SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from Commission File Number
______ to ______ 0-24934
PRI AUTOMATION, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2495703
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
805 Middlesex Turnpike 01821-3986
Billerica, MA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (978) 670-4270
-----------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--------- ---------
The number of shares outstanding of each of the issuer's classes of
common stock as of August 5, 1998:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $.01 par value 19,748,946
PRI AUTOMATION, INC.
INDEX
Page No.
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Part I. Financial Information
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Item 1. Financial Statements
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended June 28, 1998 and
June 29, 1997 3
Condensed Consolidated Balance Sheets as of
June 28, 1998 and September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended June 28, 1998 and
June 29, 1997 5-6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information
-----------------
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-19
SIGNATURE 20
Exhibit Index 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---- ---- ---- ----
Net revenue.................................. $ 38,301 $56,150 $150,558 $149,546
Cost of revenue.............................. 29,571 31,051 93,130 83,307
--------- ------- ---------- --------
Gross profit................................. 8,730 25,099 57,428 66,239
Operating expenses:
Research and development.................... 9,505 7,256 28,210 20,262
Selling, general and administrative......... 8,950 8,941 27,268 21,991
Acquired in-process research and
development................................ -- -- 8,417 --
Merger costs and special charges............ 2,140 -- 8,953 --
--------- ------- ---------- --------
Operating (loss) profit...................... (11,865) 8,902 (15,420) 23,986
Other (expense) income, net.................. (105) 257 467 820
--------- ------- ---------- --------
(Loss) income before income taxes............ (11,970) 9,159 (14,953) 24,806
(Benefit) provision for income taxes......... (4,189) 2,290 (1,980) 6,468
--------- ------- ---------- --------
Net (loss) income............................ ($ 7,781) $ 6,869 ($ 12,973) $ 18,338
========= ======= ========== ========
Net (loss) income per common share:
Basic....................................... ($0.40) $0.36 ($0.66) $0.96
Diluted..................................... ($0.40) $0.34 ($0.66) $0.91
Weighted average number shares outstanding:
Basic....................................... 19,663 19,252 19,557 19,110
Diluted..................................... 19,663 20,192 19,557 20,043
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 28, September 30,
1998 1997
---- ----
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 34,472 $ 27,615
Marketable securities................................. 1,316 2,642
Trade accounts receivable, net........................ 33,020 71,549
Contracts in progress................................. 18,098 15,463
Inventories........................................... 37,173 34,117
Other current assets.................................. 8,223 3,670
-------- --------
Total current assets................................. 132,302 155,056
Property and equipment, net........................... 17,940 12,794
Marketable securities................................. 3,331 506
Other assets.......................................... 2,352 2,354
-------- --------
Total assets......................................... $155,925 $170,710
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 16,459 $ 21,564
Accrued expenses and other liabilities................ 16,178 17,764
Capital lease obligations............................. 92 171
Billings in excess of revenues and customer advances.. 5,097 3,462
-------- --------
Total current liabilities........................... 37,826 42,961
Non-current Liabilities:
Capital lease obligations............................. 140 204
-------- --------
Total liabilities.................................... 37,966 43,165
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 19,744,930 and 19,348,781 issued and
outstanding at June 28, 1998 and
September 30, 1997, respectively..................... 197 193
Additional paid-in capital............................ 87,161 77,721
Retained earnings..................................... 30,593 49,629
Unrealized gain on securities......................... 8 2
-------- --------
Total stockholders' equity.......................... 117,959 127,545
-------- --------
Total liabilities and stockholders' equity.......... $155,925 $170,710
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
-----------------
June 28, June 29,
1998 1997
---- ----
Cash flows from operating activities:
Net (loss) income................................................ $(12,973) $ 18,338
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization expense........................... 4,768 2,866
Non-cash compensation........................................... -- 140
Tax benefit from disqualified dispositions...................... -- 1,742
Loss on abandonment of leasehold improvements................... 356 --
Provision for doubtful accounts................................. 790 300
Translation losses, net......................................... 387 --
Acquired in-process research & development...................... 8,417 --
Changes in operating assets and liabilities, net of effect from
acquisitions:
Trade accounts receivable....................................... 38,712 (15,035)
Contracts in progress........................................... (2,635) (2,110)
Inventories..................................................... (3,111) (8,875)
Other assets.................................................... (5,499) (2,011)
Accounts payable................................................ (7,165) 2,649
Accrued expenses and other liabilities.......................... (2,494) 6,368
Billings in excess of revenues and customer advances............ 1,636 (1,046)
-------- --------
Net cash provided by operating activities......................... 21,189 3,326
-------- --------
Cash flows from investing activities:
Purchases of marketable securities............................... (5,547) (4,531)
Proceeds from the sale of marketable securities.................. 2,331 9,017
Proceeds from maturities of marketable securities................ 1,685 4,490
Proceeds from sale of property and equipment..................... 20 --
Purchases of property and equipment.............................. (9,770) (4,300)
Net cash acquired in Chiptronix acquisition...................... 246 --
-------- --------
Net cash (used in) provided by investing activities............. (11,035) 4,676
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and Employee Stock
Purchase Plan................................................... 1,498 2,480
Payments under capital lease obligations......................... (143) (59)
Repayments of borrowings......................................... -- (900)
Dividend distributions to shareholders........................... (4,507) (6,573)
-------- --------
Net cash (used in) financing activities......................... (3,152) (5,052)
-------- --------
Effect of exchange rate changes on cash........................... (145) --
-------- --------
Net increase in cash and cash equivalents......................... 6,857 2,950
Cash and cash equivalents at beginning of period.................. 27,615 28,860
-------- --------
Cash and cash equivalents at end of period........................ $ 34,472 $ 31,810
======== ========
5
PRI AUTOMATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
(In thousands)
(Unaudited)
Nine Months Ended
-----------------
June 28, June 29,
1998 1997
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 30 $ 12
Taxes............................................ 8,557 5,217
Significant noncash transactions:
Acquisition of Interval Logic Corporation
(see Note E)....................................
Acquisition of Chiptronix Handling Systems GmbH
(see Note E)....................................
Fixed assets acquired under capital leases....... 194
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
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. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated.
The condensed consolidated financial statements are unaudited. However, in
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information have been
made. 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 the Company for the year ended September 30, 1997 included in its Form 10-K,
filed with the Securities and Exchange Commission.
In January 1998 the Company acquired Equipe Technologies, Inc., E-Machine,
Inc., and Equipe Japan Ltd. (collectively, "Equipe"). On May 19, 1998 the
Company acquired Chiptronix Handling Systems GmbH ("Chiptronix"). The
acquisitions of Equipe and Chiptronix both were accounted for using the pooling
of interests method of accounting. All prior period historical condensed
consolidated financial statements presented herein have been restated to include
the financial position, results of operations, and cash flows of Equipe. The
Company has not restated its financial statements for the acquisition of
Chiptronix due to immateriality (see Note E).
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):
June 28, September 30,
1998 1997
---- ----
Raw materials...................................... $24,747 $27,193
Work in process and finished goods................. 12,426 6,924
------- -------
$37,173 $34,117
======= =======
C. Accrued Expenses And Other Liabilities
The significant components of accrued expenses and other liabilities consist
of the following (in thousands):
June 28, September 30,
1998 1997
---- ----
Accrued expenses................................... $ 4,988 $ 3,531
Accrued compensation............................... 6,297 6,555
Accrued special charges............................ 2,591 --
Warranty reserves.................................. 2,302 1,725
Income taxes payable............................... -- 5,953
------- -------
$16,178 $17,764
======= =======
7
D. Earnings Per Share
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for net income (loss) per common share. Basic net income
(loss) per common share is computed based on the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
common share gives effect to all dilutive potential common shares outstanding
during the period. Under SFAS No. 128, the computation of diluted net income
per common share does not assume the issuance of common shares that have an
antidilutive effect on net income per common share. All net income per common
share amounts have been restated for periods prior to the quarter ended December
28, 1997. A reconciliation between basic and diluted earnings per share is as
follows (in thousands, except per share data):
Three Months Ended
------------------
June 28, 1998 June 29, 1997
------------- -------------
Net (loss) income............................................. ($7,781) $ 6,869
Shares used in computation:
Weighted average common shares outstanding
used in computation of basic net (loss) income
per common share....................................... 19,663 19,252
Dilutive effect of stock options.......................... -- 940
------ ------
Shares used in computation of diluted net (loss) income
per common share........................................ 19,663 20,192
====== ======
Basic net (loss) income per common share.................. ($0.40) $ 0.36
Diluted net (loss) income per common share................ ($0.40) $ 0.34
Nine Months Ended
-----------------
June 28, 1998 June 29, 1997
------------- -------------
Net (loss) income............................................. ($12,973) $18,338
Shares used in computation:
Weighted average common shares outstanding
used in computation of basic net (loss) income
per common share....................................... 19,557 19,110
Dilutive effect of stock options.......................... -- 933
------ ------
Shares used in computation of diluted net (loss) income
per common share........................................ 19,557 20,043
====== ======
Basic net (loss) income per common share.................. ($0.66) $ 0.96
Diluted net (loss) income per common share................ ($0.66) $ 0.91
Options to purchase 595,944 and 790,737 shares of common stock were
outstanding for the three and nine months ended June 28, 1998, respectively, but
were not included in the computation of diluted net loss per common share
because the Company is in a loss position and, the inclusion of such shares
therefore, would be antidilutive. Options to purchase 11,918 and 9,253 shares of
common stock were outstanding for the three and nine month periods ended June
29, 1997 but were not included in the computation of diluted net income per
common share because the options' exercise prices were greater than the average
market price of the common shares and therefore, would be antidilutive under the
treasury stock method.
8
E. Acquisitions
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-perfomance planning and scheduling
software solutions for the semiconductor industry. The value of the transaction
is $8.5 million including approximately $600,000 of expenses related to the
acquisition. The transaction was accounted for as a purchase. The purchase price
was allocated to the tangible and intangible assets of ILC based on the
estimated fair value of those assets using a risk-adjusted discounted cash flow
approach. Specifically, the purchased technology was evaluated through extensive
interviews and analysis of data concerning the state of the technology and was
deemed to be in-process research and development because the Company needed to
make significant further investments to complete development of the technology,
to integrate it with the Company's existing products including the "Transnet"
product line and to enable it to meet expected customer requirements. The
Company recognized a charge of $8,417,000 for the purchase of in-process
research and development in October 1997. Pro forma results are not presented
due to immateriality.
On January 22, 1998 the Company acquired Equipe Technologies, Inc., E-
Machine, Inc. and Equipe Japan Ltd., (collectively, "Equipe"). Equipe is a
leading worldwide developer, manufacturer, and supplier of wafer and substrate
handling robots, pre-aligners and controllers to semiconductor process tool
manufacturers. The Company issued 4,364,016 shares of common stock in exchange
for all of the outstanding stock of Equipe. The business combination was
accounted for as a pooling of interests. The accompanying condensed consolidated
financial statements for periods prior to the merger have been restated to
present the combined operations of the merged companies. Significant
intercompany transactions for the Equipe companies prior to the period in which
the business combination occurred have been eliminated from the accompanying
financial statements. Direct acquisition costs of $4,490,000, primarily relating
to legal, investment banking, and accounting fees, have been charged against
results of operations for the nine months ended June 28, 1998.
The following information presents certain statement of operations data (in
thousands) of the Company and Equipe for the periods prior to the acquisition:
PRI Combined
Automation, Inc. Equipe Companies
---------------- ------ ---------
Net revenue for:
The three months ended
December 28, 1997 $ 46,830 $18,303 $ 65,133
The three months ended
June 29, 1997 44,362 11,788 56,150
The nine months ended
June 29, 1997 122,825 26,721 149,546
Net (loss) income for:
The three months ended
December 28, 1997 (3,449) 3,042 (407)
The three months ended
June 29, 1997 4,359 2,510 6,869
The nine months ended
June 29, 1997 12,301 6,037 18,338
9
Equipe Technologies, Inc. and one of the related companies, E-Machine, Inc.,
were S-corporations for income tax purposes prior to the acquisition. The
following pro forma information gives effect to adjustments that provide for
income taxes as if Equipe Technologies, Inc. and the related company were
treated as C-corporations for the periods presented. The pro forma information
is shown for comparative purposes only.
UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
------------------------------------------------------
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------- --------------------
June 29, June 28, June 29,
1997 1998 1997
---- ---- ----
Historical net income (loss)............................. $6,869 ($12,973) $18,338
Adjustment to Equipe income tax expense to
convert from S-corporation to C-corporation
status.................................................. (965) (1,156) (2,306)
------ -------- -------
Unaudited pro forma net income (loss).................... $5,904 ($14,129) $16,032
====== ======== =======
Unaudited pro forma net income (loss) per common share:
Basic................................................... $ 0.31 ($ 0.72) $ 0.84
Diluted................................................. $ 0.29 ($ 0.72) $ 0.80
On May 19, 1998, the Company acquired Chiptronix Handling Systems GmbH
("Chiptronix"), a Switzerland corporation, for aggregate consideration of
105,000 shares of the Company's common stock. Chiptronix is the European
distributor of Equipe products. The business combination was accounted for as a
pooling of interests. However, as the financial position and results of
operations of Chiptronix are immaterial to the financial position and results of
operations of the Company on a consolidated basis, no prior period financial
amounts have been restated. In accordance with this business combination, the
Company has acquired the net assets of Chiptronix, including its retained
deficit of $1,556,000 as of March 29, 1998 and this amount is included in the
changes to stockholders' equity for the three months ended June 28, 1998. The
results of operations for the quarter ended June 28, 1998 of Chiptronix have
been consolidated into the accompanying financial statements of the Company.
F. Special Charges
For the third quarter of fiscal 1998, the Company recorded a pre-tax charge
against earnings of $2,140,000, which is included in operating expenses for the
quarter, associated with the restructuring plan announced by the Company on July
13, 1998. The charge includes provisions for severance compensation of $1.1
million resulting from reductions of approximately 161 personnel, costs of
$320,000 relating to reduction in facilities space at four locations, provisions
for doubtful accounts of $500,000 and $220,000 for other contingencies. The
Company also recorded a pre-tax charge of $4,900,000 against earnings, which is
included in cost of revenue for the third quarter of fiscal 1998, for the write-
down of inventories to their net realizable values.
10
For the second quarter of fiscal year 1998, the Company recorded a non-
recurring charge of $2,323,000 against results of operations for restructuring
costs. The Company restructured its operations by consolidating its business
unit structure into a more centralized functional organization as a result of
the Equipe acquisition. This pre-tax charge included costs of approximately
$1,723,000 related to two facilities which are anticipated to be idle until
April 1999 and approximately $600,000 for severance. As of June 28, 1998,
facilities expenses charged against this reserve amounted to $870,000 and the
Company expects to pay the balance of $853,000 through April 1999.
Additionally, as of June 28, 1998 $357,000 was charged against the restructuring
liability for severance payments to 83 former personnel and the Company expects
the balance to be paid by December 1998.
G. INCOME TAXES
The effective tax rate for the three and nine months ended June 28, 1998 was
(35.0%) and (13.2%) as compared to 25.0% and 26.1 %, respectively, for the
corresponding periods in fiscal 1997. The effective tax benefit for the nine-
month period ended June 28, 1998 was unfavorably impacted by the charges for
acquired in-process research and development and merger and other non-recurring
costs which are not fully deductible for tax purposes. This unfavorable impact
was partially offset by the impact 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 tax rate, exclusive of the
acquired in-process research and development charge, merger costs and other
special charges, for the three and nine months ended June 28, 1998 would have
been (35.0%) and 19.6% as compared to 25.0% and 26.1% for the corresponding
periods in fiscal 1997. The changes in the effective tax rates excluding these
special charges, for the three and nine months ended June 28, 1998 as compared
with the corresponding periods in fiscal 1997 are attributable to the fact that
prior to January 1, 1998 Equipe Technologies, Inc. and E-Machine, Inc. were not
subject to federal income tax due to S-corporation status.
H. JOINT VENTURE
Effective June 1, 1998 the Company entered into a Korean joint venture with
Chung Song System Co., Ltd. ("CSSC") and Shinsung Engineering Co. Ltd. ("SEC")
to distribute the Company's products and services in Korea. CSSC and SEC are in
the business of development 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 CSSC and SEC each own 10% of the joint venture. The
Company and its partners have committed to invest 2.6 billion Korean Won of
capital in the joint venture over a two-year period beginning June 1, 1998.
I. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 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 133 by October 1,
1999. The Company is evaluating SFAS 133 to determine its impact on its
consolidated financial statements.
11
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" which involve risks and uncertainties.
In particular, statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," relating to the Company's revenue and
expense levels, profitability and the sufficiency of capital to meet working
capital and capital expenditures requirements, may be forward-looking
statements. The words "expect," "anticipate," "internal," "plan," "believe,"
"seek," "estimate" and similar expressions also are intended to identify such
forward-looking statements. This Report also contains other forward-looking
statements. Such statements are not guarantees of future performance, and
involve certain 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, 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 future results are subject to substantial risks and
uncertainties. The Company's business and results of operations depend in
significant part upon capital expenditures from 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, which often have had a severe effect on the semiconductor industry's
demand for capital expenditures, including systems manufactured and marketed by
the Company. The Company believes that the markets for newer generations of
semiconductors will also 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.
The current financial uncertainty within the economies of certain Asian
countries has adversely affected, and may continue to adversely affect, the
worldwide semiconductor industry and the Company. These effects have included
and could include delay or cancellation of orders from customers in these
countries. Additional risks and uncertainties include: competitive pressures on
selling prices; inventory management, including suppliers' ability to meet the
Company's needs in a timely manner; the timing and cancellation of customer
orders; changes in product mix; the Company's ability to introduce new products
and technologies on a timely basis; the Company's ability to increase its
manufacturing capacity to meet increased demand while maintaining satisfactory
levels of product quality, service levels, and timeliness of deliveries; rapid
technological change and introduction of products and technologies by the
Company's competitors; market acceptance of the Company's and its competitors'
products; the level of orders received which can be shipped in a quarter, the
timing of investments in engineering and development, the Company's ability to
absorb and manage acquisitions, and risks associated with doing business in Asia
and Europe. As a result of the foregoing and other factors, the Company may
12
experience material fluctuations in future operating results on a quarterly or
annual basis which could materially and adversely affect its business, financial
condition, operating results and stock price.
RESULTS OF OPERATIONS
On January 22, 1998 the Company acquired Equipe Technologies, Inc.,
E-Machine, Inc. and Equipe Japan Ltd., (collectively, "Equipe"). Equipe is a
leading worldwide developer, manufacturer, and supplier of wafer-handling
robots, pre-aligners and controllers to semiconductor process tool
manufacturers. The business combination was accounted for as a pooling of
interests. The financial results of the Company for fiscal periods prior to the
second quarter of fiscal 1998 have been restated to reflect the results of
operations for the combined entities.
Revenue: Net revenue for the three and nine months ended June 28, 1998
was $38.3 million and $150.6 million, respectively, a decrease of 31.8% and an
increase of 0.7%, respectively, over the corresponding periods in fiscal 1997.
Net revenue for the three months ended June 28, 1998 as compared to the
corresponding period in fiscal 1997 was adversely affected by the current
downturn in the semiconductor industry resulting in decreased demand for the
Company's products. Net export sales to customers for the three and nine months
ended June 28, 1998 were $15.9 million and $51.7 million, respectively, compared
to $25.9 million and $62.8 million, respectively, for the corresponding periods
in fiscal 1997. Net export sales for the three months and nine months ended
June 28, 1998 accounted for 41.6% and 34.4% of net revenue, respectively, as
compared to 46.1% and 42.0%, respectively, of net revenue for the corresponding
periods in fiscal 1997.
Gross profit: The gross profit margin for the three and nine months ended
June 28, 1998 was 22.8% and 38.1% of net revenue, respectively, as compared to
44.7% and 44.3% of net revenue for the corresponding periods in fiscal 1997. The
decline in gross profit margin is partially due to a reduced level of equipment
sales and an unfavorable absorption of fixed manufacturing costs. Additionally,
a provision of $4.9 million, to reduce inventories to their net realizable
values, in the third quarter of fiscal 1998 reduced the gross profit margin by
12.8% of net revenue for this fiscal quarter and by 3.3% for the nine months
ended June 29, 1998.
Research and development: Research and development expenses for the three
and nine months ended June 28, 1998 were $9.5 million and $28.2 million,
respectively, representing 24.8% and 18.7% of net revenue, respectively,
compared to $7.3 million and $20.3 million, representing 12.9% and 13.5% of net
revenue for the corresponding periods in fiscal 1997. The increases in research
and development expenses are attributable to the Company's ongoing investment in
next-generation wafer flow automation systems for end user and OEM customers.
This includes material control and scheduling software, atmospheric and vacuum
wafer-handling systems and automated material handling systems for advanced
200mm fabs and, in the near future, 300mm pilot lines.
Selling, general and administrative: Selling, general and administrative
expenses for the three and nine months ended June 28, 1998 were $9.0 million and
$27.3 million, respectively, representing 23.4% and 18.1% of net revenue,
compared to $8.9 million and $22.0 million, representing 15.9% and 14.7% of net
revenue for the corresponding periods in fiscal 1997. The increase in selling,
general and administrative expenses occurred in the first and second quarters of
fiscal 1998 and is attributable to investments in general and administrative
infrastructure, management, and marketing and sales support.
Acquired in-process research and development: In October 1997, the Company
acquired Interval Logic Corporation ("ILC") in a transaction valued at $8.5
million, accounted for as a purchase. ILC was formed in 1995 to develop
advanced high-performance planning and scheduling software solutions for the
semiconductor industry. 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
13
discounted cash flow approach. Specifically, the purchased technology was
evaluated through extensive interviews and analysis of data concerning the state
of the technology and was deemed to be in-process research and development
because of the Company's need to make significant further investments to
complete development of the technology, to integrate it with the Company's
existing products including the "Transnet" product line and to enable it to meet
expected customer requirements. The Company recognized a charge of $8.4 million
for the purchase of in-process research and development in October 1997.
Merger costs and special charges: The Company recorded a pre-tax charge of
approximately $2.1 million against earnings for the three months ended June 28,
1998, associated with the Company's restructuring plan announced July 13, 1998.
The charge includes provisions for severance compensation of $1.1 million to
reduce personnel by approximately 161, costs of $320,000 relating to reduction
in facilities space at four locations, provisions for doubtful accounts of
$500,000 and $220,000 for other contingencies. In the second quarter of fiscal
1998 ended March 29, 1998, the Company took a $4.5 million charge against
earnings related to the January 22, 1998 acquisition of Equipe. Additionally,
in the second quarter of fiscal 1998 the Company, to restructure its business
units, took a $2.3 million charge against earnings for non-recurring costs,
which included pre-tax costs of $1.7 million for two idle facilities and
$600,000 for the severance of approximately 83 administrative and operations
personnel.
Other (expense) income, net: Other (expense) income, net for the three and
nine months ended June 28, 1998 was ($105,000) and $467,000, respectively, as
compared to $257,000 and $820,000 for the corresponding periods in fiscal 1997.
Interest income for the three and nine months ended June 28, 1998 was $342,000
and $1.1 million respectively, as compared to $261,000 and $856,000 for the
corresponding periods in fiscal 1997. Interest expense for the three and nine
months ended June 28, 1998 was ($15,000) and ($24,000), respectively, as
compared to ($6,000) and ($15,000) for the corresponding periods in fiscal 1997.
In addition, non-interest other (expenses) for the three and nine months ended
June 28, 1998 amounted to ($432,000) and ($616,000).
Income tax (benefit) provision: The effective tax rate for the three and nine
months ended June 28, 1998 was (35.0%) and (13.2%) as compared to 25.0% and
26.1%, respectively, for the corresponding periods in fiscal 1997. The effective
tax benefit for the nine-month period ended June 28, 1998 was unfavorably
impacted by the charges for acquired in-process research and development and
merger and other non-recurring costs which are not fully deductible for tax
purposes. This unfavorable impact was partially offset by the impact 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 tax rate, exclusive of the acquired in-process research
and development charge, merger costs and other special charges, for the three
and nine months ended June 28, 1998 would have been (35.0%) and 19.6% as
compared to 25.0% and 26.1% for the corresponding periods in fiscal 1997. The
changes in the effective tax rates excluding these special charges, for the
three and nine months ended June 28, 1998 as compared to the corresponding
periods in fiscal 1997 are attributable to the fact that prior to January 1,
1998 Equipe Technologies, Inc. and E-Machine, Inc. were not subject to federal
income tax due to S-corporation status.
Net (loss) income: The net loss for the three and nine months ended June 28,
1998 was $7.8 million and $13.0 million, respectively, as compared to net income
of $6.9 million and $18.3 million for the corresponding periods in fiscal 1997.
Excluding special charges of $4.6 million, post-tax, the net loss for the three
months ended June 28, 1998 would have been $3.2 million, $0.16 net loss per
common share, as compared to net income of $6.9 million, $0.34 net income per
diluted common share, in the same period in fiscal year 1997. Net income in the
nine months ended June 28, 1998, excluding the acquired in-process research and
development costs, the Equipe acquisition merger costs and other special charges
14
recorded by the Company, would have been $5.9 million, $0.29 per diluted common
share, as compared with net income of $18.3 million, $0.91 per diluted common
share, for the corresponding period in fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily through
private equity financings, bank lines of credit, public stock offerings in
October 1994 and July 1995 and cash generated from operations.
As of June 28, 1998 the Company had working capital of $94.5 million,
including cash and cash equivalents of $34.5 million and short-term marketable
securities of $1.3 million. Additionally, the Company had $3.3 million of non-
current marketable securities at June 28, 1998.
The total increase in cash and cash equivalents for the nine months ended June
28, 1998 was $6.9 million. Net cash provided by operating activities for the
nine months ended June 28, 1998 was $21.2 million, compared to $3.3 million for
the corresponding period in fiscal 1997. The net cash provided by operating
activities for the nine months ended June 28, 1998 was primarily attributable to
the net loss which, after adjusting for non-cash items, provided $1.7 million,
and to decreases in trade accounts receivable of $38.7 and billings in excess of
revenues and customer advances of $1.6 million. The sources of cash were offset
partially by cash used to increase contracts in progress by $2.6 million,
inventories by $3.1 million, other assets by $5.5 million, and to decrease
accounts payable and other liabilities by $9.7 million. For the nine months
ended June 29, 1997, net cash provided by operating activities was primarily
attributable to net income of $23.4 million after adjusting for non-cash
expenses, increases in accounts payable of $2.6 million and in accrued expenses
and other liabilities of $6.4 million, offset in part by increases in trade
accounts receivable of $15.0 million, in inventories of $8.9 million, in
contracts in progress of $2.1 million, and in other assets of $2.0 million.
Net cash used in investing activities for the nine months ended June 28, 1998
was $11.0 million as compared to $4.7 million of net cash provided by investing
activities for the corresponding period in fiscal 1997. Net cash used in
investing activities for the nine months ended June 28, 1998 was primarily
attributable to the purchase of property and equipment of $9.8 million and the
purchases, net of sales and maturities, of marketable securities of $1.5
million. Net cash provided by investing activities for the nine months ended
June 29, 1997 was attributable to the net purchase, sales and maturities of
marketable securities of $9.0 million, offset partially by the purchase of fixed
assets of $4.3 million.
Net cash used in financing activities for the nine months ended June 28, 1998
was $3.2 million as compared to $5.1 million for the corresponding period in
fiscal 1997. Net cash used in financing activities for the nine months ended
June 28, 1998 and June 29, 1997 was primarily attributable to normal dividend
distributions of $4.5 million and $6.6 million, respectively, to shareholders of
Equipe Technologies and E-Machine, Inc. prior to their acquisition by the
Company. Both of these Equipe entities operated as S-corporations prior to the
merger with the Company. In addition, net cash used in financing activities for
the nine months ended June 29, 1997 included repayments of short-term bank
borrowings of $900,000. These uses of cash were offset partially by proceeds
from the exercise of stock options and from proceeds of the Company's Employee
Stock Purchase Plan.
At June 28, 1998, the Company had a revolving credit agreement with The Chase
Manhattan Bank (the "Bank"). The revolving credit facility enables the Company
to borrow up to $20,000,000 on an unsecured basis. Outstanding revolving credit
loans bear interest, at the Company's option, at the 30, 60 or 90 day LIBOR rate
plus a credit spread or at the effective prime rate. At June 28, 1998, the
LIBOR
15
borrowing rate would have been 6.75% and the prime rate was 8.5%. 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. As of June 28, 1998, the Company had no
borrowings under this credit agreement.
The Company believes that existing cash and investment balances and funds
available under its existing lines of credit will be sufficient to meet the
Company's cash requirements to fund operations and expected capital expenditures
during the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 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 133 by October 1,
1999. The Company is evaluating SFAS 133 to determine its impact on its
consolidated financial statements.
YEAR 2000
Computer systems and software products that were designed to accept entries of
only two digits in the "year" date code field may be unable to properly process
date information beyond the year 1999. Inability of the Company's products to
process these dates could have a material adverse effect on its business. The
Company has established a centrally coordinated project team, including
representatives of each of the Company's divisions, to determine the Year 2000
readiness of the Company's products, business processes and systems. The Company
has reviewed all equipment and software currently being marketed or already
installed at customer sites for Year 2000 compliance. The Company expects to
complete all internal and field testing and upgrades of current and installed
products by the end of calendar 1998. The Company cannot presently estimate the
total cost of this testing and upgrade process but does not expect it to be
material. The Company is also assessing its internal systems, including business
information systems, systems utilized in its manufacturing and service
operations, and systems providing electronic interfaces between the Company and
its business associates and customers, to ensure the Company's operations are
not interrupted by Year 2000 issues. The Company expects to have addressed all
internal Year 2000 issues identified in this process by the end of calendar
1998. The Company is also working closely with suppliers and other third parties
upon which it is dependent to determine the extent of their Year 2000
compliance. Based on its investigation to date the Company does not expect the
total cost of its Year 2000 assessment and remediation program to have a
material adverse effect on the Company's business, results of operations or
financial condition.
16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) N/A
(b) N/A
(c) The following information is furnished with regard to all securities of
the Company sold by the Company since the end of the Company's last fiscal year
that were not registered under the Securities Act of 1933 (the "Securities
Act"):
On October 29, 1997, the Company issued 111,258 shares of Common Stock and
issued or assumed options to purchase an aggregate of 199,170 shares of Common
Stock in connection with the Company's acquisition of Interval Logic
Corporation.
On January 22, 1998, the Company issued 4,364,016 shares of Common Stock in
consideration for all of the issued and outstanding stock of Equipe
Technologies, Inc., and two related corporations.
On May 19, 1998, the Company issued 105,000 shares of Common Stock in
consideration for all of the issued and outstanding stock of Chiptronix Handling
Systems GmbH.
The above issuances were made in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act, relating to sales by an issuer
not involving any public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on March 30, 1998,
(the "Annual Meeting"), the Company's stockholders elected to fix the number of
directors that shall constitute the whole Board of Directors of the Company at
six and elected the following nominees as directors of the Company:
The number of votes cast for, or withheld from, each nominee for election as
director were as follows:
Nominee For Withheld Authority
------------------------- ---------- ------------------
Mordechai Wiesler 11,158,618 24,201
Mitchell G. Tyson 11,158,558 24,261
Amram Rasiel 11,168,618 14,201
Borouch B. Frusztajer 11,168,418 14,401
Alexander V. d'Arbeloff 11,168,315 14,504
Paul F. Rogan 11,158,384 24,435
17
ITEM 5. OTHER INFORMATION
Under rules recently adopted by the Securities and Exchange Commission,
proxies solicited by management in connection with the Company's 1999 annual
meeting of stockholders may confer discretionary authority to vote on any
shareholder proposal of which the Company did not have notice by January 20,
1999, or, if the date of the 1999 annual meeting of stockholders is changed by
more than 30 days from March 6, 1999, by a reasonable time before the Company
mails its proxy materials for such annual meeting. The Company's By-Laws
further provide that a stockholder must give written notice to the Company not
less than sixty days prior to the scheduled annual meeting describing any
proposal to be brought before such meeting, even if such item is not be included
in the Company's proxy statement relating to such meeting. Such notice
requirements are set forth in Section 3.5 of the Company's By-Laws.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
*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
10.25 Sublease agreement dated as of March 18, 1998 by and between the
Company and BAAN USA
10.26 Joint Venture Agreement by and between the Company and Chung
Song Systems, Co., Ltd. and Shinsung Engineering Co., Ltd.
10.27 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
10.28 Revolving Credit Agreement dated as of June 16, 1998 by and between
the Company and The Chase Manhattan Bank
27.1 Financial Data Schedule
27.2 Financial Data Schedule
18
_______________
* 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 June 29, 1997.
*** Incorporated by reference to the similarly-numbered Exhibit to the
Company's Quarterly Report Form 10-Q, for the period ended
December 28, 1997.
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K (the "Form 8-K") with the
Securities and Exchange Commission on July 16, 1998. The Form 8-K reported that
the Company had announced in a July 13, 1998 press release that it was
undertaking a restructuring plan designed to reduce costs and expenses,
including a workforce reduction of approximately 15%, and that its expected
operating results for the fiscal quarter ended June 28, 1998 would be lower than
previously anticipated.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRI AUTOMATION, INC.
Date: August 11, 1998 By: /s/ Stephen D. Allison
--------------------------
Stephen D. Allison
Duly Authorized Officer and
Principal Financial Officer
20
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
------ -----------
*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
10.25 Sublease agreement dated as of March 18, 1998 by and between the
Company and BAAN USA
10.26 Joint Venture Agreement by and between the Company and Chung
Song Systems, Co., Ltd. and Shinsung Engineering Co., Ltd.
10.27 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
10.28 Revolving Credit Agreement dated as of June 16, 1998 by and between
the Company and The Chase Manhattan Bank
27.1 Financial Data Schedule
27.2 Financial Data Schedule
_______________
* 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 June 29, 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.
21