<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from Commission File Number
______ to ______ 0-24934
PRI AUTOMATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
MASSACHUSETTS 04-2495703
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
805 MIDDLESEX TURNPIKE 01821-3986
BILLERICA, MA (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number: (978) 670-4270
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X .
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock as of May 5, 1999:
CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, $.01 par value 21,680,577
<PAGE>
PRI AUTOMATION, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Part I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 28, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended March 28, 1999 and
March 29, 1998 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended March 28, 1999 and
March 29,1998 5
Condensed Consolidated Statements of Comprehensive
Loss for the Three and Six Months Ended March 28,
1999 and March 29, 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II. OTHER INFORMATION
Item 2. Changes in Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 28
Exhibit Index 29
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 28, SEPTEMBER 30,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 58,519 $ 57,047
Trade accounts receivable, net...................................... 30,721 34,443
Contracts in progress............................................... 4,557 9,017
Inventories......................................................... 21,704 27,494
Deferred income taxes............................................... 7,181 7,832
Other current assets................................................ 5,518 7,254
---------- ----------
Total current assets.............................................. 128,200 143,087
Property and equipment, net......................................... 18,144 20,306
Deferred income taxes............................................... 559 559
Other assets........................................................ 3,246 3,526
---------- ----------
Total assets...................................................... $150,149 $167,478
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 9,470 $ 12,281
Accrued expenses and other liabilities.............................. 18,130 14,823
Line of credit...................................................... 54 11
Current portion of obligations under capital lease.................. 708 798
Billings in excess of revenue and customer advances................. 12,435 14,726
---------- ----------
Total current liabilities....................................... 40,797 42,639
Obligations under capital lease........................................ 501 734
Other non-current liabilities.......................................... 765 965
Minority interests..................................................... 170 --
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 21,573,570
and 21,231,418 issued and outstanding at March 28, 1999 and
September 30, 1998, respectively.................................. 216 212
Additional paid-in capital.......................................... 131,664 129,035
Accumulated deficit................................................. (23,964) (6,107)
---------- ----------
Total stockholders' equity...................................... 107,916 123,140
-------- --------
Total liabilities and stockholders' equity...................... $150,149 $167,478
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue.......................................... $ 30,291 $56,036 $ 59,926 $127,626
Cost of revenue...................................... 18,773 28,193 38,918 64,894
--------- -------- --------- ---------
Gross profit......................................... 11,518 27,843 21,008 62,732
Operating expenses:
Research and development.......................... 10,875 12,320 21,289 22,491
Selling, general and administrative............... 9,037 11,741 18,723 25,059
Acquired in-process research and
development................................... -- -- -- 8,417
Merger costs and special charges.................. 5,800 6,813 6,450 6,813
--------- -------- --------- ---------
Operating loss....................................... (14,194) (3,031) (25,454) (48)
Other income, net.................................... 625 461 1,281 172
--------- -------- --------- ---------
(Loss) income before income taxes.................... (13,569) (2,570) (24,173) 124
(Benefit from) provision for income taxes............ (3,367) (369) (6,316) 2,329
--------- -------- --------- ---------
Net loss............................................. $(10,202) $(2,201) $(17,857) $ (2,205)
--------- -------- --------- ---------
--------- -------- --------- ---------
Net loss per common share:
Basic............................................. ($0.48) ($0.11) ($0.84) ($0.11)
Diluted........................................... ($0.48) ($0.11) ($0.84) ($0.11)
Weighted average shares outstanding:
Basic............................................. 21,470 20,932 21,369 20,884
Diluted........................................... 21,470 20,932 21,369 20,884
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
MARCH 28, MARCH 29,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $(17,857) $(2,205)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expense............................. 4,293 4,006
Provision for write-downs of inventories.......................... 200 663
Provision for bad debts........................................... 54 700
Net loss on disposal of assets.................................... 54 437
Deferred taxes.................................................... 651 (14)
Translation (gains) losses, net................................... (371) 534
Minority interests in losses of subsidiaries...................... (29) --
Acquired in-process research and development...................... -- 8,417
Changes in operating assets and liabilities:
Trade accounts receivable....................................... 3,786 30,111
Contracts in progress........................................... 4,460 (10,045)
Inventories..................................................... 5,590 (4,797)
Other assets.................................................... 1,616 154
Accounts payable................................................ (2,725) 1,002
Accrued expenses and other liabilities.......................... 3,410 (1,697)
Billings in excess of revenue and customer advances............. (2,291) (30)
---------- -----------
Net cash provided by operating activities.............................. 841 27,236
---------- -----------
Cash flows from investing activities:
Proceeds from maturities of marketable securities................... -- 1,485
Purchases of marketable securities.................................. -- (4,531)
Proceeds from sale of property and equipment........................ 9 20
Purchases of property and equipment................................. (1,511) (4,860)
Purchases of intangible assets...................................... (272) (112)
Payment for MASE acquisition........................................ -- (1,533)
---------- -----------
Net cash used in investing activities.................................. (1,774) (9,531)
---------- -----------
</TABLE>
5
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
MARCH 28, MARCH 29,
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Proceeds (repayments) of short-term borrowings, net................. 43 (1,769)
(Repayments) proceeds of capital lease obligations, net............. (323) 179
Distributions to shareholders of Equipe............................. -- (3,917)
Investment from minority interest shareholders...................... 199 --
Proceeds from exercise of stock options and Employee Stock
Purchase Plan..................................................... 2,778 542
Reduction in paid-in capital for contingent consideration........... (145) (1,301)
---------- --------
Net cash provided by (used in) financing activities.................... 2,552 (6,266)
---------- --------
Adjustment to conform fiscal period of Promis.......................... -- (50)
Effect of exchange rate changes on cash................................ (147) (405)
---------- --------
Net increase in cash and cash equivalents.............................. 1,472 10,984
Cash and cash equivalents at beginning of period....................... 57,047 36,752
---------- --------
Cash and cash equivalents at end of period............................. $58,519 $47,736
---------- --------
---------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 52 $ 52
Taxes............................................................. 782 8,408
Significant non-cash transactions:
Acquisition of Interval Logic Corporation (See Note G)
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
6
<PAGE>
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss............................................. $(10,202) $(2,201) $(17,857) $(2,205)
Other comprehensive income, net of tax:
Change in unrealized gain or loss on
available-for-sale securities, net of tax..... -- 3 -- 2
----------- ----------- ---------- ----------
Total other comprehensive income, net of tax -- 3 -- 2
----------- ----------- ---------- ----------
Comprehensive loss................................... $(10,202) $(2,198) $(17,857) $(2,203)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
7
<PAGE>
PRI AUTOMATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of PRI
Automation, Inc., its wholly-owned domestic subsidiaries and its wholly-owned
and majority-owned foreign subsidiaries (collectively, the "Company"). All
significant intercompany transactions and balances have been eliminated.
The interim financial data as of March 28, 1999 and for the six months
ended March 28, 1999 and March 29, 1998 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods. The results for interim periods are not necessarily
indicative of the results for the entire year. The condensed consolidated
financial statements should be read in connection with the audited consolidated
financial statements of PRI Automation, Inc. for the year ended September 30,
1998 included in its Form 10-K and Form 10-K/A, filed with the Securities and
Exchange Commission.
In March 1999, the Company acquired Promis Systems Corporation Ltd.
("Promis"). The acquisition of Promis was accounted for using the pooling of
interests method of accounting (see Note E). In January 1998, the Company
acquired Equipe Technologies, Inc., E-Machine, Inc., and Equipe Japan Ltd.
(collectively, "Equipe"). The acquisition of Equipe was accounted for using the
pooling of interests method of accounting (see Note F). All prior period
historical condensed consolidated financial statements presented herein have
been restated to include the financial position, results of operations, and cash
flows of Promis and Equipe.
For interim reporting purposes, the Company closes its first three fiscal
quarters on the Sunday nearest the last day of December, March and June in each
year. The Company's fiscal year ends on the last day of September.
B. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 28, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Raw materials................................................ $14,779 $19,072
Work-in-process.............................................. 4,635 5,242
Finished goods............................................... 2,290 3,180
-------- --------
$21,704 $27,494
-------- --------
-------- --------
</TABLE>
8
<PAGE>
C. ACCRUED EXPENSES AND OTHER LIABILITIES
The significant components of accrued expenses and other liabilities
consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 28, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Accrued expenses............................................. $ 9,949 $ 6,699
Accrued compensation......................................... 3,247 3,086
Warranty reserves............................................ 4,934 5,038
--------- ---------
$18,130 $14,823
--------- ---------
--------- ---------
</TABLE>
D. NET LOSS PER SHARE
Basic net loss per common share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share gives effect to all dilutive potential common shares outstanding
during the period. A reconciliation between basic and diluted net loss per share
is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss............................................. $(10,202) $(2,201) $(17,857) $(2,205)
Shares used in computation:
Weighted average common shares outstanding
used in computation of basic net loss
per common share.............................. 21,470 20,932 21,369 20,884
Dilutive effect of stock options and warrants... -- -- -- --
--------- --------- ----------- --------
Shares used in computation of diluted net loss
per common share.............................. 21,470 20,932 21,369 20,884
--------- --------- ----------- --------
--------- --------- ----------- --------
Basic net loss per common share...................... $(0.48) $(0.11) $(0.84) $(0.11)
Diluted net loss per common share.................... $(0.48) $(0.11) $(0.84) $(0.11)
</TABLE>
Weighted average options to purchase 1,835,641 and 1,327,793 shares of
common stock were outstanding for the three and six month periods ended March
28, 1999, respectively, but were not included in the computation of diluted net
loss per common share because the Company was in a loss position and, the
inclusion of such shares would be anti-dilutive. Additionally, weighted average
options to purchase 6,706 and 143,978 shares of common stock were outstanding
for the three and six month periods ended March 28, 1999, respectively, but were
not included in the computation of diluted net loss per common share because the
options' exercise prices were greater than the average market price of the
common shares, and therefore, would be anti-dilutive under the treasury stock
method.
Weighted average options to purchase 949,927 and 1,064,028 shares of common
stock were outstanding for the three and six month periods ended March 29, 1998,
respectively, but were not included in the computation of diluted net loss per
common share because the Company was in a loss position and, the inclusion of
such shares would be anti-dilutive. Additionally, weighted average options to
purchase 235,632 and 123,566 shares of common stock were outstanding for the
three and six month periods ended March 29, 1998, respectively, but were not
included in the computation of diluted net loss
9
<PAGE>
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.
E. ACQUISITION OF PROMIS
On March 2, 1999, the Company acquired Promis, a Canadian corporation, in a
transaction accounted for as a pooling of interests. Promis was 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 under this acquisition
agreement.
Prior to the acquisition, Promis prepared its financial statements based on
a December 31 fiscal year-end. Promis' results of operations and cash flows for
the three months ended December 31, 1997 are included in the Company's condensed
consolidated statements of operations and cash flows for both fiscal 1998,
presented herein, and fiscal 1997 in order to conform Promis' fiscal period.
Promis' results of operations and cash flows for the three and six months ended
March 31, 1998 have been combined with the Company's results of operations and
statement of cash flows for the three and six months ended March 29, 1998. To
conform fiscal periods, Promis' $50,000 increase in cash and cash equivalents
for the three months ended December 31, 1997 has been eliminated in the
Company's condensed consolidated statement of cash flows for the six months
ended March 29, 1998 because this increase has been included in the beginning
cash and cash equivalents at October 1, 1997. Promis' results of operations
and cash flows for the three and six months ended March 28, 1999 have been
combined with the Company's results of operations and statement of cash flows
for the corresponding periods.
The following information presents certain statements of operations data of
the Company and Promis for the period prior to the Promis acquisition:
<TABLE>
<CAPTION>
PRI COMBINED
AUTOMATION PROMIS COMPANIES
---------------------------------------
(in thousands)
<S> <C> <C> <C>
Net revenue for:
Three months ended December 27, 1998 $ 25,316 $ 4,319 $ 29,635
Net loss for:
Three months ended December 27, 1998 (5,608) (2,047) (7,655)
</TABLE>
10
<PAGE>
F. ACQUISITION OF EQUIPE
On January 22, 1998, the Company acquired Equipe Technologies, Inc.,
E-Machine, Inc. and Equipe Japan Ltd., (collectively, "Equipe" or the "Equipe
Combined Companies"). Equipe was a worldwide developer, manufacturer, and
supplier of wafer and substrate handling robots, pre-aligners and controllers
for semiconductor process tool manufacturers. The Company issued 4,088,016
shares of common stock in exchange for all of the outstanding stock of Equipe
Technologies, Inc., using an exchange ratio of 0.760372 of one share of the
Company's common stock for each share of Equipe Technologies, Inc, and the
Company issued 36,000 and 240,000 shares of the Company's common stock for the
common stock of E-Machine, Inc. and Equipe Japan Ltd., respectively. In
addition, all outstanding Equipe stock options were converted, at the common
stock exchange ratio, into options to purchase the Company's common stock. The
business combination was accounted for as a pooling of interests. The
consolidated financial statements of the Company for periods prior to the
acquisition have been restated to include the financial position, results of
operations and cash flows of Equipe. Significant intercompany transactions among
the Equipe Combined Companies prior to the period in which the business
combination occurred have been eliminated from the accompanying financial
statements.
Equipe Technologies, Inc. and E-Machine, Inc. were S-corporations for
income tax purposes prior to the acquisition. The following pro forma net loss
and net loss per common share give effect to adjustments that provide for income
taxes as if Equipe Technologies, Inc. and E-Machine, Inc. had been treated as
C-corporations for the period presented. The pro forma information is shown for
comparative purposes only.
UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 29, 1998
<S> <C>
Historical consolidated net loss $(2,205)
Adjustment to Equipe income tax expense (1,156)
--------
Unaudited pro forma net loss $(3,361)
--------
--------
Unaudited pro forma diluted net loss per common share. $ (0.16)
--------
--------
</TABLE>
G. ACQUISITION OF INTERVAL LOGIC CORPORATION
On October 29, 1997 the Company acquired Interval Logic Corporation
("ILC"), a California corporation, for aggregate consideration of 111,258 shares
of the Company's common stock. In addition, the Company assumed options to
purchase an aggregate of 199,170 shares of the Company's common stock. ILC was
formed in 1995 to develop advanced, high-performance planning and scheduling
software solutions for the semiconductor industry. The value of the transaction
was $8,523,000, including approximately $600,000 of expenses related to the
acquisition. The Company accounted for the transaction as a purchase.
At the time of the acquisition, the purchase price was allocated to the
tangible and intangible assets of ILC. Management is aware that it is
responsible for estimating the fair value of purchased in-process research and
development. The value assigned to the intangible assets, primarily the acquired
technology, was based on the fair market value using a risk-adjusted discounted
cash flow approach. ILC's sole product at the time of the acquisition was the
Leverage product, which was under development. ILC had no product revenues
during its prior existence and was a development stage
11
<PAGE>
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. To date, the actual costs of completion
incurred have not been materially different from the cost estimates used in the
valuation model.
The Company expects to make significant further investments in
development in order to meet expected customer requirements, and anticipates
that it will complete development in the third quarter of fiscal 1999. The
Company must create a non-static model of a fab and provide links to
real-time data that will enable the product to react to multiple real-time
events that might impact the current fab scheduling. The Company estimates
that the remaining effort will take approximately 95 engineering man-months
at a cost of approximately $1.2 million.
There have been no events subsequent to the acquisition which indicate that
the completion of the Leverage product will be any less successful than the
Company anticipated at the time of its initial valuation. However, the expected
timing of the product release directly affects the timing of the Company's
revenue projections. Any delay in the product release date could affect the
revenue projections.
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.
12
<PAGE>
H. ACQUISITION OF MASE
Effective October 2, 1997, the Company's Promis subsidiary purchased
certain business assets and assumed liabilities of MASE Systems, Inc. of San
Jose, California for $1.5 million in cash. The business acquisition was
accounted for as a purchase. The following net assets were acquired:
<TABLE>
<CAPTION>
<S> <C>
Net non-cash working capital $ 170
Capital assets 26
Intellectual property 1,337
------
Total consideration $1,533
------
------
</TABLE>
I. MERGER COSTS AND SPECIAL CHARGES
During fiscal 1998, the Company restructured its operations by
consolidating its business unit structure in response to market conditions and
the Equipe acquisition. In connection with the restructuring, the Company
recorded special charges of $5,601,000. The major components of the special
charges included: provisions for severance compensation of $1,910,000 resulting
from terminations of 244 personnel in manufacturing, engineering, and selling,
general and administrative functions; costs of $2,943,000 relating to reductions
in leased facilities; and a non-cash write-down of specialized demonstration
equipment of $528,000 associated with the closure of a customer training site
for a particular customer that was not usable elsewhere. Of the total $4,853,000
severance and lease reduction charges recorded in connection with the
restructuring, $240,000 remained in accrued expenses at March 28, 1999. The
Company expects these remaining costs to be paid by the end of fiscal 1999.
During the quarter ended December 27, 1998, the Company recorded additional
special charges of $650,000. These charges represent provisions for severance
compensation relating to the termination of 62 personnel, approximately 6% of
the workforce, completed in the first quarter of fiscal 1999. These personnel
reductions were approximately 65% in manufacturing and customer support, 15% in
engineering, and 20% in selling, general and administrative functions. The
reduction in force occurred in response to the continued downturn in the
semiconductor equipment industry. At March 28, 1999, $22,000 of these special
charges remained in accrued expenses. The Company expects these costs to be paid
by the end of the third fiscal quarter of 1999.
During the quarter ended March 28, 1999, the Company recorded merger
costs of $3,950,000 related to the acquisition of Promis, primarily
consisting of legal, accounting and investment banking fees. As of March 28,
1999, $2,043,000 of these acquisition costs remained in accrued expenses and
are expected to be paid by the end of fiscal 1999. Additionally, during the
quarter the Company recorded special charges of $1,850,000. The special
charges consisted of $1,406,000 for severance and other compensation costs
related to personnel in the selling, general, and administrative functions;
$196,000 of costs associated with the reductions of leased facilities; and
$248,000 for other legal issues. At March 28, 1999, $1,296,000 of these
charges remained in accrued expenses and is expected to be paid by the end of
calendar year 2000.
J. INCOME TAXES
The income tax benefit for the three months ended March 28, 1999 was
$3,367,000, compared to a benefit of $369,000 for the corresponding period in
fiscal 1998. The effective tax rate reflects a 24.8% benefit in the second
quarter of fiscal 1999 compared to a 14.4% benefit for the corresponding
period in fiscal 1998. The tax rate for the second quarter of fiscal 1999,
excluding $3,950,000 of Promis merger-related costs which were primarily
non-deductible, would have been 35%. The effective tax rate for the second
quarter of fiscal 1998 would have been a 13.7% provision, excluding the $4.1
million in non-deductible
13
<PAGE>
merger costs related to Equipe, primarily due to the utilization of net
operating loss carryforwards to offset earnings of certain foreign subsidiaries.
For the six months ended March 28, 1999, the income tax benefit was
$6,316,000, or an effective tax rate of 26.1%. For the corresponding period in
fiscal 1998, the income tax provision was $2,329,000 or an effective tax rate of
21.4%, excluding special charges related to the acquired in-process research and
development and the Equipe merger costs, which were primarily non-deductible for
tax purposes. Prior to January 1, 1998, Equipe Techonologies, Inc. and
E-Machine, Inc. were not subject to federal income tax due to S-corporation
status.
The Company has recognized a net deferred tax asset of $7,740,000 at March
28, 1999, and the Company believes it is more likely than not that this will be
realized. However, the realization of the net deferred tax assets considered
realizable could be significantly or completely reduced if taxable income is not
anticipated to be generated in the foreseeable future.
K. CONTINGENT LIABILITY
In 1993, the Company's Promis subsidiary purchased the business assets and
assumed selected liabilities of Palette Systems, Inc., a Canadian company. The
purchase price of approximately $9.9 million consisted of $5.5 million in cash
and 59,889 exchangeable common shares of the Company, valued at $73.91 per
common share. At that time, Promis agreed that on April 7, 1998 it would pay
additional cash consideration to the sellers of an amount equal to the amount by
which approximately $4.0 million exceeded the market value of the common shares
owned by the sellers on April 7, 1998.
On March 29, 1996, Promis made a formal claim against the sellers pursuant
to the dispute resolution provisions of the original purchase and sale
agreements. The sellers filed certain counterclaims against the Company.
In 1997, Promis and the sellers reached a settlement of the dispute. The
settlement provided that commencing on April 7, 1998 the Company would pay
additional cash to the sellers in an amount equal to the amount by which the
market value of 59,889 exchangeable common shares, on each of the agreed-upon
payment dates, is less than $73.91 per common share. As part of the settlement,
the additional cash consideration was payable as to 50% on April 7, 1998, and
the remaining 50% being 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 additional consideration 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 March 28,
1999, calculated based on the market value of the Company's common stock at
March 26, 1999, is approximately $1.2 million.
L. JOINT VENTURE
Effective June 1, 1998, the Company entered into a joint venture with
Shinsung Engineering Co. Ltd. ("SEC") and Chung Song Systems Co., Ltd. ("CSSC")
to distribute the Company's products and services in Korea. SEC and CSSC are in
the business of developing and marketing of products and services for the
semiconductor industry. Under the terms of the agreement, the Company owns 80%
of the joint venture and SEC and CSSC each own 10% of the joint venture. The
Company, SEC and CSSC have committed to invest 2.6 billion Korean won, or
approximately $2.2 million, in the joint venture over a
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two-year period through June 2000. As of March 28, 1999, the Company had
outstanding commitments under this agreement of 1.3 billion Korean won, or
approximately $1.1 million.
M. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." This
statement includes requirements to report selected segment information including
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
Company will comply with the disclosure requirements of this statement in its
Annual Report on Form 10-K for fiscal 1999.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, "Accounting for the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 requires all costs of start-up activities (as
defined by SOP 98-5) to be expensed as incurred. The Company does not expect the
statement to have a material impact on its financial condition and results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS No. 133 by fiscal
2000. The Company is evaluating SFAS No. 133 to determine its impact on its
consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward-looking statements" involving risks and uncertainties. The
words "expect," "anticipate," "internal," "plan," "believe," "seek," "estimate"
and similar expressions are intended to identify such forward-looking
statements. In particular, statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations relating to the Company's expected
shipment levels and profitability and the sufficiency of capital to meet working
capital and capital expenditure requirements may be forward-looking statements.
This Report also contains other forward-looking statements. Such statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that could cause the Company's future results to differ materially
from those expressed in any forward-looking statements made by or on behalf of
the Company. Many of such factors are beyond the Company's ability to control or
predict. Readers are accordingly cautioned not to place undue reliance on
forward-looking statements. The Company disclaims any intent or obligation to
update publicly any forward-looking statements, whether in response to new
information or future events or otherwise. Important factors that may cause the
Company's actual results to differ from such forward-looking statements include,
but are not limited to, the factors discussed below.
The Company's business and results of operations depend in significant part
upon capital expenditures of manufacturers of semiconductors, which in turn
depend upon the current and anticipated market demand for semiconductors and
products incorporating semiconductors. Historically, the semiconductor industry
has been highly cyclical, with recurring periods of over-supply. This recurring
over-supply often has had a severe effect on the semiconductor industry's
capital expenditures and, consequently, on demand for systems manufactured and
marketed by the Company. The present continuing downturn in the semiconductor
industry has materially adversely affected the Company's business, and could
continue to do so in the future. The Company believes that the markets for newer
generations of semiconductors will be subject to similar fluctuations. Also, the
recent high rate of technical innovation and resulting improvements in the
performance and price of semiconductor devices, which have driven much of the
demand for the Company's products, could slow, or encounter limits, in the
future. In addition, any other factor adversely affecting the semiconductor
industry or particular segments within the semiconductor industry may adversely
effect the Company's business, financial condition and operating results.
In addition to the risks and uncertainties posed generally by the
cyclicality of the semiconductor industry and the effects of the continued
downturn throughout the industry, the Company faces the following risks and
uncertainties: continuation of the semiconductor industry downturn and expense
reduction measures the Company might take in response could interfere with the
Company's product development efforts and jeopardize its ability to respond
rapidly to an industry recovery; the Company's restructuring costs have
adversely affected its financial position; the Company's lengthy sales cycle
makes it difficult to anticipate sales; the Company's operating results
fluctuate significantly and are affected by the high price and relatively small
number of systems it sells, variations in its gross margins, its significant
fixed costs and lack of backlog; the Company depends on a limited number of
customers; the Company's future revenue sources are uncertain; the downturn in
Asia could continue to adversely affect the Company's business; the Company's
planned investments in Asia may not be successful; the Company has invested
heavily in 300mm wafer technology, which is being adopted more slowly than the
Company expected; the Company needs employees who because of their skills and
experience may be
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difficult to hire and retain; the Company may have difficulty managing growth
in light of fluctuating demand; the Company's recent acquisitions may disrupt
its operations; acquisitions may dilute the equity interests of the Company's
stockholders and reduce the Company's liquidity; the Company's international
operations create special risks and uncertainties over which the Company has
substantially less control than those relating to its domestic operations;
the Company faces significant competition from other automation companies;
the Company must continually improve its technology to remain competitive;
the Company may experience delays in product development and technical
difficulties; the Company depends on one or a few suppliers for some
materials; the Company may be unable to protect its proprietary technology;
claims by others that the Company infringes their proprietary technology
could harm the Company's business; the Company uses small quantities of toxic
and hazardous substances that could expose it to liability; the Company
depends on Mordechai Weisler, its chairman, and Mitchell G. Tyson, its
President and Chief Executive Officer; Year 2000 problems may disrupt the
Company's operations; the market price of the Company's common stock is
volatile; future sales by existing stockholders could depress the market
price of the Company's common stock; and certain provisions of the Company's
charter and by-laws and Massachusetts law make a takeover of the Company more
difficult. As a result of the foregoing and other factors, the Company may
experience material fluctuations in its future operating results on a
quarterly or annual basis which could materially adversely affect its
business, financial condition, operating results and stock price.
RESULTS OF OPERATIONS
On March 2, 1999, the Company acquired Promis Systems Corporation Ltd., a
Canadian corporation ("Promis"). Promis was a leading developer of manufacturing
execution systems ("MES") software solutions for semiconductor and precision
electronics manufacturers. On January 22, 1998 the Company acquired Equipe
Technologies, Inc., E-Machine, Inc. and Equipe Japan Ltd., (collectively,
"Equipe"). Equipe was a leading worldwide developer, manufacturer, and supplier
of wafer handling robots, pre-aligners and controllers to semiconductor process
tool manufacturers. Each of these business combinations was accounted for as a
pooling of interests. The financial results of the Company have been restated to
reflect the results of operations for the combined entities.
REVENUE: Net revenue for the three and six months ended March 28, 1999 was
$30.3 million and $59.9 million, respectively, a decrease of 45.9% and 53.0%,
respectively, over the corresponding periods in fiscal 1998. Net revenue was
adversely affected by the slowdown in capital equipment spending in the
semiconductor industry and by the Asian financial crisis, both of which resulted
in further delays in customer orders and postponements of customer deliveries.
Net export sales for the three and six months ended March 28, 1999 were $10.8
million and $16.7 million, respectively, compared to $21.1 million and $44.3
million, respectively, for the corresponding periods in fiscal 1998. Net export
revenue to European and Asian customers for the three months and six months
ended March 28, 1999 accounted for 35.6% and 27.8% of net revenue, respectively,
as compared to 37.8% and 34.7%, respectively, of net revenue for the
corresponding periods in fiscal 1998. Most sales to foreign customers are
denominated in U.S. dollars, with the exception of some sales by foreign
subsidiaries which are denominated in local currencies. Non-U.S. dollar
denominated sales amounted to approximately $0.5 million and $0.9 million, or
1.5% and 1.5% of net revenue, for the three and six months ended March 28, 1999.
As a result, the Company does not believe it is significantly exposed to foreign
currency risk.
GROSS PROFIT: The gross profit margin for the three and six months ended
March 28, 1999 was 38.0% and 35.1%, respectively, as compared to 49.7% and 49.2%
for the corresponding periods in fiscal 1998. The deterioration in margins is
the result of fixed costs and lower volumes, change in product mix and price
competition.
RESEARCH AND DEVELOPMENT: Research and development expenses for the three
and six months ended March 28, 1999 were $10.9 million and $21.3 million,
respectively, representing 35.9% and 35.5% of net
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revenue, respectively, compared to $12.3 million and $22.5 million, representing
22.0% and 17.6% of net revenue for the corresponding periods in fiscal 1998. The
increase in spending as a percent of net revenue reflects the Company's
continued investment in research and development during the industry downturn.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses for the three and six months ended March 28, 1999 were $9.0 million and
$18.7 million, respectively, representing 29.8% and 31.2% of net revenue,
compared to $11.7 million and $25.1 million, representing 21.0% and 19.6% of net
revenue for the corresponding periods in fiscal 1998. During fiscal 1999, the
Company has continued to reduce its costs in these areas in response to the
reduction in net revenue.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT: On October 29, 1997 the
Company acquired Interval Logic Corporation ("ILC"), a California corporation,
for aggregate consideration of 111,258 shares of the Company's common stock. In
addition, the Company assumed options to purchase an aggregate of 199,170 shares
of the Company's common stock. ILC was formed in 1995 to develop advanced,
high-performance planning and scheduling software solutions for the
semiconductor industry. The value of the transaction was $8,523,000, including
approximately $600,000 of expenses related to the acquisition. The 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 based on the fair market value of those
assets using a risk-adjusted discounted cash flow approach. The purchased
technology, specifically, ILC's Leverage product, 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. At
the time of the acquisition, the fair value of $8,417,000 of the acquired
technology that had not reached technological feasibility was expensed as
in-process research and development. The significant further investments in
development required and currently underway to meet expected customer
requirements is anticipated to be completed in the third quarter of fiscal 1999.
The total effort was estimated to take approximately 225 engineering man-months
at a cost of approximately $2,800,000. This project included completion of the
software requirement definition, data integration and validation, completion of
the graphics user interface, development of alpha and beta versions for customer
testing, and integration and adaptation with customer systems. The underlying
technology had no alternative future use to the Company in other research and
development projects or otherwise.
There have been no subsequent events to the acquisition which indicate
that the completion or exploitation of the Leverage project will be any less
successful than was anticipated in the initial valuation. The Leverage
product was first released to a beta test site in March 1999, the development
costs still approximate those earlier estimates, and the revenue and cost
projections remain unchanged. The Company estimates that the remaining effort
will take approximately 95 engineering man-months at a cost of approximately
$1.2 million. No key assumptions to date have been invalidated with the
passage of time. See Note G of Notes to Condensed Consolidated Financial
Statements, entitled "Acquisition of Interval Logic Corporation," for
additional information relating to the Company's acquisition of ILC.
MERGER COSTS AND SPECIAL CHARGES: During fiscal 1998, the Company
restructured its operations by consolidating its business unit structure in
response to market conditions and the Equipe acquisition. In connection with the
restructuring, the Company recorded special charges of $5,601,000. The major
components of the special charges included: provisions for severance
compensation of $1,910,000 resulting from terminations of 244 personnel in
manufacturing, engineering, and selling, general and
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administrative functions; costs of $2,943,000 relating to reductions in leased
facilities; and a non-cash write-down of specialized demonstration equipment of
$528,000 associated with the closure of a customer training site for a
particular customer that was not usable elsewhere. Of the total $4,853,000
severance and lease reduction charges recorded in connection with the
restructuring, $240,000 remained in accrued expenses at March 28, 1999. The
Company expects these remaining costs to be paid by the end of fiscal 1999.
During the quarter ended December 27, 1998, the Company recorded additional
special charges of $650,000. These charges represent provisions for severance
compensation relating to the termination of 62 personnel, approximately 6% of
the workforce, completed in the first quarter of fiscal 1999. These personnel
reductions were approximately 65% in manufacturing and customer support, 15% in
engineering, and 20% in selling, general and administrative functions. The
reduction in force occurred in response to the continued downturn in the
semiconductor equipment industry. At March 28, 1999, $22,000 of these special
charges remained in accrued expenses. The Company expects these costs to be paid
by the end of the third fiscal quarter of 1999.
During the quarter ended March 28, 1999, the Company recorded merger
costs of $3,950,000 related to the acquisition of Promis, primarily
consisting of legal, accounting and investment banking fees. As of March 28,
1999, $2,043,000 of these acquisition costs remained in accrued expenses and
are expected to be paid by the end of fiscal 1999. Additionally, during the
quarter the Company recorded special charges of $1,850,000. The special
charges consisted of $1,406,000 for severance and other compensation costs
related to personnel in the selling, general, and administrative functions;
$196,000 of costs associated with the reductions of leased facilities; and
$248,000 for other legal issues. At March 28, 1999, $1,296,000 of these
charges remained in accrued expenses and is expected to be paid by the end of
calendar year 2000.
The special charges recorded by the Company during the first two
quarters of fiscal 1999, as well as the special charges recorded in fiscal
1998, are expected to reduce operating expenses, primarily for payroll and
facility costs, by approximately $3.9 million per quarter for the remainder
of fiscal 1999. These savings, while significant, are not commensurate with
the revenue decreases experienced by the Company during these periods.
Rather, the Company's objective has been to bring its cost structure more in
line with business requirements without sacrificing future growth prospects.
OTHER INCOME, NET: Other income, net, for the three and six months ended
March 28, 1999 was $625,000 and $1,281,000, respectively, compared to $461,000
and $172,000 for the corresponding periods in fiscal 1998. Interest income for
the three and six months ended March 28, 1999 was $488,000 and $1,036,000,
respectively, compared to $525,000 and $938,000 for the corresponding periods in
fiscal 1998. Interest expense for the three and six months ended March 28, 1999
was $20,000 and $52,000, respectively, compared to $30,000 and $42,000 for the
corresponding periods in fiscal 1998. The fluctuation in other income, net, for
the six months ended March 28, 1999, compared to the corresponding period in
fiscal 1998, is primarily due to a net foreign exchange gain of $371,000 for the
six months ended March 28, 1999 and a net foreign exchange loss of $534,000 for
the corresponding period in fiscal 1998.
(BENEFIT FROM) PROVISION FOR INCOME TAXES: The income tax benefit for the
three months ended March 28, 1999 was $3,367,000, compared to a benefit of
$369,000 for the corresponding period in fiscal 1998. The effective tax rate
reflects a 24.8% benefit in the second quarter of fiscal 1999 compared to a
14.4% benefit for the corresponding period in fiscal 1998. The tax rate for the
second quarter of fiscal 1999, excluding $4.0 million of Promis merger-related
costs which were primarily non-deductible, would have been 35%. The effective
tax rate for the second quarter of fiscal 1998 would have been a 13.7%
provision, excluding
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the $4.1 million in non-deductible merger costs related to Equipe, primarily due
to the utilization of net operating loss carryforwards to offset earnings of
certain foreign subsidiaries. For the six months ended March 28, 1999, the
income tax benefit was $6,316,000, or an effective tax rate of 26.1%. For the
corresponding period in fiscal 1998, the income tax provision was $2,329,000 or
an effective tax rate of 21.4%, excluding special charges related to the
acquired in-process research and development and the Equipe merger costs, which
were primarily non-deductible for tax purposes. Prior to January 1, 1998, Equipe
Techonologies, Inc. and E-Machine, Inc. were not subject to federal income tax
due to S-corporation status. The Company has recognized a net deferred tax asset
of $7,740,000 at March 28, 1999, and the Company believes it is more likely than
not that this will be realized. However, the realization of the net deferred tax
assets considered realizable could be significantly or completely reduced if
taxable income is not anticipated to be generated in the foreseeable future.
NET LOSS: The net loss for the three and six months ended March 28, 1999
was $10.2 million and $17.9 million, respectively, as compared with a net loss
of $2.2 million for each of the three and six month periods ended March 29,
1998. Excluding merger costs and special charges, the net loss for the three
months ended March 28, 1999 would have been $5.0 million as compared to net
income of $3.7 million in the same period in fiscal 1998. Diluted net loss per
common share excluding the special charges would have been $0.24 for the three
months ending March 28, 1999 as compared to diluted net income per common share
of $0.17 for the corresponding period in fiscal 1998. Excluding the acquired
in-process research and development costs and the other special charges recorded
by the Company, and after adjusting for pro forma taxes for Equipe for the three
months ended December 28, 1997, net loss for the six months ended March 28, 1999
would have been $12.3 million, or diluted net loss per common share of $0.57, as
compared with net income of $10.9 million, or diluted net income per common
share of $0.50, for the corresponding period in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through private equity
financing, bank lines of credit, public stock offerings in October 1994 and July
1995 and cash generated from operations.
As of March 28, 1999 the Company had working capital of $87.4 million,
including cash and cash equivalents of $58.5 million, compared to working
capital of $100.4 million and cash and cash equivalents of $57.0 million as of
September 30, 1998.
Net cash provided by operating activities for the six months ended March
28, 1999 was $0.8 million, compared to $27.2 million for the corresponding
period in fiscal 1998. Net cash provided by operating activities for the six
months ended March 28, 1999 was attributable to a decrease in accounts
receivable of $3.8 million, a decrease in contracts in progress of $4.5 million,
a decrease in inventories of $5.6 million, a decrease in other assets of $1.6
million and an increase in accrued expenses and other liabilities of $3.4
million. This was partially offset by a decrease in accounts payable of $2.7
million and a decrease in billings in excess of revenue and customer advances of
$2.3 million. The net loss, after adjusting for non-cash items, also used $13.0
million. Net cash provided by operating activities for the six months ended
March 29, 1998 was primarily attributable to a decrease in accounts receivable
of $30.1 million. The net loss, after adjusting for non-cash items, also
provided $12.5 million. These amounts were offset by an increase in contracts in
progress of $10.0 million and an increase in inventories of $4.8 million.
Net cash used in investing activities for the six months ended March 28,
1999 was $1.8 million, compared to $9.5 million for the corresponding period in
fiscal 1998. This fluctuation is primarily attributable to the decrease of $3.3
million in capital equipment purchases by the Company in fiscal 1999.
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Additionally, in the same period of fiscal 1998, net cash was also invested in
marketable securities of $3.0 million and used in the $1.5 million Promis
acquisition of MASE.
Net cash provided by financing activities for the six months ended March
28, 1999 was $2.6 million, compared to net cash used in financing activities
for the corresponding period of fiscal 1998 of $6.3 million. The net cash
provided by financing activities for the six months ended March 28, 1999 was
primarily attributable to proceeds from the exercise of stock options and the
Company's Employee Stock Purchase Plan. The net cash used in financing
activities for the same period of fiscal 1998 was primarily due to repayments
of Equipe's bank overdraft borrowings of $1.8 million, distributions to
Equipe shareholders of $3.9 million and a payment for contingent
consideration of $1.3 million related to the Promis acquisition of Palette
Systems, Inc.
At March 28, 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 March
28, 1999, the LIBOR borrowing rate would have been 5.15%. The ability of the
Company to effect borrowings under the revolving credit facility is conditioned
upon meeting certain financial criteria. The revolving credit agreement expires
on June 16, 2000. The Company had outstanding letters of credit with the Bank in
the aggregate amount of $140,000 at March 28, 1999, and therefore, the available
balance under this credit agreement was $19,860,000 at March 28, 1999. At March
28, 1999, the Company was not in compliance with certain of the required
covenants but subsequently obtained a waiver from the Bank. The Company was in
default of the minimum consolidated net worth requirement, the minimum fixed
charge coverage ratio, and the minimum consolidated net income requirements of
the revolving credit agreement for the three months ended March 28, 1999. The
Company expects to seek future waivers as necessary from the Bank, on the next
measurement date of June 27, 1999. However, there can be no assurance that such
waivers will be obtained.
The Company's Promis subsidiary also had an operating line of credit of
approximately $2.9 million and two forward exchange contract facilities up to a
maximum of $20 million for contract periods of 12 months and 18 months with the
Bank of Nova Scotia. The operating line of credit bears interest at the bank's
prime rate plus 0.25%. At March 28, 1999, the effective borrowing rate was
7.25%. The ability of the Company to effect borrowings under these credit
facilities is conditioned upon the meeting of certain margin and convenant
requirements. The operating line of credit agreement expired on April 30, 1999
and has not been renewed. The forward contract facilities expire monthly
through December 31, 1999. There were no borrowings against the operating
credit facilities as of March 28, 1999. Open forward contracts of $5,195,000
existed as of March 28, 1999. The Company's Promis subsidiary has entered
into these foreign currency contracts to purchase Canadian dollars forward,
as a hedge against currency fluctuations. The Company does not purchase or
hold any derivative financial instruments for trading or speculative
purposes. The Company intends to conform Promis' policies to those of the
Company. Based on the Company's overall evaluation of its market risk
exposures from its financial instruments at March 28, 1999, a short-term
change in exchange rates would not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
The Company believes its existing cash balances and access to financing
will be sufficient for the next twelve months. The Company also believes its
existing cash balances and access to financing will be sufficient for the
foreseeable future beyond the next twelve months. However, there can be no
assurance that adequate financing will be available or at terms acceptable to
the Company.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information including
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
Company will comply with the disclosure requirements of this statement in its
Annual Report on Form 10-K for fiscal 1999.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-5, "Accounting for the Costs of Start-Up Activities" ("SOP 98-5").
SOP 98-5 requires all costs of start-up activities (as defined by SOP 98-5) to
be expensed as incurred. The Company does not expect the statement to have a
material impact on its financial condition and results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS No. 133 in fiscal
2000. The Company is evaluating SFAS No. 133 to determine its impact on its
consolidated financial statements.
YEAR 2000
GENERAL
Many computer systems and software products are expected to experience
problems handling dates beyond the year 1999 because the systems are coded to
accept only two-digit entries in the date code fields. Inability of the
Company's products, or of products and systems on which the Company relies, to
process these dates could have a material adverse effect on the Company's
business. The Company has implemented a company-wide Year 2000 Project (the
"Project") with the objective of minimizing the impact of Year 2000 issues on
its products, services, infrastructure, and internal business support
applications. The Project's goals are to ensure Year 2000 readiness and
compliance for: (i) all of the Company's products; (ii) all business systems
that are used by the Company; and (iii) all critical business services or
products provided to the Company by its vendors.
PROJECT
The Company is implementing a plan intended to ensure that all of the
Company's processes and systems have been assessed, tested and made Year 2000
compliant. The Company engaged the services of an information technology
consulting firm to assist in the program management of the Project and created a
Project Team which includes representatives from each of the Company's
divisions. The Year 2000 Project has been in operation since 1997 and is
proceeding on schedule.
The Project is addressing the impact of Year 2000 on Company products,
internal IT systems, internal non-IT systems, and systems and products of the
Company's suppliers and other third parties. The steps in completing the project
are to: (1) identify software systems and products that pose potential Year 2000
issues; (2) assess the Year 2000 readiness of each item identified; (3) develop
and implement
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programs that will achieve Year 2000 readiness; (4) test to verify
readiness; and (5) develop contingency plans as required.
At March 28, 1999, the Project is in various stages of progress as
discussed below:
- PRI PRODUCTS: The Company has completed the testing, evaluation and
verification portion of the project for all of its current products.
New products not yet released to customers are being designed and
tested to achieve Year 2000 readiness prior to the Company's sale of
these products.
- INTERNAL IT SYSTEMS: The Company has assessed its internal information
technology, or IT, systems, including business information systems,
systems utilized in its manufacturing and service operations, and
systems providing electronic interfaces between the Company and its
customers, to determine whether the Company's operations will be
interrupted by Year 2000 issues. The Company has completed
approximately 80% of testing and verifying Year 2000 compliance of its
internal IT systems. This segment of the Project is on schedule and is
expected to be completed by June 1999.
- INTERNAL NON-IT SYSTEMS: Internal non-IT systems include
telecommunications systems, security systems, HVAC systems and
utilities. Testing and verification of these systems is approximately
70% complete and is expected to be completed by June 1999.
- SUPPLY CHAIN: The Company has been working with suppliers and other
third parties upon which it is dependent to determine the extent of
their Year 2000 compliance. The Company's inquiry and assessment of
their Year 2000 readiness is approximately 80% complete and is expected
to be completed by June 1999.
COSTS
Based on its investigation to date, the Company does not expect the
total cost of its Year 2000 Project to have a material adverse effect on the
Company's business or financial results. The estimated total cost of the Year
2000 Project is approximately $400,000. The total amount charged to expense
through March 28, 1999 was approximately $230,000. The remaining amounts are
expected to be spent during calendar 1999.
RISKS
The Project is intended to reduce the Company's risk of experiencing
significant Year 2000 problems. Based on the progress that the Company has made
to date in addressing its Year 2000 issues, and its plan and timetable to
complete the Project, the Company does not anticipate significant interruption
of its normal operations or significant liability resulting from Year 2000
non-compliance of the Company's products. However, the risk posed by Year 2000
issues depends substantially on the number and type of any instances of
non-compliance that have not yet been discovered by the Company. To the extent
that the Company's internal systems, or products and services obtained from
third parties, are found not to be Year 2000 compliant, the Company could face
disruptions in its business which could, in turn, cause delays in meeting
production and shipping goals and could divert significant management resources.
To minimize potential disruptions, the Company intends to adopt a
contingency plan to address any issues raised during the completion of the
assessment and testing phases of the Project. The Company expects to establish
an initial contingency plan for each Project phase by the end of June 1999. This
plan
23
<PAGE>
will be modified as necessary during the final stages of the Project.
If the Company identifies any significant Year 2000 problems late in the
testing schedule, it is possible that the Company may not have sufficient time,
resources or ability to remedy the problems. Any unexpected Year 2000 problem
could require the Company to spend significant amounts of money to try to
correct the problem. If any of the Company's products demonstrate previously
undetected Year 2000 non-compliance that the Company cannot quickly correct,
then the Company could lose customer goodwill and could face customer lawsuits.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on February 25,
1999, (the Annual Meeting") the Company's stockholders fixed the number of
directors of the Company at six, and elected six persons as directors of the
Company.
The number of votes cast for, or withheld from, each nominee for election
as director were as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD AUTHORITY
- ------- -- ------------------
<S> <C> <C>
Mordechai Wiesler 12,713,973 1,551,632
Mitchell G. Tyson 12,713,575 1,552,030
Amram Rasiel 12,714,373 1,551,232
Boruch B. Frusztajer 12,713,173 1,552,432
Alexander V. d'Arbeloff 12,714,373 1,551,232
Kenneth M. Thompson 12,718,673 1,546,932
</TABLE>
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
*3.4 Amended and Restated By-Laws of the Company
*3.5 Restated Articles of Organization of the Company
**3.6 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on April 22, 1997
***3.7 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on January 16, 1998
****10.1 Plan of Arrangement under Section 192 of the Canada Business Corporations Act of Promis
Systems Corporation Ltd. dated March 2, 1999
****10.2 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
****10.3 Support Agreement among the Company, 1325949 Ontario Inc. and Promis Systems
Corporation Ltd. dated March 2, 1999
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- --------------
* Incorporated by reference to the similarly-numbered Exhibit to the
Company's Registration Statement on Form S-1,
File No. 33-81836.
** Incorporated by reference to the similarly-numbered Exhibit to the
Company's Quarterly Report Form 10-Q, for the period ended March 30, 1997.
*** Incorporated by reference to the similarly-numbered Exhibit to the
Company's Quarterly Report Form 10-Q,for the period ended December 28,
1997.
**** Incorporated by reference to the form of agreement included as an Exhibit
to the Company's Registration Statement on Form S-3, File No. 333-69721.
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 January 14, 1999. The Form 8-K disclosed
information concerning the Company's directors and executive officers, the
compensation of such directors and officers, and the security ownership of
management and certain beneficial owners of the Company's common stock for the
fiscal year ended September 30, 1998. The Company elected to disclose this
information prior to the distribution of its proxy statement so that it could
provide the information to the shareholders of Promis Systems Corporation, Ltd.
upon the filing of the Form 8-K.
The Company also filed Form 8-K with the Securities and Exchange Commission
on January 29, 1999. This Form 8-K reported that the Company had announced in a
January 28, 1999 press release its operating results for the fiscal quarter
ended December 27, 1998.
26
<PAGE>
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on March 16, 1999. This report stated that on March 2, 1999,
the Company acquired Promis Systems Corporation Ltd., a Canadian corporation,
pursuant to a plan of arrangement under Section 192 of the Canada Business
Corporations Act. Also, this Form 8-K reported that on March 11, 1999, Promis
changed its name to PRI Automation (Canada), Inc.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRI AUTOMATION, INC.
/s/ Stephen D. Allison
Date: May 12, 1999 By:
---------------------------------------
Stephen D. Allison
Duly Authorized Officer and
Principal Financial Officer
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C> <C>
*3.4 Amended and Restated By-Laws of the Company
*3.5 Restated Articles of Organization of the Company
**3.6 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on April 22, 1997
***3.7 Articles of Amendment to the Restated Articles of Organization of the Company,
as approved by stockholders of the Company on January 16, 1998
****10.1 Plan of Arrangement under Section 192 of the Canada Business Corporations Act of Promis
Systems Corporation Ltd. dated March 2, 1999
****10.2 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
****10.3 Support Agreement among the Company, 1325949 Ontario Inc. and Promis Systems
Corporation Ltd. dated March 2, 1999
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the similarly-numbered Exhibit to the
Company's Registration Statement on Form S-1,
File No. 33-81836.
** Incorporated by reference to the similarly-numbered Exhibit to the
Company's Quarterly Report Form 10-Q, for the period ended March 30, 1997.
*** Incorporated by reference to the similarly-numbered Exhibit to the
Company's Quarterly Report Form 10-Q,for the period ended December 28,
1997.
**** Incorporated by reference to the form of agreement included as an Exhibit
to the Company's Registration Statement on Form S-3, File No. 333-69721.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-28-1999
<CASH> 58,519
<SECURITIES> 0
<RECEIVABLES> 34,026
<ALLOWANCES> (3,305)
<INVENTORY> 21,704
<CURRENT-ASSETS> 128,200
<PP&E> 39,333
<DEPRECIATION> (21,189)
<TOTAL-ASSETS> 150,149
<CURRENT-LIABILITIES> 40,797
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 107,700
<TOTAL-LIABILITY-AND-EQUITY> 150,149
<SALES> 59,926
<TOTAL-REVENUES> 59,926
<CGS> 38,918
<TOTAL-COSTS> 38,918
<OTHER-EXPENSES> 46,462<F1>
<LOSS-PROVISION> 54
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (24,173)
<INCOME-TAX> (6,316)
<INCOME-CONTINUING> (17,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,857)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
<FN>
<F1>INCLUDES $6,450 OF MERGER COSTS AND SPECIAL CHARGES
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-29-1998
<CASH> 47,736
<SECURITIES> 6,185
<RECEIVABLES> 52,934
<ALLOWANCES> (2,300)
<INVENTORY> 38,251
<CURRENT-ASSETS> 169,954
<PP&E> 31,151
<DEPRECIATION> (14,647)
<TOTAL-ASSETS> 191,877
<CURRENT-LIABILITIES> 49,132
<BONDS> 0
0
0
<COMMON> 209
<OTHER-SE> 140,846
<TOTAL-LIABILITY-AND-EQUITY> 191,877
<SALES> 127,626
<TOTAL-REVENUES> 127,626
<CGS> 64,894
<TOTAL-COSTS> 64,894
<OTHER-EXPENSES> 62,780<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 124
<INCOME-TAX> 2,329
<INCOME-CONTINUING> (2,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,205)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
<FN>
<F1>INCLUDES $15,230 OF MERGER COSTS, SPECIAL CHARGES, AND IN-PROCESS R&D
</FN>
</TABLE>
