of machinery,
supplies, tools, equipment and materials used in
connection with the Building or any rentals thereof;
(c) costs of providing electric light and power, fuel,
heat, processed air, water, telephone, steam, gas,
sewage disposal and other utilities and costs of
replacing building standard electric light fixtures,
ballasts, tubes, starters, lamps, light bulbs and
controls;
(d) costs of all insurance which the Landlord is
obligated or permitted to obtain under this Lease;
(e) Sales Taxes and excise or other taxes on goods and
services provided by or on behalf of the Landlord in
connection with the maintenance, repair, operation,
administration or management of the Building;
(f) Property Taxes to the extent not charged to the
Tenant pursuant to Subsection 4.02(a) and to other
tenants of the Building pursuant to lease provisions
similar to Subsection 4.02(a); and costs (including
legal and other professional fees and interest and
penalties on deferred payments) incurred by the
Landlord in contesting, resisting or appealing any
Property Taxes;
(g) capital tax (including without limitation Large
Corporations Tax), if applicable, being the
applicable amount (as hereinafter defined) of any tax
or taxes levied against the Landlord and owners of
the Building by any governmental authority having
jurisdiction based upon or computed by reference to
the paid-up capital or place of business of the
Landlord and owners of the Building or the taxable
capital employed in Canada by the Landlord or owners
of the Building as determined for the purposes of
such tax or taxes; and for the purpose of this
paragraph the phrase "applicable amount" of such tax
or taxes means the amount of tax that, in the
Landlord's discretion, is attributable to the
Building, as if the Building was the only building of
the Landlord and such other owners of the Building;
(h) a reasonable amount, as determined by the Landlord
from time to time, of costs incurred by or on behalf
of tenants in the Building with whom the Landlord may
have agreements whereby in respect of their premises
those tenants perform any cleaning, maintenance or
other work or services which, if directly incurred by
the Landlord, would have been included in Operating
Costs to the extent that such costs are actually
incurred by the Landlord;
(i) costs of repairs and replacements (including those
required to comply with Applicable Laws or the
requirements of the Landlord's insurers which become
effective or are imposed after substantial completion
of the original construction of the relevant
structure) to the extent of, in the case of any
particular item of repair or replacement made in the
given Accounting Period, the lesser of the portion of
the cost thereof allocated to the Building and Two
Hundred and Fifty Thousand Dollars ($250,000) (such
amount of Two Hundred and Fifty Thousand Dollars
($250,000) to be adjusted by the Landlord on the
first day of each Accounting Period to reflect
increases in CPI over the prior Accounting Period);
and amortization of the cost of any repairs or
replacements except to the extent charged in
accordance with the foregoing provisions of this
paragraph, in the case of each item of repair or
<PAGE>
-20-
replacement to be calculated on a straight line basis
over such period the Landlord determines is
reasonable having regard to the nature of the repair
or replacement or fifteen (15) years, whichever is
lesser;
(j) depreciation (excluding depreciation on the costs of
original components of the Building Systems installed
as part of the original construction of the Building)
of the costs of machinery, equipment, facilities,
furniture, furnishings, systems and property
(individually and collectively in this paragraph of
this Section 7.07 called "machinery") installed in or
used in connection with the Building (except to the
extent that the costs are charged fully in the
Accounting Period in which they are incurred):
(i) if a principal purpose of such
machinery is to conserve energy,
reduce the cost of other items
included in Operating Costs or
comply with Applicable Laws or
requirements of the Landlord's
insurers which become effective or
are imposed after substantial
completion of the Building, or such
machinery is used for normal
maintenance of the Building; or
(ii) if, as in the case of the Building
Systems, such machinery by its
nature requires periodic or
substantial replacement;
in the case of each item of machinery to be calculated on a
straight line basis over its useful life or fifteen (15)
years, whichever is lesser;
(k) interest on the unamortized or undepreciated portion
of the costs referred to in paragraphs (i) and of
this Section 7.07, calculated monthly, from the date
on which the relevant costs were incurred, at an
annual rate of interest that is one percent (1%)
above Prime in effect on the first day of the
Accounting Period in which the relevant costs were
incurred (the applicable rate of interest to be
adjusted by the Landlord on the first day of each
Accounting Period to the annual rate of interest that
is one percent (1%) above Prime then in effect);
(l) the fair market rental value (having regard to rent
being charged for similar space including additional
rent for operating costs and property taxes) of space
used by the Landlord, acting reasonably, in
connection with the maintenance, repair, operation,
administration and management of the Building;
(m) management fees or management agent fees and
administrative charges of a management company, if
any, for the Building or any part of it or, if the
Landlord chooses to manage the Building or any part
of it through itself or through a company or other
Person with whom it does not deal at arm's length, a
management fee to the Landlord in an amount
comparable to that which would be charged by a first
class real estate management company for management
of similar buildings in the City of Toronto; and
(n) amounts payable by the Landlord to the lessor a
ground of the Lands or the Building, if any, in
respect and to the extent (but only to the extent) of
costs which the Landlord would itself have incurred
if the Landlord were the owner of the Building,
including costs of the type described in the
foregoing provisions of this Section 7.07 but, for
greater certainty, excluding basic annual grand rent.
7.08 EXCLUSIONS FROM OPERATING COSTS. The following shall be
excluded from Operating Costs as determined pursuant to
Section 7.07:
<PAGE>
-21-
(a) depreciation on the costs of the original components
of the Building Systems installed as part of the
construction, reconstruction or material renovation
of the Building;
(b) the cost of any repair to, or replacement or
maintenance of, the structure of the Building;
(c) the cost of any repair, replacement or maintenance,
of the structure of the Building;
(d) the costs of enforcing leases of other tenants of the
Building;
(e) any fines or penalties that the Landlord incurs in
connection with any failure to perform obligations;
(f) the costs of acquisition of the Lands and Building,
development of the Lands and Building and the cost of
original construction of the Building, adding new
improvements to the Building;
(g) any costs included in Operating Costs representing an
amount paid to any Person or other entity related to
the Landlord (other than the management and
administration fee referred to in Subsection 7.7(l)
above) which are in excess of the amounts which would
have been paid had the Landlord acted as a reasonable
and prudent manager and administrator;
(h) debt service costs;
(i) basic annual ground rent payable by the Landlord to
the lessor under a ground lease, if any, of the Lands
or the Building;
(j) any taxes on the income or profits of the Landlord to
the extent that they are not imposed in lieu of
Property Taxes or Sales Taxes; and
(k) costs incurred by the Landlord in leasing the
Building, including commissions, advertising costs
and tenant inducement payments.
7.09 DEDUCTIONS FROM OPERATING COSTS. The following shall be
deducted from Operating Costs as determined pursuant to
Section 7.07:
(a) net recoveries by the Landlord from the tenants of
the Building in respect of and to the extent (but
only to the extent) of costs which have been charged
directly to the relevant tenants pursuant to
Operating Costs other than recoveries from the Tenant
pursuant to lease provisions similar to Sections
6.01, 6.03 and 6.05;
(b) net insurance proceeds received by the Landlord to
the extent (but only to the extent) that such
proceeds reimburse the Landlord for costs of repair
and replacement which have been charged as Operating
Costs;
(c) net recoveries by the Landlord in respect of
warranties or guarantees relating to the construction
of the Building to the extent (but only to the
extent) that the repair costs in respect of the work
covered by such warranties or guarantees have been
charged as Operating Costs; and
(d) any input tax credits, refunds, rebates or other
similar reduction of Sales Taxes to the extent that
the Landlord is entitled to such input tax credits,
refunds, rebates or other reductions under the
applicable federal, provincial or municipal
legislation.
<PAGE>
-22-
7.10 ADJUSTMENT OF OPERATING COSTS. In computing Operating Costs,
if less than one hundred percent (100%) of the Rentable Area
of the Building is completed or occupied during any period for
which a computation must be made the amount of Operating Costs
will be increased by the amount of the additional costs
determined by the Landlord, acting reasonably, that would have
been incurred had one hundred percent (100%) of the Rentable
Area of the Building been completed or occupied during that
period. In addition, if the Landlord enters into agreements
with any tenants of the Building whereby such tenants perform
any cleaning, maintenance or other work or services the cost
of which, but for such agreement with the Landlord, would have
been incurred by the Landlord directly and included in
Operating Costs, the Landlord in computing Operating Costs may
include a reasonable amount determined by the Landlord from
time to time of such costs to the extent that the Landlord's
costs for cleaning, maintenance and similar services for the
Building as a whole are not proportionally reduced by such
arrangements with tenants.
ARTICLE 8
USE OF PREMISES
8.01 PERMITTED BUSINESS AND USE.
(a) The Tenant shall use the Premises solely as
business offices in a first-class and
reputable manner. The Tenant shall not in
any event use or allow the use of the
Premises, or any part thereof, for any other
purpose.
8.02 NUISANCE. The Tenant shall not carry on any business or do or
suffer any act or thing which constitutes a nuisance or which
is offensive or an annoyance to the Landlord or other
occupants of the Building.
8.03 COMPLIANCE WITH LAWS. The Tenant shall promptly comply with
and conform to all Applicable Laws affecting the Premises or
the Leasehold Improvements therein. If any obligation to
modify, extend, alter or replace any part of the Premises or
any Leasehold Improvements, trade fixtures, furniture or
equipment in the Premises is imposed upon the Landlord, the
Landlord may at its option either do the necessary work, at
the expense of the Tenant, or forthwith give notice to the
Tenant to do such work within the requisite period of time and
the Tenant shall thereupon do such work within the requisite
period of time. The Tenant shall pay to the Landlord the costs
of any work done by the Landlord.
8.04 COMPLIANCE WITH RULES AND REGULATIONS. The Tenant shall comply
and cause every Person over whom it has control to comply with
the Rules and Regulations annexed hereto as Schedule C. The
Landlord shall have the right from time to time during the
Term to make reasonable amendments, deletions and additions to
such Rules and Regulations in the interests of the Building.
Such Rules and Regulations, together with all amendments,
deletions and additions made thereto by the Landlord, acting
reasonably, and of which notice shall have been given to the
Tenant, shall be deemed to be part of this Lease, provided
that, in the event of a conflict with any other provisions of
this Lease, the other provisions of this Lease shall govern.
8.05 NAMES. The Building shall be known and identified by such
other name as designated by the Landlord from time to time. In
the event the Tenant utilizes the name of the Building in its
stationery or other materials, the Tenant shall only use such
name in referring to the Building unless and until the
Landlord otherwise directs.
<PAGE>
-23-
8.06 DISFIGURATION, OVERLOADING. The Tenant shall not commit, do or
suffer any waste, damage, disfiguration or injury to the
Premises and shall not permit or suffer any overloading of the
floors thereof or the bringing into any part of the Building,
including the Premises, any articles or fixtures that by
reason of their weight, use or size might damage or endanger
the structure or any of the Building Systems.
8.07 REMEDIAL ACTION. If the Tenant is in breach of any of the
provisions of this Article 8, the Landlord may, in addition to
any other remedies that it may have hereunder, enter upon the
Premises and take such remedial action as is necessary to
remedy the breach and repair any damage caused thereby and the
Tenant shall pay to the Landlord the Landlord's costs incurred
in connection therewith.
ARTICLE 9
INSURANCE, LIABILITY AND INDEMNITY
9.01 TENANT'S INSURANCE. The Tenant shall effect and maintain
during the Term:
(a) "all risks" insurance upon all property owned by the
Tenant or installed by or on behalf of the Tenant
which is located in the Building including, without
limitation, Leasehold Improvements, trade fixtures,
furniture and equipment in the Premises in an amount
not less than the replacement cost thereof;
(b) broad form boiler and machinery insurance with limits
for each accident in an amount not less than the full
replacement cost of all Leasehold Improvements and of
all boilers, pressure vessels, heating, ventilating
and air-conditioning equipment and miscellaneous
electrical apparatus owned or operated by the Tenant
or by others (other than the Landlord) on behalf of
the Tenant in the Premises, or relating to or serving
the Premises;
(c) comprehensive general liability insurance against
claims for bodily injury (including death), personal
injury and property damage in or about the Premises
in amounts satisfactory from time to time to the
Landlord acting reasonably but in any event in an
amount not less than Five Million Dollars
($5,000,000.00) per occurrence;
(d) business interruption insurance for a minimum period
of twenty-four (24) months in an amount that will
reimburse the Tenant for direct or indirect loss of
earnings and extra expense attributable to all perils
insured against in Subsection 9.01(a) or attributable
to prevention of access to the Premises or the
Building as a result of any of such perils;
(e) "all risks" tenants' legal liability insurance for
the replacement value of the Premises including the
loss of the use of the Premises; and
(f) any other form of insurance that the Landlord or any
Mortgagee may reasonably require from time to time in
form, amounts and for insurance risks acceptable to
the Landlord and any Mortgagee.
The Landlord further agrees that the Tenant may self-insure with respect to any
insurance requirements contained in the Lease with the exception of any
comprehensive general liability insurance required to be maintained by the
Tenant pursuant to the provision contained in this Lease.
9.02 FORM OF POLICIES.
(a) Each policy required pursuant to Section 9.01 shall
be in form and with insurers acceptable to the
Landlord any Mortgage and any other Persons with an
interest in the Building. The insurance described in
Subsections
<PAGE>
-24-
9.01 (a) and (b) shall name as loss payee the
Landlord and anyone else with an interest in the
Building from time to time designated in writing
by the Landlord. The insurance described in
Subsections 9.01(c) and (d) shall name as an
additional named insured the Landlord and any
other Persons with an interest in the Building
from time to time designated in writing by the
Landlord. All property damage and liability
insurance shall contain provisions for
cross-liability and severability of interests as
between the Landlord and the Tenant. Each policy
maintained pursuant to Subsections 9.01(a), (b),
(c) and (d) shall contain a waiver of any rights
of subrogation which the insurer may have against
the Landlord and those for whom the Landlord is in
law responsible whether the damage is caused by
the act, omission or negligence of the Landlord or
such other Persons.
(b) The insurance described in Subsections 9.01(a) and
(b) shall provide that any proceeds recoverable in
the event of damage to Leasehold Improvements shall
be payable to the Landlord. The Landlord agrees to
make available such proceeds toward repair or
replacement of the insured property if this Lease is
not terminated pursuant to any other provision of
this Lease.
(c) Each policy required pursuant to Section 9.01 shall
provide that the insurer must notify the Landlord and
any Mortgagee in writing at least thirty (30) days
prior to any material change or cancellation thereof
and that the policy shall not be invalidated in
respect of the interests of the Landlord and any
Mortgagee by reason of any breach or violation of any
warranties, representations, declarations or
conditions contained in such policies, and the policy
will be considered as primary insurance and shall not
call into contribution any other insurance that may
be available to the Landlord.
(d) The Tenant shall furnish to the Landlord any
Mortgagee and any other Persons with an interest in
the Building, prior to the commencement of the Term,
evidence satisfactory to the Landlord, Mortgagee or
other Persons that each policy required by Section
9.01 has been obtained, The Tenant shall provide
written evidence of the continuation of such policies
not less than ten (10) days prior to their respective
expiry dates. Upon request of the Landlord, the
Tenant shall provide certified copies of all such
policies. The cost or premium for each and every such
policy shall be paid by the Tenant. If the Tenant
fails to maintain such insurance the Landlord shall
have the right, but not the obligation, to do so, and
to pay the cost or premium therefor, and in such
event the Tenant shall repay to the Landlord, as
Additional Rent, forthwith on demand the amount so
paid.
9.03 LANDLORD'S INSURANCE. The Landlord shall effect and maintain
during the Term:
(a) "all risks" insurance which shall insure the Building
for an amount not less than the replacement cost
thereof from time to time (excluding foundations at
the Landlord's option), against loss or damage by
perils now or hereafter from time to time embraced by
or defined in a standard all risks insurance policy
including fire, explosion, impact by aircraft or
vehicles, lightning, riot, vandalism or malicious
acts, smoke, leakage from fire protective equipment,
windstorm or hail, collapse or earthquake;
(b) broad form boiler and machinery insurance on objects
defined in a standard broad form boiler and machinery
policy against accidents as defined therein, with
limits of not less than Ten Million Dollars
($10,000,000.00) which coverage shall include,
without limitation, loss or damage of whatsoever kind
or nature by reason of explosion or collapse by
<PAGE>
-25-
vacuum or cracking, burning, or bulging of any steam
or hot water boilers, pipes and accessories and loss
of rental income;
(c) "all risks" rent and rental value insurance in an
amount sufficient to replace all Minimum Rent and
Additional Rent payable under the provisions of this
Lease for an indemnity period of one (1) year or such
other period as the Landlord may determine;
(d) comprehensive general liability insurance against
claims for bodily injury (including death); personal
injury and property damage arising out of all
operations in connection with the management and
administration of the Building, in an amount not less
than Five Million Dollars ($5,000,000.00) inclusive
of any one occurrence; and
(e) such other coverage, or increases in the amount of
coverage specified above in this Section 9.03, as any
Mortgagee or as the lessors under any ground lease
may require from time to time or as the Landlord may
deem prudent from time to time, with such reasonable
deductions and exclusions as the Landlord deems
appropriate from time to time. At the request of the
Tenant, the Landlord shall provide the Tenant with
evidence of such insurance. The Landlord agrees that
at its sole cost each such policy shall contain a
waiver of the insurer's subrogation rights as against
the Tenant and those claiming through and under the
Tenant.
9.04 INSURANCE RISKS. The Tenant shall not do, omit to do, or
permit to be done or omitted to be done upon the Premises
anything that may contravene or be prohibited by any of the
Landlord's insurance policies in force from time to time
covering or relevant to any part of the Building or which
would prevent the Landlord from procuring such policies with
companies acceptable to the Landlord. If the occupancy of the
Premises, the conduct of business in the Premises or any acts
or omissions of the Tenant in the Premises or any other
portion of the Development causes or results in any increase
in premiums for any of the Landlord's insurance policies, the
Tenant shall pay any such increase as Additional Rent upon
receipt of an invoice of the Landlord for such additional
premiums.
9.05 LIMITATION OF LANDLORD'S LIABILITY. The Landlord, its agents,
officers, employees and other Persons for whom the Landlord is
legally responsible shall not be liable for:
(a) damage to or destruction or loss of (i) any property
of the Tenant entrusted to the care or control of the
Landlord, or any of them, or (ii) the Premises
(including Leasehold Improvements) or any property in
or upon the Premises; or
(b) any bodily injury (including death), personal injury,
damages for personal discomfort or illness or
consequential injury or damage (including, without
limitation, loss of business income) sustained by the
Tenant or any of its agents, officers, employees,
customers, invitees or licensees or any other Person
who may be in or upon the Premises or any other part
of the Building; whether or not caused by (i) the
negligence of the Landlord, its agents, officers,
employees or other Persons for whom the Landlord is
legally responsible, (ii) the operation, faulty
operation, interruption or breakdown of any of the
Building Systems or services to be provided by the
Landlord under Article 6 including, without
limitation, electricity interruption, "brown-outs" or
surges, or (iii) any act or omission of any other
tenant or occupant of space in the Building.
9.06 INDEMNITY BY TENANT. The Tenant shall indemnify and
save harmless the Landlord against any and all
claims, actions, damages, losses, liabilities and
<PAGE>
-26-
expenses (including, without limitation, those in
connection with bodily injury (including death),
personal injury or damage to property) arising from
or out of the occupancy or use by the Tenant of the
Premises or any other part of the Building or the
Development or occasioned wholly or in part by any
act or omission of the Tenant, its officers,
employees, agents, contractors, invitees, licensees
or by any Person permitted by the Tenant to be on the
Premises or due to or arising out of any breach by
the Tenant of this Lease.
9.07 INDEMNITY BY LANDLORD. The Landlord shall indemnify and save
harmless the Tenant against any and all claims, actions,
damages, losses, liabilities and expenses (including, without
limitation, those in connection with bodily injury (including
death), personal injury or damage to property) arising from
any act or omission of the Landlord or those for whom the
Landlord is in law responsible.
ARTICLE 10
MAINTENANCE, REPAIR AND ALTERATIONS
10.01 MAINTENANCE BY LANDLORD.
(a) Subject to Article 11, the Landlord
covenants to keep or cause to be kept in
good repair the following as would a prudent
owner of a comparable development of similar
age, size and location in the City of
Toronto:
(i) the footings, foundations,
structural columns and beams,
structural subfloors, bearing walls,
exterior walls, windows and roofs of
the Building;
(ii) the Building Systems; and
(iii) the Common Areas and Facilities.
If any repairs or any alterations to the Building or Building Systems are
required by any Applicable Laws due to the business carried on by the Tenant,
then the full cost of such repairs or alterations shall be paid by the Tenant to
the Landlord. In carrying out repairs, maintenance or replacements, the Landlord
need not use the same material or equipment as used originally but may use
different material or equipment of at least comparable quality.
(b) The Landlord and its agents, employees and
contractors may, upon twenty-four (24)
hours' prior notice to the Tenant (except in
an emergency, when no notice shall be
required), enter the Premises to provide
maintenance, to make repairs or alterations
or to gain access to the Building Systems;
in exercising its rights hereunder the
Landlord shall use reasonable efforts to
schedule major or noisy work outside
Business Hours or with reasonable advance
notice to Tenant.
(c) If the Tenant fails to carry out any
maintenance, repairs or work required to be
carried out by it under this Lease to the
reasonable satisfaction of the Landlord, the
Landlord may at its option carry out such
maintenance, repairs or work without any
liability for any resulting damage to the
Tenant's property or business. The cost of
such maintenance, repairs or work shall be
paid by the Tenant to the Landlord.
10.02 MAINTENANCE BY TENANT. The Tenant shall at its sole cost
maintain and repair the Premises and all Leasehold
Improvements therein to a standard consistent with comparable
premises in a development of similar age, size and location in
<PAGE>
-27-
the City of Toronto, comparable to the Building, with the
exception only of those repairs which are the obligation of
the Landlord under this Lease and subject to Article 11. The
Landlord may enter the Premises at all reasonable times to
view their condition and the Tenant shall maintain and repair
according to notice in writing from the Landlord. At the
expiration or earlier termination of the Term the Tenant shall
surrender the Premises to the Landlord in as good condition
and repair as the Tenant is required to maintain the Premises
throughout the Term.
10.03 APPROVAL OF TENANT'S ALTERATIONS.
(a) The Tenant will not require approval of the
Landlord for any alterations, improvements,
repairs or replacements to the Premises
after the commencement of the Term which do
not affect the structure of the Building,
any exterior wall, windows or roof thereof,
the ground floor lobby or any of the
Building Systems or the aesthetics of the
Building and which do not require a building
permit, provided the Tenant has given
written notice with reasonable detail of the
proposed work to the Landlord in advance.
All other alterations, improvements, repairs
or replacements after the commencement of
the Term will require the Landlord's prior
written approval (not to be unreasonably
withheld).
(b) The Tenant shall submit to the Landlord
details of the proposed work and a
reasonable number (as required by the
Landlord) of copies of drawings and
specifications for such work prepared by
qualified architects or engineers. The
Tenant shall pay to the Landlord its then
current charge and all disbursements
incurred by the Landlord for the review of
such drawings and specifications. The
Landlord shall respond to any request for
approval within fifteen 15 days of receipt
of all required details, drawings and
specifications and provide details of any
changes required. The Tenant shall
incorporate such changes into such drawings
and specifications and resubmit them for
approval. The Tenant shall not apply for a
building permit prior to receiving the
Landlord's approval of the drawings and
specifications.
(c) All alterations, improvements, repairs and
replacements shall be performed:
(i) at the sole cost of the Tenant;
(ii) by contractors and workmen approved
by the Landlord, acting reasonably,
and compatible with the labour
affiliation, if any, of the
Landlord's contractors and workmen,
provided that if the alterations,
improvements, repairs or
replacements would affect any of
the structural components, exterior
walls, windows or roofs of the
Building or any of the Building
Systems or the aesthetics of the
Building, such work shall, at the
option of the Landlord, be
performed at the Tenant's cost by
the Landlord or by contractors and
workmen designated by the Landlord
in its sole discretion;
(iii) in a good and workmanlike manner;
(iv) in accordance with the drawings and
specifications approved by the
Landlord;
<PAGE>
-28-
(v) in accordance with all Applicable
Laws, any ground lease of the Lands
or the Building, the Municipal and
Operating Agreements and
requirements of the Landlord's
insurers;
(vi) subject to the reasonable
regulation, supervision, control
and inspection of the Landlord; and
(vii) subject to such indemnification
against liens and expenses as the
Landlord reasonably requires.
(d) If the Tenant installs Leasehold
Improvements or makes alterations,
improvements, repairs or replacements which
depart from the standard for the Building,
and which restrict access by the Landlord to
any of the Building Systems or Common Areas
or Facilities, or which restrict the
installation of the leasehold
improvements of any other tenant in the
Building, then the Tenant shall be
responsible for all costs incurred by the
Landlord in obtaining access to such
Building Systems or Common Areas and
Facilities or in installing such other
tenant's leasehold improvements.
10.04 REPAIR WHERE TENANT AT FAULT. Subject to Section 9.06,
notwithstanding any other provisions of this Lease, if any
part of the Building is damaged or destroyed or requires
repair, replacement or alteration as a result of the act or
omission of the Tenant, its employees, agents, contractors,
invitees, licensees or other Person for whom it is in law
responsible, the cost of the resulting repairs or alterations
shall be paid by the Tenant to the Landlord.
10.05 REMOVAL OF IMPROVEMENTS AND FIXTURES. All Leasehold
Improvements shall immediately upon their placement become the
Landlord's property without compensation to the Tenant. Except
as otherwise agreed by the Landlord in writing, no Leasehold
Improvements or trade fixtures shall be removed from the
Premises by the Tenant either during or at the expiry or
earlier termination of the Term except that the Tenant may,
during the Term, in the usual course of its business, remove
its trade fixtures, provided that the Tenant is not in default
under this Lease.
For greater certainty, the Tenant shall not be required to remove or replace its
Leasehold Improvements, trade fixtures, or other approved alterations made in
the Premises at any time during the Term or an extension thereof or at the
expiry or termination of the Lease, and the Tenant shall be entitled to leave
the Premises in an "as is" condition subject only to the Tenant being required
to keep the Premises in the condition that the Tenant is required to maintain
the Premises during the Term.
10.06 LIENS. The Tenant shall promptly pay for all materials
supplied and work done in respect of the Premises so as to
ensure that no lien or claim of lien is registered against any
portion of the Lands or Building or against the Landlord's or
Tenant's interest therein. If a lien or claim of lien is
registered or filed, the Tenant shall discharge it at its
expense with seven (7) days after notice from the Landlord,
failing which the Landlord may at its option discharge the
lien or claim of lien by paying the amount claimed to be due
into court or directly to the lien claimant and the amount so
paid and all expenses of the Landlord including legal fees (on
a solicitor and client basis) shall be paid by the Tenant to
the Landlord.
10.07 NOTICE BY TENANT. The Tenant shall promptly notify the
Landlord of any accident, defect, damage or deficiency which
occurs or exists in any part of the Premises, the Building
Systems within the Premises or the Common Areas and Facilities
located
<PAGE>
-29-
on the floor(s) on which the Premises are located and which
comes to the attention of the Tenant.
ARTICLE 11
DAMAGE BY FIRE OR OTHER CASUALTY
11.01 DAMAGE TO PREMISES. Subject to Section 11.03, if all or part
of the Premises are rendered unfit for use by damage from any
cause, the Landlord shall with reasonable diligence repair
such damage, other than damage to the trade fixtures,
furniture, equipment and personal property which do not belong
to the Landlord and to the Leasehold Improvements, and the
Tenant shall with reasonable diligence repair damage to all
Leasehold Improvements, trade fixtures, furniture, equipment
and personal property in the Premises.
11.02 ABATEMENT. There shall be no abatement or reduction of Rent
where the Landlord's repairs to the Premises take less than
ten (10) days after the damage occurs to complete. If the
Landlord's repairs take ten (10) or more days to complete,
then the Minimum Rent and Additional Rent payable under
Subsections 4.02(a) and (b), and also paragraph 4.02(c)(i) to
the extent utilities are not billed to the Tenant directly,
shall be proportionately reduced in the proportion that the
Rentable Area of the part of the Premises thereby rendered
unfit for use by the Tenant in its business and not in fact so
used bears to the Rentable Area of the Premises from the date
of such damage until the earlier of:
(a) substantial completion by the Landlord of its
necessary repairs to the Premises (or the part
thereof rendered unfit for use) (during which period
of time the Tenant shall with reasonable diligence
make such repairs as are necessary for the Tenant to
again use the Premises (or the part thereof rendered
unfit for use) in its business; and
(b) the day on which the Tenant again uses the Premises
(or the part thereof rendered unfit for use) for its
business (with abatement continuing as aforesaid in
respect of the parts remaining unfit for use and not
actually used).
11.03 MAJOR DAMAGE TO BUILDING. Notwithstanding Section 11.01, if:
(a) the Premises;
(b) premises, whether of the Tenant or other tenants of
the Building, comprising in the aggregate fifty
percent (50%) or more of the Rentable Area of the
Building; or
(c) any part or parts of the Building, the Building
Systems or the Common Areas and Facilities required
for the proper operation of the Building;
are damaged or destroyed by any cause to the extent that, in the reasonable
opinion of the Landlord, the damage or destruction cannot be repaired within one
hundred and twenty (120) days after the occurrence of such damage or
destruction, then:
(d) the Landlord or the Tenant may at its option,
exercisable by notice to the other party given within
sixty (60) days after the occurrence of such damage
or destruction, terminate this Lease.
If the Lease is terminated the Tenant shall forthwith deliver up possession of
the Premises to the Landlord and Rent shall be apportioned and paid to the date
upon which possession is so delivered up, subject to any abatement to which the
Tenant may be entitled under Section 11.02.
<PAGE>
-30-
11.04 Certificate of Architect. The certificate of the Architect
shall be binding upon the Landlord and the Tenant as to
whether or not the Premises are unfit for use, the percentage
of the Premises rendered unfit for use, the date upon which
the Premises or relevant part thereof became unfit for use,
what constitutes a reasonable period of time under Subsection
11.02(a) and the state of completion of any work or repair of
either the Landlord or the Tenant.
11.05 LANDLORD'S RIGHTS ON REBUILDING. In repairing or rebuilding
the Building or the Premises the Landlord may use drawings,
designs, plans and specifications other than those used in the
original construction and may alter or relocate the Building,
the Common Areas and Facilities or any part thereof, and may
alter or relocate the Premises, provided that the Premises as
altered or relocated shall be of substantially the same size
and have substantially the same attributes as the original
Premises.
ARTICLE 12
TRANSFERS
12.01 TRANSFERS. The Tenant shall not enter into, consent to, or
permit any Transfer without the prior written consent of the
Landlord in each instance, which consent shall not be
unreasonably withheld but shall be subject to the Landlord's
rights under Section 12.02. The Tenant shall pay to the
Landlord its then current reasonable charge and all reasonable
disbursements incurred by the Landlord for its review of the
proposed Transfer. Notwithstanding any statutory provision to
the contrary, it shall not be considered unreasonable for the
Landlord to withhold its consent if, without limiting any
other factors or circumstances which the Landlord may
reasonably take into account:
(a) the Tenant is then in default under this Lease;
(b) the proposed Transfer would be or could result in
violation or breach of any covenants or restrictions
made or granted by the Landlord to other tenants or
occupants, or prospective tenants or occupants, of
the Building, the lessors under any ground lease of
the Lands or the Building, any Mortgagee or any other
Person;
(c) in the Landlord's reasonable opinion, the financial
background, business history and capability of the
proposed Transferee is not satisfactory;
(d) the proposed Transfer is to an existing tenant of the
Building; or
(e) the Landlord at that time has or will have in the
next ensuing three-month period, other premises
elsewhere in the Building which might be suitable for
the needs of the Transferee; or
(f) the Transfer is a mortgage, charge or debenture
(floating or otherwise) of, or in respect of this
Lease or the Leased Premises or any part thereof or
the Tenant's interest therein; or
(g) the minimum and additional rent payable by the
proposed Transferee, if less than the Minimum Rent
and Additional Rent payable by the Tenant hereunder,
will, in the Landlord's opinion arrived at in good
faith, detrimentally affect the leasing program for
the Building; or
(h) the use of the Premises by the proposed Transferee,
in the Landlord's opinion arrived at in good faith,
(i) could result in excessive use of the
<PAGE>
-31-
elevators or other Building Systems or services, (ii)
is illegal, (iii) might harm or tend to harm the
business or reputation of the landlord or the image
and standards of the Building or (iv) could expose
the Landlord or the occupants of the Building to risk
of harm, damage or interference with their use and
enjoyment thereof.
Any consent by the Landlord to a Transfer shall not constitute a waiver of the
necessity for such consent to any subsequent Transfer. This prohibition against
Transfer shall include a prohibition against any Transfer by operation of law.
Notwithstanding the foregoing, no consent of Landlord shall be required (but the
Tenant shall provide the Landlord with prior written notice) in the event that
the Tenant assigns the Lease or sublets or parts with or shares possession of
the whole or any portion of the Premises to a Related Party. For the purposes of
this Lease a "Related Party" means an affiliate (as such term is defined in the
Canada Business Corporations Act as of the date hereof) of Promis Systems
Corporation Ltd.. In no event will an assignment or subletting, parting with or
sharing possession of the whole or any part of the Premises by Tenant or a
request for permission to assign or sublet or part with or share possession of
the whole or any part of the Premise result in an increase in or addition to any
rental charge stipulated to be payable in the Lease, or entitle Landlord to
cancel the Lease, or entitle Landlord to any consideration received by Tenant in
connection with any assignment, subletting or parting with or sharing possession
of all or any part of the Premises, except for reasonable out of pocket expenses
which costs shall not exceed One Thousand Dollars ($1,000.00).
12.02 LANDLORD'S RIGHT TO TERMINATE. [INTENTIONALLY DELETED.]
12.03 CONDITIONS OF TRANSFER.
(a) If there is a permitted Transfer, the
Landlord may collect Rent from the
Transferee and apply the amount collected to
the Rent payable under this Lease but no
acceptance by the Landlord of any payments
by a Transferee shall be deemed to be a
waiver of the Tenant's covenants or any
acceptance of the Transferee as a tenant or
a release of the Tenant from the further
performance by the Tenant of its obligations
under this Lease. Any consent by the
Landlord shall be subject to the Tenant and
Transferee executing, prior to the Transfer
being made, an agreement with the Landlord
agreeing that the Transferee will be bound
by all of the terms of this Lease, and
except in the case of a sublease, that the
Transferee will be so bound as if it had
originally executed this Lease as tenant.
(b) Notwithstanding any Transfer permitted or
consented to by the Landlord, the Tenant
shall remain liable under this Lease and
shall not be released from performing any of
the terms of this Lease.
(c) If the Transfer in respect of which consent
has been given is not completed within sixty
(60) days of the date of such consent, then
such consent shall, at the Landlord's
option, become void.
(d) Notwithstanding the effective date of any
permitted Transfer as between the Tenant and
the Transferee, all Rent for the month in
which such effective date occurs shall be
paid in advance by the Tenant so that the
Landlord will not be required to accept
partial payments of Rent for such month from
either the Tenant or Transferee.
(e) The agreements referred to in this Section
12.03 and any document evidencing the
Landlord's consent to any Transfer shall, at
the
<PAGE>
-32-
Landlord's option, be prepared by the
Landlord or its solicitors at the Tenant's
cost, which costs shall not exceed One
Thousand Dollars ($1,000.00).
12.04 CHANGE OF CONTROL. [INTENTIONALLY DELETED.]
12.05 NO ADVERTISING. The Tenant shall not advertise that the whole
or any part of the Premises are available for a Transfer and
shall not permit any broker or other Person to do so unless
the text and format of such advertisement is approved in
writing by the Landlord. No such advertisement shall contain
any reference to the rental rate of the Premises.
12.06 ASSIGNMENT BY LANDLORD. The Landlord shall have the
unrestricted right to sell, transfer, lease, charge or
otherwise dispose of all or any part of its interest in the
Building or any interest of the Landlord in this Lease. In the
event of any sale, transfer, lease, charge or other
disposition to the extent that the assignee from the Landlord
agrees with the Landlord to assume the obligations of the
Landlord under this Lease, the Landlord shall thereupon, and
without further agreement, be released of all liability under
this Lease.
12.07 EXHIBITING PREMISES. The Landlord and its agents, upon 24
hours' prior written notice to the Tenant, may exhibit the
Premises during Business Hours to prospective purchasers or
Mortgagees of the Building. In addition, during the last six
months of the Term, the Landlord or its agent, upon 24 hours'
prior written notice to the Tenant, may exhibit the Premises
during Business Hours to prospective tenants for such space.
ARTICLE 13
STATUS CERTIFICATES, SUBORDINATION, ATTORNMENT
13.01 STATUS CERTIFICATES. The Tenant shall at any time and from
time to time execute and deliver to the Landlord or as the
Landlord, may direct within five (5) business days after it is
requested a statement in writing, in the form supplied by the
Landlord, certifying that this Lease is unmodified and in full
force and effect (or if modified, stating the modification and
stating that the Lease is in full force and effect as
modified), the Commencement Date, the amount of the Minimum
Rent and other Rent then being paid hereunder, the dates to
which such Rent hereunder has been paid, whether or not there
is any existing default on the part of the Landlord of which
the Tenant is aware and any other particulars that the
Landlord may reasonably request.
13.02 SUBORDINATION AND ATTORNMENT. This Lease and the rights of the
Tenant hereunder shall be subject and subordinate to all
existing or future Mortgages and to all renewals,
modifications, consolidations, replacements and extensions
thereof. Whenever requested by the Landlord or a Mortgagee,
the Tenant shall, within five (5) business days after such
request, enter into an agreement with the Mortgagee whereby
the Tenant postpones or subordinates this Lease to the
interest of any stipulated Mortgagee and agrees that whenever
requested by such Mortgagee it shall attorn to and become the
tenant of such Mortgagee, or any purchaser from such Mortgagee
in the event of the exercise by the Mortgagee of its power of
sale, for the then unexpired residue of the Term upon all the
terms and conditions of this Lease. The Tenant shall, at the
request of the Landlord or any lessor under any ground lease
affecting the Building, enter into an agreement with such
lessor to the effect that it shall attorn to and become the
tenant of such lessor, or any successor or assign, if the
lessor or any successor or assign should take possession of
the Building as a result of a default tinder any ground lease
for
<PAGE>
-33-
the then unexpired residue of the Term upon all the terms
and conditions of this Lease. Upon written request by the
Tenant, the Landlord shall use its best efforts (provided this
shall not involve any expense) to obtain written assurances
from the lessor under any ground lease of the Lands or the
Building or any Mortgagee with an interest in the Building
prior to that of the Tenant to the effect that so long as the
Tenant is not in default under this Lease such owner or
Mortgagee will recognize the Tenant's rights under this Lease
and not disturb the Tenant's occupancy of the Premises.
13.03 NON-DISTURBANCE AGREEMENT. On the execution of this Lease, the
Landlord, at Tenant's expense, shall use its best efforts to
obtain a written agreement in a form acceptable to any
Mortgagee and the Tenant, each acting reasonably, from any
mortgagee, chargee or any encumbrancer of all or any part of
the lands in the complex of which the Building forms part
having priority over the Tenant to the effect that provided
Tenant complies with the terms of the Lease, the Tenant shall
be permitted to remain in quiet possession of the Premises
pursuant to the terms of the Lease without interruption or
disturbance from such Mortgagee.
ARTICLE 14
REMEDIES OF LANDLORD
14.01 EVENTS OF DEFAULT. Any of the following constitutes an Event
of Default under this Lease:
(a) any Rent is in arrears and is not paid within five (5) days
after written demand by the Landlord;
(b) the Tenant has breached any of its obligations in this Lease
and, if such breach is capable of being remedied and is not
otherwise listed in this Section 14.01, after notice in
writing from the Landlord:
<PAGE>
-34-
(i) the Tenant fails to remedy such breach within fifteen
(15) days (or such shorter period as may be provided
in this Lease); or
(ii) if such breach cannot reasonably be remedied within
15 days or such shorter period, the Tenant fails to
commence to remedy such breach within such fifteen
(15) days or shorter period or thereafter fails to
proceed diligently to remedy such breach;
(c) the Tenant or any Indemnifier becomes bankrupt or insolvent or
takes the benefit of any statute for bankrupt or insolvent
debtors or makes any proposal, an assignment or arrangement
with its creditors, or any steps are taken or proceedings
commenced by any Person for the dissolution, winding-up or
other termination of the Tenant's existence or the liquidation
of its assets;
(d) a trustee, receiver, receiver/manager, or a Person acting in a
similar capacity is appointed with respect to the business or
assets of the Tenant or any Indemnifier;
(e) the Tenant or any Indemnifier makes a sale in bulk of all or a
substantial portion of its assets other than in conjunction
with a Transfer approved by the Landlord;
(f) this Lease or any of the Tenant's assets are taken under a
writ of execution and such writ is not stayed or vacated
within fifteen (15) days after the date of such taking;
(g) the Tenant makes a Transfer other than in compliance with the
provisions of this Lease;
(h) the Tenant abandons or attempts to abandon the Premises or the
Premises become vacant or substantially unoccupied for a
period of ten (10) consecutive days or more without the prior
written consent of the Landlord;
(i) the Tenant moves or commences, attempts or threatens to move
its trade fixtures, chattels or equipment out of the Premises
other than in the routine course of its business;
(j) an Indemnifier, if any, fails to execute and deliver to the
Landlord before the commencement of the Fixturing Period an
indemnity agreement in the form attached hereto as Schedule F
or at any time denies liability under any such indemnity
agreement;
(k) any event of default occurs under any lease or agreement
relating to other premises in the Building leased to or
occupied by the Tenant (save and except the letter agreement
between the Landlord and Tenant executed contemporaneously
with this Lease); or
(1) any insurance policy covering any part of the Building is, or
is threatened to be, cancelled or adversely changed (including
a substantial premium increase) as a result of any action or
omission by the Tenant or any Person for whom it is legally
responsible.
14.02 DEFAULT AND REMEDIES. If and whenever an Event of Default
occurs, then without prejudice to any other rights which it
has pursuant to this Lease or at law, the Landlord shall have
the following rights and remedies, which are cumulative and
not alternative:
(a) to terminate this Lease by notice to the Tenant or to
re-enter the Premises and repossess them and, in
either case, enjoy them as of its former estate, and
the Landlord may remove all Persons and property from
the Premises
<PAGE>
-35-
and store such property at the expense and risk of
the Tenant or sell or dispose of such property in
such manner as the Landlord sees fit without notice
to the Tenant;
(b) to enter the Premises as agent of the Tenant and to
relet the Premises for whatever length, and on such
terms as the Landlord in its discretion may determine
and to receive the rent therefor and as agent of the
Tenant to take possession of any property of the
Tenant on the Premises, to store such property at the
expense and risk of the Tenant or to sell or
otherwise dispose of such property in such manner as
the Landlord sees fit without notice to the Tenant;
to make alterations to the Premises to facilitate
their reletting; and to apply the proceeds of any
such sale or reletting first, to the payment of any
expenses incurred by the Landlord with respect to any
such reletting or sale second, to the payment of any
indebtedness of the Tenant to the Landlord other than
Rent and third, to the payment of Rent in arrears,
with the residue to be held by the Landlord and
applied to payment of future Rent as it becomes due
and payable; provided that the Tenant shall remain
liable for any deficiency to the Landlord;
(c) to remedy or attempt to remedy any default of the
Tenant under this Lease for the account of the Tenant
and to enter upon the Premises for such purposes; and
no notice of the Landlord's intention to remedy or
attempt to remedy such default need be given the
Tenant unless expressly required by this Lease; and
the Landlord shall not be liable to the Tenant for
any loss, injury or damages caused by acts of the
Landlord in remedying or attempting to remedy such
default and the Tenant shall pay to the Landlord all
expenses incurred by the Landlord in connection
therewith;
(d) to recover from the Tenant all damages, costs and
expenses incurred by the Landlord as a result of any
default by the Tenant including, if the Landlord
terminates this Lease, any deficiency between those
amounts which would have been payable by the Tenant
for the portion of the Term following such
termination and the net amounts actually received by
the Landlord during such period of time with respect
to the Premises; and
(e) to recover from the Tenant the full amount of the
current month's Rent together with the next three
months' instalments of Rent, all of which shall
accrue on a day to day basis and shall immediately
become due and payable as accelerated rent.
14.03 DISTRESS. Notwithstanding any provision of this Lease or any
provision of applicable legislation, none of the goods and
chattels of the Tenant on the Premises at any time during the
Term shall be exempt from levy by distress for Rent in
arrears, and the Tenant waives any such exemption. If the
Landlord makes any claim against the goods and chattels of the
Tenant by way of distress this provision may be pleaded as an
estoppel against the Tenant in any action brought to test the
right of the Landlord to levy such distress.
14.04 COSTS. The Tenant shall pay to the Landlord all damages, costs
and expenses (including, without limitation, all legal fees on
a solicitor and client basis) incurred by the Landlord in
enforcing the terms of this Lease, or with respect to any
matter or thing which is the obligation of the Tenant under
this Lease, or in respect of which the Tenant has agreed to
insure or to indemnify the Landlord.
14.05 SURVIVAL OF OBLIGATIONS. The indemnity provisions of this
Lease and the Landlord's rights in respect of any failure by
the Tenant to perform any of its obligations under this Lease
shall remain in full force and effect notwithstanding the
expiration or earlier termination of the Term.
<PAGE>
-36-
14.06 REMEDIES CUMULATIVE. Notwithstanding any other provision of
this Lease, the Landlord may from time to time resort to any
or all of the rights and remedies available to it in the event
of any default hereunder by the Tenant, either by any
provision of this Lease, by statute or common law, all of
which rights and remedies are intended to be cumulative and
not alternative, and the express provisions hereunder as to
certain rights and remedies are not to be interpreted as
excluding any other or additional rights and remedies
available to the Landlord by statute or the general law.
ARTICLE 15
MISCELLANEOUS
15.01 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall
be given by facsimile or other means of electronic
communication or by hand delivery as hereinafter provided. Any
such notice other communication, if sent by facsimile or other
means of electronic communication, shall be deemed to have
been received on the date of sending if sent during normal
business hours on a Business Day, and otherwise on the first
Business Day following the date of sending, or if delivered by
hand shall be deemed to have been received at the time it is
delivered to the applicable address noted below either to the
individual designated below or to an individual at such
address having apparent authority to accept deliveries on
behalf of the addressee. Notice of change of address or
telecopier number shall also be governed by this Section
15.01. Notices and other communications shall be addressed as
follows:
(a) in the case of notice to the Landlord, to it
at the address or telecopier number set out
in paragraph 1.01(a)(ii); and
(b) in the case of notice to the Tenant, to it
at the Premises or the telecopier number set
out in paragraph 1.01(b)(ii).
15.02 REGISTRATION OF LEASE. Neither the Tenant nor anyone on the
Tenant's behalf or claiming under the Tenant shall register
this Lease or any other instrument pertaining to this Lease
against the Lands. If the Landlord or the Tenant intends to
register a document for the purpose only of giving notice of
this Lease or of any dealing with it, then, upon request of
such party, the other party shall join in the execution of a
short form or notice of this Lease solely for the purpose of
supporting an application for registration of notice of this
Lease or any subsequent dealing therewith. At the Landlord's
option, the form of such documentation shall be prepared by
the Landlord's solicitors at the requesting party's expense;
otherwise the Tenant shall pay the Landlord's reasonable legal
costs of reviewing the documentation presented by the Tenant.
15.03 RELOCATION. Intentionally Deleted.
15.04 OVERHOLDING - NO TACIT RENEWAL. It is the Landlord's policy
not to permit tenants to overhold. If the Tenant nevertheless
remains in possession of the Premises after the end of the
Term with the consent of the Landlord but has not executed and
delivered a new lease, there shall be no tacit renewal of this
Lease or the Term, notwithstanding any statutory provisions or
legal presumption to the contrary, and the Tenant shall be
deemed to be occupying the Premises as a tenant from month to
month at a monthly Minimum Rent payable in advance on the
first day of each month equal to the monthly amount of Minimum
Rent payable during the last month of the Term and otherwise
upon the same terms, covenants and
<PAGE>
-37-
conditions as are set forth in this Lease insofar as these are
applicable to a monthly tenancy but, for greater certainty,
including liability for all Additional Rent.
15.05 UNAVOIDABLE DELAY. If and to the extent that either the
Landlord or the Tenant shall be prevented, delayed or
restricted by reason of Unavoidable Delay in the fulfilment of
any obligation hereunder, then either the Landlord or the
Tenant, as the case may be, shall be deemed not to be in
default in the performance of such covenant or obligation and
any period for the performance of such obligation shall be
extended accordingly and the other party to this Lease shall
not be entitled to compensation for any loss, inconvenience,
nuisance or discomfort thereby occasioned, provided that in no
event will the Tenant be relieved of its obligation to pay
Rent as it becomes due.
15.06 WAIVER. If either the Landlord or Tenant excuses or condones
any default of the other of any obligation under this Lease,
no waiver of such obligation shall be implied as a result of
any continuing or subsequent default.
15.07 PARTIAL PAYMENT OF RENT. Acceptance by the Landlord of a
lesser amount than the monthly payment of Rent herein
stipulated and any endorsement or statement on any check or
documentation accompanying any payment of Rent shall not be
deemed an acknowledgment of full payment or an accord and
satisfaction, and the Landlord may accept such payment without
prejudice to the Landlord's right to recover the balance of
such Rent or to pursue any other remedy provided in this
Lease.
15.08 PLANNING ACT. This Lease is expressly conditional upon
compliance with the Planning Act (Ontario) and any amendments
thereto.
15.09 METRIC CONVERSION. The Landlord may express any measurement in
this Lease in metric measure in which case the following
conversion factors apply: 1 meter = 3.2808 feet; 1 square
meter = 1.7636 square feet; 1 foot =.3048 metres; and 1 square
foot =.0929 square metres.
15.10 DECISION OF EXPERT.The decision of any Expert whenever
provided for under this Lease and any certificate related
thereto (provided such decision is reasonably arrived at in
accordance with the standards of his or her profession) shall
be final and binding on the parties hereto and there shall be
no further right of dispute or appeal.
15.11 POWER, CAPACITY, AUTHORITY. The Landlord and the Tenant
covenant, represent and warrant to one another respectively
that they have the power, capacity and authority to enter into
this Lease and to perform their obligations hereunder and that
the Person(s) who have executed this Lease on their behalf
have the authority to bind them.
15.12 BANKRUPTCY AND INSOLVENCY ACT. The Tenant hereby irrevocably
waives any right it may have under section 65.2(l) of the
Bankruptcy and Insolvency Act, S.C. 1992, or any successor or
similar legislation, to repudiate this Lease, and any such
purported repudiation of this Lease shall be of no force or
effect.
15.13 PRIOR COMMITMENTS. The Tenant represents and warrants that
there are no covenants, restrictions or commitments given by
the Tenant to any other landlords, tenants in other
developments, its mortgagees or any other third party which
would prevent or inhibit the Tenant from entering into this
Lease.
15.14 QUIET ENJOYMENT. If the Tenant pays the Rent, fully performs
all its obligations under this Lease and there has been no
Event of Default, then the Tenant shall be
<PAGE>
-38-
entitled, subject to the provisions of this Lease, to peaceful
and quiet enjoyment of the Premises for the Term without
interruption or interference by the Landlord or any Person
claiming through the Landlord.
IN WITNESS WHEREOF the parties hereto have executed this Lease under seal.
PROMIS SYSTEMS CORPORATION LTD.
-----------------------------------------
Name:
Title:
-----------------------------------------
Name:
Title:
We have authority to bind the Corporation
170 UNIVERSITY (TORONTO)
PARTNERSHIP, by its asset manager,
Gentra Canada Investments Inc.
-----------------------------------------
Name: Scott E. Pennock
Title: Vice President
-----------------------------------------
Name: Ryk Stryland
Title: Senior Vice President
We have authority to bind the Corporation
<PAGE>
A-1
SCHEDULE A to the Lease dated May 28, 1996, between 170 University (Toronto)
Partnership (Landlord) and Promis Systems Corporation Ltd. (Tenant).
LEGAL DESCRIPTION OF LANDS
170 University Avenue
Toronto, Ontario
Parcel 2-1, Section A-736E
Land Titles Division of Metropolitan Toronto (No. 66) at Toronto
In the City of Toronto, in the Municipality of Metropolitan Toronto, being
composed of Lot 2 on Registered Plan 736-E, designated as part 1 on Reference
Plan 66R-16016.
The boundaries of the south side of Adelaide Street West and the west side of
University Avenue were confirmed under the BOUNDARIES ACT (Ontario) by Plan
BA-1325, registered as Instrument CT308070.
<PAGE>
B-1
SCHEDULE B to the Lease dated May 28, 1996, between 170 University (Toronto)
Partnership (Landlord) and Promis Systems Corporation Ltd. (Tenant).
PLAN OF THE 10TH FLOOR OF THE BUILDING
<PAGE>
B-2
SCHEDULE B to the Lease dated May 28, 1996, between 170 University (Toronto)
Partnership (Landlord) and Promis Systems Corporation Ltd. (Tenant).
PLAN OF THE 11TH FLOOR OF THE BUILDING
<PAGE>
B-3
SCHEDULE B to the Lease dated May 28, 1996, between 170 University (Toronto)
Partnership (Landlord) and Promis Systems Corporation Ltd. (Tenant).
PLAN OF THE 12TH FLOOR OF THE BUILDING
<PAGE>
B-4
SCHEDULE B to the Lease dated May 28, 1996, between 170 University (Toronto)
Partnership (Landlord) and Promis Systems Corporation Ltd. (Tenant).
PLAN OF THE 13TH FLOOR OF THE BUILDING
<PAGE>
C-1
SCHEDULE C to the Lease date May 28, 1996, between 170 University (Toronto)
Partnership and Promis Systems Corporation Ltd. (Tenant).
RULES AND REGULATIONS
1.01 LIFE SAFETY.
(a) If any emergency situation arises the Tenant shall cause all
occupants of the Premises to vacate the Building if directed to do so by the
Landlord or any public authority, in the manner prescribed by the Landlord or
such public authority.
(b) No inflammable, explosive or dangerous materials shall be stored or
used in the Premises and the Tenant shall not do, or omit to do, anything which
may in any way breach Applicable Laws, increase the risk of fire or obstruct or
interfere with the rights of other occupants of the Building.
2.01 SECURITY.
(a) The Landlord may require that any Person entering and leaving the
Building at any time other than Business Hours identify himself and satisfy
security measures prescribed by the Landlord from time to time. The Landlord may
prevent any Person from entering the Premises unless that Person possesses a
key, pass or other authorization satisfactory to the Landlord, and may prevent
any Person removing any goods therefrom without written authorization. The
Landlord may institute a photo-identification or other security system, in which
case identification cards or other necessary security devices must be obtained
from the Landlord at the expense of the Tenant.
(b) All entrance doors to the Premises must be kept locked when the
Premises are not in use. Except as provided for below, all locks within the
Premises and on the access doors to the Premises will permit access by the
Landlord's master key or access cards. The Tenant shall not install any locks,
bolts or other security devices affecting access to the Premises, or any part
thereof, without the Landlord's prior written consent, which may be granted on a
conditional basis. No change may be made to existing locks or locking mechanism
within the Premises or on the access doors to the Premises without the
Landlord's consent and co-ordination.
3.01 HOUSEKEEPING.
(a) The Tenant shall keep the Premises tidy and free from rubbish,
which shall be deposited in receptacles designated by the Landlord for waste.
(b) The entrance, lobbies, elevators, staircases and other such
facilities of the Building shall be used only for access to the Premises; the
Tenant shall not obstruct or damage such facilities, or permit them to be
obstructed or damaged by its agents, employees, officers, invitees or others
under its control.
(c) The Tenant shall not obstruct access to main header ducts, janitor
and electrical closets and other Building Systems.
(d) The Tenant shall, at its expense and at such reasonable intervals
as the Landlord requires, exercise such pest control measures as directed by the
Landlord using contractors designated by the Landlord, failing which the
Landlord shall have the right, at its option, to exercise such pest control
measures for the Premises, at the expense of the Tenant.
4.01 RECEIVING, SHIPPING, MOVEMENT OF ARTICLES.
(a) No heavy equipment, safe or other items shall be moved by or for
the Tenant except with the prior written consent of the Landlord, which may be
arbitrarily withheld. Any such item shall be moved upon the appropriate
steel-bearing plates, skids, or platforms, subject always to direction by the
Landlord, and shall take place at such times and by such persons as the Landlord
shall have approved.
<PAGE>
C-2
(b) No equipment, freight, office materials or supplies, furnishings or
bulky matter shall be moved in or out of the Premises or carried on the
escalators or elevators of the Building except during such hours as the Landlord
shall have approved. Hand trucks and similar appliances shall be equipped with
rubber tires, rubber bumpers and other safeguards approved by the Landlord, and
shall be used only by prior arrangement with the Landlord.
(c) The Tenant shall receive, ship and take delivery of, and require
shippers and others to deliver and take delivery of, equipment, freight, office
materials and supplies, and furnishings only through the appropriate service and
delivery facilities and elevators provided in the Building and subject to such
further regulations as the Landlord may from time to time impose. The service
elevators in the Building shall not be used for the movement of any such item
without the prior written consent of the Landlord and shall be left in clean
condition following use.
5.01 PREVENTION OF INJURY TO PREMISES.
(a) The Tenant shall not misuse or damage the Premises or any of the
improvements or facilities therein, or unreasonably deface or mark any walls or
other parts of the Premises.
(b) The Tenant shall not: (a) install or use any radio, television or
other similar device in the Premises which may in any manner constitute a
disturbance or an annoyance to any other tenant in the Building, (b) install in
the Premises or elsewhere in the Building any transmitting radio communications
equipment without the Landlord's prior written consent; or (c) operate an
electrical device from which may emanate electrical waves that may interfere
with or impair radio or television broadcasting or reception from or in the
Building. The Tenant shall not in any case erect or cause to be erected any
aerial anywhere in the Building.
6.01 WINDOWS.
(a) No curtains, blinds or other window coverings shall be installed by
the Tenant without the prior written consent of the Landlord. Window coverings
that are installed shall comply with the uniform scheme of the Building.
(b) The Tenant shall not interfere with any window coverings installed
upon exterior windows of the Building, and shall close such window coverings
during such hours as the Landlord may require, and shall not install or operate
any interior drapes installed by the Tenant so as to interfere with the exterior
appearances of the Building or the climate control system of the Building.
7.01 WASHROOMS. The water closets and other water apparatus shall not be used
for any purpose other than those for which they were constructed, and no
sweepings, rubbish, rags, ashes or other substance shall be placed therein. The
Tenant shall be responsible for any damages resulting from misuse caused by it
or by its agents, employees, officers, licensees or invitees. The Tenant shall
not let the water run unless it is then being used.
9.01 Use of PREMISES.
(a) No cooking or preparation of food which requires venting or
produces odours shall be permitted in the Premises and no electrical apparatus
likely to cause overloading of electrical circuits shall be used therein.
(b) The tenant shall not use or permit use of the Premises in such
manner as to create any noises or odours objectionable or offensive to the
Landlord or any other tenant of the Building or other nuisance or hazard or
to breach the provisions of Applicable Laws or any requirement of the
insurers of the Building.
(c) No Person shall use the Premises for sleeping apartments or
residential purposes, or for the storage of personal effects or articles other
than those required for business purposes.
(d) No musical instruments or sound producing equipment or amplifiers
which may be heard outside the Premises shall be played or operated on the
Premises.
<PAGE>
C-3
9.01 CANVASSING, SOLICITING, PEDDLING. The Tenant shall not perform, patronize
or permit anyone under its control to perform any canvassing, soliciting or
peddling in the Building and shall not install in the Premises any machines
vending or dispensing refreshments or merchandising, except with the prior
written consent of the Landlord.
10.01. BICYCLES. Bicycles or other vehicles shall not be brought or left in or
upon any part of the Building except in such area or areas as are designated by
the Landlord from time to time.
11.01 SIGNS. If pursuant to Section 6.07 of the Lease the Tenant is permitted to
erect, affix or instal any sign or lettering which may be seen outside the
Premises it shall at its own expense erect and maintain in good condition and
repair any such sign or lettering and shall observe and comply with Applicable
Laws, including the payment of license or other fees.
12.01 GENERAL. These rules and regulations, together with all amendments,
deletions and additions, are not necessarily intended for uniform application,
but may be waived in whole or in part in respect of other tenants of the
Building without affecting their enforceability with respect to the Tenant and
the Premises, and may be waived in whole or in part with respect to the Premises
without waiving them as to future application to the Premises. The imposition of
such rules and regulations shall not create or imply any obligation of the
Landlord to enforce them or create any liability of the Landlord for any such
lack of enforcement.
<PAGE>
D-1
SCHEDULE D to the Lease dated May 28, 1996 between 170 University (Toronto)
Partnership (Landlord) and promis Systems Corporation Ltd. (Tenant).
SPECIAL PROVISIONS
1.01 FAIR MARKET RENT. In this Schedule "D", the term "Fair Market Rent" means
the rent charged for a similar term for space comparable to the Premises within
the Building or other developments of similar age, size, and location in the
City of Toronto for the purposes of determining Minimum Rent under Section 2.01
of this Schedule "D", Fair Market Rent shall be determined based upon the
assumptions that: (a) all improvements to the Premises required to enable the
Tenant to conduct business in the Premises in accordance with the provisions of
this Lease, including the Leasehold Improvements, have been constructed and
installed in the Premises as of the date of determination of Minimum Rent; and
(b) a Fair Market Allowance (as hereinafter defined) has been previously paid to
the Tenant by the Landlord. For the purpose of determining, Minimum Rent under
Sections 5.01 and 7.01 of this Schedule "D", tenant inducements, including
leasehold allowances, if any, payable as of the date of determination of Fair
Market Rent in respect of leases of such comparable space having a similar term
(collectively the "Fair Market Allowance") shall be taken into account in
determining Fair Market Rent.
2.01 ARBITRATION PROCEDURE. In the event of any dispute which this Lease
expressly provides shall be resolved by arbitration, the following procedures
shall apply:
(a) The party wishing to have the issues submitted to arbitration
shall give notice to the other party specifying the
particulars of the matter or matters in dispute and proposing
the name of the person it wishes to be the single arbitrator.
Within fifteen (15) days thereafter, the other party shall
give notice to the initiating party advising whether such
party accepts the arbitrator proposed by the initiating party.
If such notice is not given within such fifteen (15) day
period, the other party shall be deemed to have accepted the
arbitrator proposed by the initiating party. Failing agreement
of the parties on a single arbitrator within such fifteen (15)
day period, either party may apply to a judge of the Supreme
Court of Ontario under the Arbitrations Act (Ontario) for the
appointment of a single arbitrator on two (2) clear days'
notice to the other party. Each party shall propose up to
three (3) candidates for the position of arbitrator to the
said judge who, upon receiving submissions of the parties with
respect to the matter, shall select the arbitrator from
amongst the candidates so named.
(b) Within thirty (30) days of the establishment of the
arbitrator, the party initiating the arbitration (the
"Claimant") shall send the other party (the "Respondent") a
statement of claim setting out in sufficient detail the facts
and the contentions of law on which it relies and the relief
it claims.
(c) Within thirty (30) days of the receipt of the statement of
claim, the Respondent shall send the Claimant a statement of
defence stating in sufficient detail which of the facts and
contentions of law in the statement of claim it admits or
denies, on what grounds, and on what other facts and
contentions of law it relies.
(d) Within thirty (30) days of receipt of the statement of
defence, the Claimant may send the Respondent a statement of
reply.
(e) All statements of claim, defence and reply shall be
accompanied by copies (or, if they are especially voluminous,
lists) of all essential documents on which the party concerned
relies and which have not previously been submitted by any
party, and (where practicable) by any relevant samples.
(f) After submission of all the statements, the arbitrator will
give directions for the further conduct of the arbitration.
<PAGE>
D-2
(g) Meetings and hearings of the arbitrator shall take place in
the City of Toronto, or in such other place as the Claimant
and the Respondent shall agree upon in writing and such
meetings and hearings shall be conducted in the English
language unless otherwise agreed by such parties and the
arbitrator. Subject to the foregoing the arbitrator may at any
time fix the date, time and place of meetings and hearings in
the, arbitration, and will give all the parties adequate
notice of these. Subject to any adjournments which the
arbitrator allows, the final hearing will be continued on
successive working days until it is concluded.
(h) All meetings and hearings will be in private unless the
parties otherwise agree.
(i) Any party may be represented at any meetings or hearings by a
legal practitioner.
(j) The arbitrator will make its decision in writing and, unless
both the parties otherwise agree, its reasons will be set out
in the decision.
(k) The arbitrator will send its decision to the parties as soon
as practicable after the conclusion of the final hearing.
(1) The decision shall be final and binding on the parties and
shall not be subject to any appeal or review procedure
provided that the arbitrator has followed the rules provided
herein in good faith and has proceeded in accordance with the
principles of natural justice.
(m) By submitting to arbitration under the foregoing rules, the
parties shall be taken to have conferred on the arbitrator the
following jurisdiction and powers, to be exercised by it so
far as the relevant law allows, and in its absolute and
unfettered discretion, if it shall judge it to be expedient
for the purpose of ensuring the just, expeditious, economical
and final determination of the dispute referred to it.
(n) The arbitrator shall have jurisdiction to:
(i) determine any question of law arising in the
arbitration;
(ii) determine any question as to its own jurisdiction;
(iii) determine any question of good faith, dishonesty or
fraud arising in the dispute;
(iv) order any party to furnish such further details of
the party's case, in fact or in law, as it may
require;
(v) proceed in the arbitration notwithstanding the
failure or refusal of any party to comply with these
Rules or with its orders or directions, or to attend
any meeting or hearing, but only after giving that
party written notice that it intends to do so;
(vi) receive and take into account such written or oral
evidence as it shall determine to be relevant,
whether or not strictly admissible in law;
(vii) hold meetings and hearings and make its decision
(including the final decision) in Ontario or
elsewhere with the concurrence of the parties
thereto; and
(viii) order the parties to produce to it and to each other
for inspection and to supply copies of any document
or classes of documents in their possession or power
which it determines to be relevant.
<PAGE>
D-3
(o) In addition, the arbitrator shall have such further
jurisdiction and powers as may be allowed to it by the laws of
Ontario, the contract between the parties, the arbitration
agreement, the submission or reference to arbitration, and the
laws of any place in which it holds hearings or in which
witnesses attend before it, and of any place in which it gives
any directions or makes any orders or any award.
(p) Notwithstanding the parties' intention that the arbitrator be
able to act free of court proceedings as set forth herein, the
parties consent to the decision of the arbitrator being
entered in any court having jurisdiction for the purposes of
enforcement. In addition, any party may apply to an
appropriate court for such relief and it is expressly agreed
that the making of any such application or the grant of such
relief by a court shall not be deemed to be in derogation of
the parties' intention that the dispute be the subject of
final and binding arbitration as set forth herein.
(q) Notwithstanding any other provision contained herein, the
costs of such arbitration shall be shared equally by the
Landlord and the Tenant.
3.01 RIGHT OF FIRST OFFER. The Landlord grants to the Tenant an option to lease
all or any part of the ninth (9th) floor (the "First Offer Premises") of the
Building which becomes available to lease at any time following the date the
first lease for such premises is entered into by the Landlord, on the following
terms and conditions:
(a) The Landlord shall give notice (the "Notice") in writing to
the Tenant that the First Offer Premises are available, which
notice shall state the rental rate per square foot of Rentable
Area, any cash allowances or inducements to be granted with
respect thereto and any rent free periods available in
connection with the First Offer Promises. The Tenant shall
have fourteen (14) business days (the "Option Period") after
receipt of the Notice to exercise its option to lease the
First Offer Premises. If the Tenant elects to lease the First
Offer Premises within the Option Period, then the lease of the
First Offer Premises shall be upon the terms set out in the
Notice, shall be for a term commencing on the date specified
in the Notice and expiring on the date of expiry of the Term
or the Extended Term, as the case may be, and shall otherwise
be on the same terms and conditions as this Lease (including
without limitation, the rights to extend the Term under
Section 3.01). If the Tenant shall fail to elect to lease the
First Offer Premises within Option Period, then the Landlord
shall be free to lease the First Offer Premises to any third
party at a rental and upon terms which in the aggregate are
not more favourable to the tenant than those offered to the
Tenant in the Notice. It is acknowledged that the Lease to a
third party may be for a term which is longer or shorter than
the term of the Lease for spare to the Tenant and the tenant
allowance, if any, provided for in the Notice will be
adjusted, if necessary, to take into account the different
term.
(c) For greater certainty, it is understood and agreed that the
option granted herein is a continuing option and shall
continue to apply as the First Offer Premises become available
to lease from time to time during the term, as extended.
(d) The Landlord and Tenant shall enter into a lease amending
agreement prepared by the Landlord at the Tenant's expense to
give effect to the provisions of this Section 6.01.
4.01 EXTENSION OF TERM. If:
(a) the Tenant is Promis Systems Corporation Ltd. or a Related
Party of Promis Systems Corporation Ltd. and is not then in
default under this Lease; and
<PAGE>
D-4
(b) the Tenant gives the Landlord not less than nine (9) months
notice prior to the expiration of the Term (the "Notice of
Extension") of the Tenant's intention to extend the Term, then
the Landlord will grant the Tenant the right to extend the
Term for the Premises on an "as is" basis for a further period
of five (5) years (the "Extended Term") commencing upon the
expiration of the Term, and the Extended Term shall be on the
same terms and conditions as are contained in this Lease
except that:
(i) there shall be no further right to extend the Term;
(ii) the Tenant shall enter into an Extension Agreement
prepared by the Landlord at the Tenant's expense to
give effect to the Extended Term; and
(iii) the Minimum Rent payable during each Lease Year
during the Extended Term shall be the Fair Market
Rent to be agreed upon between the Tenant and
Landlord within thirty (30) days of the delivery of
the Notice of Extension failing agreement, determined
by arbitration pursuant to Section 3.01.
If Tenant fails to give the Notice of Extension then this Section 4.01 shall be
null and void and of no further force or effect. If the Tenant gives the Notice
of Extension the Tenant will forthwith execute the documentation submitted by
the Landlord pursuant to subsection (ii) of this Section 4.01.
It is further understood and agreed that the right of the Tenant to extend the
Term of this Lease pursuant to this Section 4.01 shall apply to all of the
Premises occupied by the Tenant on expiration of the initial Term,
5.01 PARKING SPACES. So long as the ownership of 170 University Avenue, Toronto,
Ontario and 105 Adelaide Street West, Toronto, Ontario remain the same, the
Tenant shall have the right throughout the Term and any extensions thereof, to
use up to three (3) reserved parking spaces and twelve (12) unreserved parking
spaces in the parking garage of the Building municipally known as 105 Adelaide
Street West, Toronto, Ontario. The present parking rates for reserved parking is
Three Hundred and Fifteen Dollars ($315.00) per month (plus applicable Goods and
Services Tax) and Two Hundred and Ten Dollars ($210.00) per month (plus
applicable Goods and Services Tax) for unreserved spaces. The said parking rates
will be based upon the current market rates designated by the Landlord and are
subject to change from time to time.
6.01 REASONABILITY. Save where a contrary intention is expressly stated, any
allocation of any cost, charge or expense which is to be determined by the
Landlord under this Lease shall be done on a reasonable and equitable basis.
7.01 SIGNAGE. The Tenant shall be entitled to prominently install at its sole
cost and expense (including the maintenance and repair thereof) its corporate
logo or signage to the top facia of the north side of the Building. The said
signage shall be of a design and quality selected by the Tenant acting
reasonably and befitting the image of the Building and shall be further subject
to the consent of the Landlord, such consent not to be unreasonably delayed or
withheld. The Landlord shall not grant any prominent external building
identification rights on the top facia of the Building to any third party tenant
during the Term and any renewal thereof.
The Tenant shall further be entitled to prominently install at its sole cost and
expense (including the maintenance and repair), its corporate name and/or logo
above the main entrance to the Building. The said signage shall be of a design
and quality selected by the Tenant acting reasonably and befitting the image of
the building and shall be subject to the consent of the Landlord such consent
not to the unreasonably withheld.
<PAGE>
D-5
All of the rights granted by the Landlord pursuant to this Section 7.01 shall be
personal to the Tenant and shall not be assignable by the Tenant and shall be
further subject to compliance with all applicable by-laws and regulations.
The Tenant agrees to pay as Additional Rent an amount equal to Sixteen Thousand
Dollars ($16,000.00) per annum in equal monthly payments in the manner
prescribed in Article 4 of the Lease for the initial Term of the Lease for the
signage rights granted by the Landlord pursuant to this Section 7.01, provided,
however, in the event that the Tenant extends the lease pursuant to Section 4.01
of this Schedule "D", there will be no further charge for the signage granted
pursuant to this Section 7.01.
The Tenant agrees to be responsible throughout the Term and any renewals or
extensions thereof for the cost of all maintenance and repair of all signage
installed pursuant to this Section 7.01.
<PAGE>
E-1
SCHEDULE E to the Lease dated , between 170 University (Toronto) Partnership
(Landlord) and Promis Systems Corporation Ltd. (Tenant).
INDEMNITY AGREEMENT - INTENTIONALLY DELETED
THIS AGREEMENT dated
BETWEEN:
(the "Indemnifier")
OF THE FIRST PART
- and -
(the "Landlord")
OF THE SECOND PART
WHEREAS the Indemnifier and the Tenant have requested the Landlord to
enter into a lease (the "Lease") dated __, 19__, between it as landlord and
__________ as tenant (the "Tenant") relating to premises in the building known,
or to be known, as __________ and the Landlord has agreed to do so only if the
Indemnifier executes and delivers this agreement under seal in favour of the
Landlord;
NOW THEREFORE for good and valuable consideration (the receipt and
sufficiency of which are hereby acknowledged by the Indemnifier), the
Indemnifier hereby agrees with the Landlord as follows:
(a) the Indemnifier shall indemnify and save the Landlord harmless
from all damages and costs incurred by the Landlord if, during
the period which is expressed by Section 3.01 of the Lease to
be its term, or any renewal thereof, the Landlord does not
receive any amount payable by the Tenant under the Lease for
such period which, if the Lease were in full force and effect
and good standing, would be payable under the Lease;
(b) if the Tenant defaults in the payment of any amount payable
under the Lease or in the due performance of any other
obligation of the Tenant under the Lease the Indemnifier shall
forthwith upon demand by the Landlord pay to the Landlord any
amount so payable and all damages that may arise upon the
default by the Tenant in the payment thereof or in the due
performance of any such obligation;
(c) the Indemnifier shall be jointly and severally bound with the
Tenant to the Landlord for the performance of the obligations
of the Tenant under the Lease, and its liability shall be that
of a direct and primary obligor and not merely that of a
surety;
(d) if the Tenant defaults under the Lease the Landlord may
proceed against the Indemnifier as if it were the Tenant,
without waiving any of its rights against the Tenant and
without any requirement that the Landlord shall first have
proceeded against the Tenant or had recourse to or exhausted
any of its remedies against the Tenant;
(e) the obligations of the Indemnifier and the rights of the
Landlord hereunder shall not be affected or in any way
prejudiced or impaired by any delay, neglect or forbearance
by the Landlord in enforcing performance by the Tenant of its
obligations under the Lease or by the granting by the Landlord
to the Tenant of any extension of time or by any waiver by the
Landlord of any of the Tenant's obligations or by any
assignment or sublease or other dealing by the Tenant with
<PAGE>
E-2
the Lease or the premises whether with or without the consent
of the Landlord or by any want of notice to the Indemnifier or
by any dealing between the Landlord and the Tenant with or
without notice to the Indemnifier or by any dealing between
the Landlord and the Tenant with or without notice to the
Indemnifier whereby the respective obligations and rights of
either the Landlord or the Tenant are amended including any
amendment of the Lease or by any other act or failure to act
by the Landlord which would release, discharge or affect the
obligations of the Indemnifier if it were a mere surety, and
with the intent that this indemnity shall not be released or
affected or the rights of the Landlord hereunder in any way
impaired until such time as all the obligations of the Tenant
under the Lease have been fully performed and satisfied;
(f) the obligations of the Indemnifier hereunder shall not be
released, discharged or affected by the bankruptcy or
insolvency of the Tenant or any disclaimer by any trustee in
bankruptcy of the Tenant or by the Tenant ceasing to exist
(whether by winding-up, forfeiture, cancellation or surrender
of charter, or any other circumstance) or by any event
terminating the Lease including a re-entry or termination
pursuant to Section 14.02 of the Lease; if a re-entry or
termination shall occur under any such provisions the Landlord
may requi re the Indemnifier to enter into a lease of the
premises as a tenant upon the terms and conditions of the
Lease for the unexpired residue of the term of the Lease;
(g) the obligations of the Indemnifier hereunder may be assigned
by the Landlord, will benefit and be enforceable by the
successors and assigns of the Landlord and shall bind the
heirs, executors and legal representatives and the successors
and assigns of the Indemnifier; and
(h) the grammatical changes required to make the provisions of
this agreement apply in the plural sense where the Indemnifier
comprises more than one person and to corporations, firms,
partnerships, or individuals male or female, will be assumed
as though in each case fully expressed, and if the Indemnifier
consists of more than one person, the agreements of the
Indemnifier shall be deemed to be joint and several agreements
of each such person; and
(i) this agreement shall be governed by the laws of the Province
of Ontario.
The Indemnifier acknowledges receipt of a copy of the Lease
and covenants, represents and warrants that it has full power, capacity and
authority to enter into this agreement and to perform its obligations
hereunder and that the person(s) who have executed this agreement on behalf
of the Indemnifier have the authority to bind the Indemnifier. Whenever any
reference is made herein to the Lease or the obligations of the Tenant
thereunder, such reference shall be deemed to include all amendments and
modifications to the Lease and any change of or increase in the Tenant's
obligations thereunder, including without limitation those which result from
the exercise by the Tenant of any option to lease additional premises or the
exercise by the Tenant of any right to extend or renew the term of the Lease
as provided therein, any and all agreements and instruments executed by the
Tenant concurrently with the Lease or pursuant thereto and which relate to
the Premises, and shall be deemed to include the Tenant's obligations under
such agreements and instruments, including without limitation any agreement
with respect to the work to be performed by the Tenant or by the Landlord on
its behalf with respect to the construction of leasehold improvements and
fixtures in the Premises, any parking agreement, any agreement with respect
to storage facilities and any agreement with respect to the assumption by the
Landlord of the Tenant's existing lease obligations elsewhere.
In witness whereof the Indemnifier has executed this
agreement under seal.
Per: _____________________
<PAGE>
E-3
CERTIFICATE
___________________________1, 199__
170 University (Toronto) Partnership, by its Asset Manager
Gentra Canada Investments Inc.
70 York Street
Suite 1400
Toronto, Ontario
M5J 1S9
Attention: The Asset Manager, 170 University Avenue
Dear Sirs:
Re: Promis Systems Corporation Ltd.
LEASE AT 170 UNIVERSITY AVENUE
This letter shall confirm that effective ____________________1, 199_, Promis
Systems Corporation Ltd. (the "Corporation") is not currently in material
default of any of the obligations of the Corporation and does not anticipate a
material default of any obligations of the Corporation in the next 30 days.
Yours truly,
Chief Financial Officer
<PAGE>
EXHIBIT 21.1 - SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION
COMPANY OF ORGANIZATION OWNERSHIP
--------------------------------------------------------------------------------------
<S> <C> <C>
PRI Automation Taiwan, Ltd. Taiwan 100%
PRI Automation, SARL France 100%
PRI Automation Ireland, Inc. Ireland 100%
PRI Automation Korea, Inc. Korea 100%
PRI Automation, LTD United Kingdom 100%
PRI Automation Israel, Inc. Israel 100%
PRI Automation GmbH Germany 100%
PRI Automation Pte, Ltd Singapore 100%
Precision Robots FSC, Inc. U.S.Virgin Islands 100%
PRI Security Corporation Massachusetts 100%
Interval Logic Corporation Massachusetts 100%
Equipe Technologies, Inc. California 100%
Equipe Japan, Ltd. Japan 100%
Chiptronix Handling Systems, GmbH Switzerland 100%
PRI Switzerland, Inc. Massachusetts 100%
PRI Holdings, Inc. Massachusetts 100%
PRI International Holdings, Inc. Massachusetts 100%
PRI Ontario Canada 100%
PRI Automation Canada Canada 100%
MSISUB Inc. Delaware 100%
Promis Systems Corporation Ltd. Hong Kong 100%
Promis Systems Corporation (U.K.) Ltd. United Kingdom 100%
Promis Systems GmbH I GR. Germany 100%
Promis Systems Corp Singapore Pte. Ltd Singapore 100%
PRI Korea, Ltd. Korea 80%
</TABLE>
The subsidiaries listed are all included in the consolidated financial
statements of the Company.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of PRI Automation, Inc. on Form S-8 (File Numbers 33-90702,
33-90726, 33-90732, 333-3408, 333-25217, 333-41067, 333-45063 and 333-74141)
and Form S-3 (File Numbers 333-69721, 333-64519 and 333-42167), of our report
dated November 15, 1999 on our audits of the consolidated financial
statements and financial statement schedule of PRI Automation, Inc. as of
September 30, 1999 and 1998, and for each of the three years in the period
ended September 30, 1999, which report is included in the Company's 1999
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
December 20, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 27, 1998 with respect to
the financial statements of Promis Systems Corporation Ltd. as at December
31, 1997 and for the year ended December 31, 1997 included in the annual
report on Form 10-K of PRI Automation, Inc. for the year ended September 30,
1999.
Toronto, Canada (Signed) Ernst & Young LLP
December 20, 1999 Chartered Accountants
<PAGE>
Exhibit 23.3
AUDITORS' REPORT
To the Directors of
Promis Systems Corporation Ltd.
We have audited the consolidated balance sheets of Promis Systems
Corporation Ltd. as at December 31, 1997 and 1996 and the consolidated
statements of income (loss) and retained earnings (deficit) and changes in
financial position for each of the years in the three-year period ended December
31, 1997. 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, which require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and 1996 and the results of its operations and the changes in its financial
position for each of the years in the three-year period ended December 31, 1997
in accordance with generally accepted accounting principles in Canada.
Toronto, Canada (Signed) Ernst & Young LLP
February 27, 1998 Chartered Accountants
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000927362
<NAME> PRI AUTOMATION, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 51,865
<SECURITIES> 0
<RECEIVABLES> 40,100
<ALLOWANCES> 2,646
<INVENTORY> 28,351
<CURRENT-ASSETS> 7,063
<PP&E> 43,621
<DEPRECIATION> 24,493
<TOTAL-ASSETS> 146,552
<CURRENT-LIABILITIES> 45,797
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> 99,277
<TOTAL-LIABILITY-AND-EQUITY> 146,552
<SALES> 100,074
<TOTAL-REVENUES> 136,296
<CGS> 63,850
<TOTAL-COSTS> 83,754
<OTHER-EXPENSES> 90,897<F1>
<LOSS-PROVISION> (523)
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> (35,020)
<INCOME-TAX> 1,065
<INCOME-CONTINUING> (36,085)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,085)
<EPS-BASIC> (1.67)
<EPS-DILUTED> (1.67)
<FN>
<F1> Includes $6,375 of merger costs and special charges
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK>0000927362
<NAME>PRI AUTOMATION, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 57,047
<SECURITIES> 0
<RECEIVABLES> 46,712
<ALLOWANCES> 3,252
<INVENTORY> 27,494
<CURRENT-ASSETS> 143,087
<PP&E> 38,558
<DEPRECIATION> 18,252
<TOTAL-ASSETS> 167,478
<CURRENT-LIABILITIES> 42,639
<BONDS> 0
0
0
<COMMON> 212
<OTHER-SE> 122,928
<TOTAL-LIABILITY-AND-EQUITY> 167,478
<SALES> 171,791
<TOTAL-REVENUES> 203,545
<CGS> 105,342
<TOTAL-COSTS> 124,755
<OTHER-EXPENSES> 107,943<F1>
<LOSS-PROVISION> 1,724
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> (30,389)
<INCOME-TAX> (7,766)
<INCOME-CONTINUING> (22,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,623)
<EPS-BASIC> (1.08)
<EPS-DILUTED> (1.08)
<FN>
<F1>Includes $8,417 acquired in-process R&D and $10,091 merger costs and special
charges
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK>0000927362
<NAME>PRI AUTOMATION, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 36,752
<SECURITIES> 3,148
<RECEIVABLES> 99,432
<ALLOWANCES> 1,600
<INVENTORY> 34,117
<CURRENT-ASSETS> 175,401
<PP&E> 27,499
<DEPRECIATION> 12,044
<TOTAL-ASSETS> 195,315
<CURRENT-LIABILITIES> 52,541
<BONDS> 0
0
0
<COMMON> 207
<OTHER-SE> 140,820
<TOTAL-LIABILITY-AND-EQUITY> 195,315
<SALES> 217,437
<TOTAL-REVENUES> 236,100
<CGS> 105,616
<TOTAL-COSTS> 120,972
<OTHER-EXPENSES> 78,740
<LOSS-PROVISION> 956
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 36,539
<INCOME-TAX> 9,042
<INCOME-CONTINUING> 27,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,497
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.27
</TABLE>
