UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: December 31, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission File Number 0-25434 ------- BROOKS AUTOMATION, INC. (Exact name of registrant as specified in its charter) Delaware 04-3040660 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 Elizabeth Drive Chelmsford, Massachusetts (Address of principal executive offices) 01824 (Zip Code) Registrant's telephone number, including area code: (978) 262-2566 _____________________________________________ 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 --- --- As of February 9, 1999, there were outstanding 11,046,250 shares of the Company's Common Stock, $0.01 par value. This report, including all exhibits and attachments, contains 20 pages.
BROOKS AUTOMATION, INC. INDEX <TABLE> <CAPTION> <S> <C> <C> Page PART I. FINANCIAL INFORMATION Number - ------- --------------------- ------ Item 1 Financial Statements: Condensed Consolidated Balance Sheet at December 31, 1998, and September 30, 1998 3 Condensed Consolidated Statement of Operations for the three months ended December 31, 1998 and 1997 4 Condensed Consolidated Statement of Cash Flows for the three months ended December 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Item 3 Quantitative and Qualitative Disclosures about Market Risk 12 Risk Factors 13-16 PART II. OTHER INFORMATION - -------- ----------------- Item 6 Exhibits and Reports on Form 8-K 17 Signatures 18 </TABLE> Page 2 of 18
<TABLE> <CAPTION> BROOKS AUTOMATION, INC. CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except share data) December 31, September 30, 1998 1998 --------------- --------------- (unaudited) <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 70,411 $ 68,161 Accounts receivable, net of allowance for doubtful accounts of $1,898 and including related party receivables of $906 and $2,365, respectively 18,660 20,701 Inventories 17,237 19,589 Prepaid expenses and other current assets 1,866 3,535 Deferred income taxes 6,204 6,106 -------- -------- Total current assets 114,378 118,092 Fixed assets, net 18,255 18,606 Other assets 4,532 4,254 -------- -------- Total assets $137,165 $140,952 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,938 $ 5,505 Deferred revenue 3,086 2,935 Accrued expenses and other current liabilities 9,052 9,731 -------- -------- Total current liabilities 15,076 18,171 Long-term debt and capital lease obligations 35 130 Deferred income taxes 738 888 -------- -------- Total liabilities 15,849 19,189 -------- -------- Stockholders' equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding - - Common stock, $0.01 par value; 21,500,000 shares authorized; 11,019,270 and 11,007,281 shares issued and outstanding, respectively 110 110 Additional paid-in capital 128,884 128,839 Cumulative translation adjustment (461) (536) Deferred compensation (111) (119) Accumulated deficit (7,106) (6,531) -------- -------- Total stockholders' equity 121,316 121,763 -------- -------- Total liabilities and stockholders' equity $137,165 $140,952 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 of 18
BROOKS AUTOMATION, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (In thousands, except share data) <TABLE> <CAPTION> Three months ended December 31, 1998 1997 ---------- ---------- <S> <C> <C> Revenues: Product, including related party revenues of $705 and $4,745, respectively $15,155 $25,033 Services 4,654 4,615 ------- ------- Total revenues 19,809 29,648 ------- ------- Cost of revenues: Product 8,568 15,038 Services 2,500 2,971 ------- ------- Total cost of revenues 11,068 18,009 ------- ------- Gross profit 8,741 11,639 ------- ------- Operating expenses: Research and development 4,092 6,744 Selling, general and administrative 5,727 7,075 ------- ------- Total operating expenses 9,819 13,819 ------- ------- Loss from operations (1,078) (2,180) Interest income 757 955 Interest expense 33 265 ------- ------- Loss before income taxes (354) (1,490) Income tax provision 221 1,364 ------- ------- Net loss (575) (2,854) Dividends on preferred stock - (131) ------- ------- Net loss attributable to common stockholders $ (575) $(2,985) ======= ======= Loss per share: Basic $ (0.05) $ (0.29) Diluted $ (0.05) $ (0.29) Shares used in computing loss per share: Basic 11,010 10,194 Diluted 11,010 10,194 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 of 18
BROOKS AUTOMATION, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) <TABLE> <CAPTION> Three months ended December 31, (In thousands) 1998 1997 ----------- ---------- <S> <C> <C> Cash flows from operating activities Net loss $ (575) $ (2,854) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,686 2,024 Compensation expense related to common stock options 8 26 Deferred income taxes (330) 1,334 Changes in operating assets and liabilities: Accounts receivable 2,078 4,647 Inventories 2,376 (2,940) Prepaid expenses and other current assets 1,703 (347) Accounts payable (2,568) 262 Deferred revenue 174 (178) Accrued expenses and other current liabilities (851) (718) ----------- ---------- Net cash provided by operating activities 3,701 1,256 ----------- ---------- Cash flows from investing activities Purchases of fixed assets (1,292) (1,624) Increase in other assets (235) (413) ----------- ---------- Net cash used in investing activities (1,527) (2,037) ----------- ---------- Cash flows from financing activities Payments on long-term debt (102) (322) Proceeds from sale and leaseback of equipment - 258 Proceeds from issuance of common stock 45 292 ----------- ---------- Net cash (used in) provided by financing activities (57) 228 ----------- ---------- Elimination of net cash activities of FASTech for the three months ended December 31, 1997 - (1,761) ----------- ---------- Effects of exchange rate changes on cash and cash equivalents 133 (284) ----------- ---------- Net increase (decrease) in cash and cash equivalents 2,250 (2,598) Cash and cash equivalents, beginning of period 68,161 75,253 ----------- ---------- Cash and cash equivalents, end of period $ 70,411 $ 72,655 =========== ========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 of 18
BROOKS AUTOMATION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation ---------------------- The accompanying unaudited consolidated financial statements of Brooks Automation, Inc. and its subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The financial statements for the three months ended December 31, 1997, have been restated to reflect the fiscal 1998 acquisition of FASTech Integration, Inc., which was accounted for under the pooling of interests method. Certain prior year's balances have been reclassified in order to conform to the current year's presentation. For further information, refer to the audited consolidated financial statements of the Company that are included in the Company's Annual Report on Form 10-K for the year ended September 30, 1998. The results of operations for the three months ended December 31, 1998, are not necessarily indicative of the results that may be expected for other quarters or the entire fiscal year. 2. Inventories ----------- <TABLE> <CAPTION> Inventories consist of the following December 31, September 30, (in thousands): 1998 1998 ------------ ------------- <S> <C> <C> Raw materials and purchased parts $ 7,360 $ 8,815 Work-in-process 7,037 7,878 Finished goods 2,840 2,896 ------- ------- $17,237 $19,589 ======= ======= </TABLE> 3. Earnings Per Share ------------------ The following is a summary of the shares used in computing basic and diluted earnings per share (in thousands): <TABLE> <CAPTION> Three months ended December 31, 1998 1997 ------ ------ <S> <C> <C> Weighted average shares outstanding used in computing basic earnings per share 11,010 10,194 Dilutive securities - - ------ ------ Shares used in computing diluted earnings per share 11,010 10,194 ====== ====== </TABLE> 4. Comprehensive Income -------------------- The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in the first quarter of fiscal 1999. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of SFAS 130 had no impact on the Company's net income or stockholders' equity. SFAS No. 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Total comprehensive loss, which was comprised of net loss and foreign currency translation adjustments, was $0.5 million and $3.6 million for the three months ended December 31, 1998 and 1997, respectively. Page 6 of 18
BROOKS AUTOMATION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. Recent Accounting Pronouncements -------------------------------- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting information on operating segments in interim and annual financial statements. The statement is effective for the Company for fiscal 1999; however, the Company has no interim disclosure requirements in the year of adoption. Adoption of this statement will not have a material impact on the Company's results of operations or financial position. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (fiscal 2000 for the Company) and requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that the adoption of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. 6. Significant Customers and Related Party Information ---------------------------------------------------- For the three months ended December 31, 1998, the Company had revenues from two customers (not related parties) representing 20% and 16% of total revenues. For the three months ended December 31, 1997, the Company had revenues from a related party representing 16% of total revenues. At December 31, 1998, accounts receivable from two customers (not related parties) accounted for 14% and 11% of total accounts receivable. At September 30, 1998, accounts receivable from one customer (not a related party) represented 14% of total accounts receivable and accounts receivable from a related party represented 11% of total accounts receivable. Related party amounts included in accounts receivable are on standard terms and manner of settlement. 7. Contingency ----------- There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor and related industries. The Company has received notice from a third party alleging infringements of such party's patent rights by certain of the Company's products. The Company's patent counsel is investigating the claim, and the Company believes the patents claimed may be invalid. In the event of litigation with respect to this claim, the Company is prepared to vigorously defend its position. However, because patent litigation can be extremely expensive and time consuming, the Company may seek to obtain a license to one or more of the disputed patents. Based upon currently available information, the Company would only do so if such license fees would not be material to the Company's consolidated financial statements. Currently, the Company does not believe that it is probable that future events related to this threatened matter will have a material adverse effect on the Company's business. Page 7 of 18
BROOKS AUTOMATION, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this quarterly report constitute "forward-looking statements" which involve known risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include the factors that may affect future results set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, which is included in this report. Precautionary statements made herein should be read as being applicable to all related forward-looking statements wherever they appear in this report. OVERVIEW The predecessor of Brooks Automation, Inc. (the "Company") was organized in February 1989 and acquired the semiconductor wafer handling business of the Brooks Automation Division of Aeronca Electronics, Inc., a subsidiary of Fleet Aerospace Corporation, in March 1989. The Company and its predecessors have been in the semiconductor wafer handling business since 1978. In 1992 the Company introduced the family of vacuum central wafer handling systems and modules that forms the foundation of the Company's current business. In 1994 the Company introduced a similar family of systems and modules for flat panel display substrates, including a next-generation magnetically driven vacuum transfer robot. In 1996 the Company acquired Techware Systems Corporation, a designer and supplier of integrated equipment control software for the semiconductor and related industries, expanding its software and control capability. In 1997 the Company introduced a line of products for the atmospheric handling market, including in-line and controlled environment systems, robots, aligners and traversers. In 1998 the Company acquired FASTech Integration, Inc. ("FASTech"), a designer and supplier of top-to-bottom integrated manufacturing execution system software solutions. Many of the Company's customers purchase the Company's vacuum transfer robots and other modules before purchasing the Company's vacuum central wafer handling systems. The Company believes that once a customer has selected the Company's products for a process tool, the customer is likely to rely on those products for the life of that process tool model, which can be in excess of five years. The Company's product revenues include sales of hardware and software products; the Company's service revenues include revenue from maintenance contracts and application consulting contracts. The Company's foreign revenues are generally denominated in United States dollars. Accordingly, foreign currency fluctuations have not had a significant impact on the comparison of the results of operations for the periods presented. The costs and expenses of the Company's international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of the Company's international subsidiaries is the local currency, foreign currency translation adjustments are reflected as a component of stockholders' equity. To the extent that the Company expands its international operations or changes its pricing practices to denominate prices in foreign currencies, the Company will be exposed to increased risk of currency fluctuation. The Company's business is highly dependent upon the capital expenditures of semiconductor and flat panel display manufacturers, which historically have been cyclical, and the Company's ability to develop, manufacture, and sell new products and product enhancements. The Company's results will also be affected, especially when measured on a quarterly basis, by the volume, composition and timing of orders, conditions in industries served by the Company, competition, and general economic conditions. The Company's stock is currently quoted on the Nasdaq National Market under the symbol "BRKS." Page 8 of 18
RESULTS OF OPERATIONS The following table sets forth certain financial data for the periods indicated as a percentage of revenues: <TABLE> <CAPTION> For the three months ended December 31, 1998 1997 -------- --------- <S> <C> <C> Revenues: Product 76.5% 84.4% Services 23.5% 15.6% -------- --------- Total revenues 100.0% 100.0% ======== ========= Gross profit: Product 43.5% 39.9% Services 46.3% 35.6% Total gross profit 44.1% 39.3% Operating expenses: Research and development 20.7% 22.7% Selling, general and administrative 28.9% 23.9% -------- --------- Loss from operations (5.5%) (7.3%) Interest income 3.9% 3.2% Interest expense (0.2%) (0.9%) -------- --------- Loss before income taxes (1.8%) (5.0%) ========= ========== </TABLE> THREE MONTHS ENDED DECEMBER 31, 1998, COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 1997: Revenues Total revenues decreased 33.2% to $19.8 million for the three months ended December 31, 1998, compared with revenues in the comparable quarter of the prior fiscal year. Product revenues decreased $9.9 million or 39.5% primarily as a result of an $8.1 million decrease in hardware revenues and a $1.8 million decrease in software revenues; and services revenues increased slightly to $4.7 million. The decrease in product revenues was primarily the result of the prolonged economic recession currently impacting the semiconductor industry and related fabrication equipment sector. Foreign revenues for the three months ended December 31, 1998, were $11.9 million (60.2% of revenues) including $7.6 million of direct sales to Asian customers, compared with foreign revenues of $10.6 million (35.7% of revenues), including $6.9 million of direct sales to Asian customers in the comparable quarter of the prior fiscal year. The Company expects that foreign revenues will continue to account for a significant portion of total revenues in fiscal 1999. However, there can be no assurance that foreign revenues particularly from Asia, which is suffering regional economic downturns, will remain a strong component of the Company's total revenues. Gross Profit Overall, the gross profit as a percentage of total revenues increased to 44.1% for the three months ended December 31, 1998, compared to 39.3%, in the comparable quarter of the prior fiscal year. The gross profit percentage for product revenues was 43.5%, an increase from the 39.9% in the comparable quarter Page 9 of 18
of the prior fiscal year primarily as a result of an improvement in the mix of products sold and reductions in costs due to recently implemented cost controls. The gross profit rate in the period is impacted by the mix of products sold during the period. The gross profit as a percentage of services revenues increased to 46.3% for the three months ended December 31, 1998, as compared with 35.6% in the comparable quarter of the prior fiscal year primarily as a result of cost reductions. Included in the cost of services revenues are global support costs, which consist primarily of personnel costs and travel expenses. Research and Development Research and development expenses decreased 39.3% to $4.1 million (20.7% of revenues) for the three months ended December 31, 1998, from $6.7 million (22.7% of revenues) in the comparable quarter of the prior fiscal year. The decrease in research and development expenses in the current quarter is due primarily to lower personnel and personnel-related costs following a reduction in headcount in the second and fourth quarters of fiscal 1998 and a reduction in incremental spending, primarily consulting fees and other expenses incurred during the first quarter of fiscal 1998 related to the launch of new atmospheric products and the transition to the next generation of vacuum wafer handling products. Selling, General and Administrative Selling, general and administrative expenses decreased 19.1% to $5.7 million (28.9% of revenues) for the three months ended December 31, 1998, from $7.1 million (23.9% of revenues) in the comparable quarter of the prior fiscal year. The decrease in selling, general and administrative expenses is due primarily to lower personnel and personnel-related costs following a reduction in headcount in the second and fourth quarters of fiscal 1998 and expense control programs initiated during the third and fourth quarters of fiscal 1998. Interest Income and Interest Expense Interest income decreased to $757,000 for the three months ended December 31, 1998, from $955,000 in the comparable quarter of the prior fiscal year. The decrease in interest income is primarily due to lower interest rates. Interest expense for the three months ended December 31, 1998, decreased to $33,000 from $265,000 in the comparable period of the prior fiscal year primarily due to the fact that most of the debt outstanding was repaid during fiscal 1998. Included in the prior period's interest expense was $115,000 of deferred financing costs resulting from the repayment of the related note payable and interest on subordinated notes retired and capital leases repaid during fiscal 1998. Income Tax Provision The Company recorded a tax provision of $221,000 during the three months ended December 31, 1998, primarily due to taxes on revenues and profits from foreign operations. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company's principal source of liquidity consisted of $70.4 million in cash and cash equivalents, compared to $68.2 million at September 30, 1998. The Company had working capital of $99.3 million as of December 31, 1998, compared to $99.9 million at September 30, 1998. For the three months ended December 31, 1998, cash and cash equivalents increased $2.2 million primarily as a result of $3.7 million in cash generated by operating activities, partially offset by $1.6 million in cash used for investing and financing activities. The improvement in operating cash flow resulted primarily from decreases in accounts receivable, inventory, and prepaid expenses partially offset by a decrease in accounts payable and the Company's net loss adjusted for noncash items. The Company's primary investing activities encompassed capital spending aggregating $1.3 million primarily for business information systems including computer hardware and software, as well as headquarters facility improvements. The Company expects to continue to make capital expenditures to support its business activities. Financing activities consisted primarily of repayments of long-term debt and capital lease obligations. The Company believes that current cash and cash equivalent balances will be adequate to fund planned working capital and capital expenditure requirements for at least the next twelve months. Page 10 of 18
YEAR 2000 READINESS The year 2000 issue is the potential for system and processing failure of date- related data as the result of computer-controlled systems using two digits rather than four digits to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company may be affected by year 2000 issues related to noncompliant information technology ("IT") systems or non-IT systems operated or sold by the Company or by third parties. The Company has substantially completed assessment of its internal IT systems and non-IT systems. At this point in its assessment, the Company is not currently aware of any year 2000 problems relating to systems operated or sold by the Company that would have a material adverse effect on the Company's business, results of operations, or financial condition without taking into account the Company's efforts to avoid such problems. Although the Company believes that its systems are year 2000 compliant, the Company utilizes third-party equipment and software that may not be year 2000 compliant. In addition, the Company's products and software are often sold to be integrated into or interfaced with third-party equipment or software. Failure of third-party equipment or software to operate properly with regard to the year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company may also be vulnerable to any failures by its major suppliers, service providers, and customers to remedy their own internal IT and non-IT system year 2000 issues which could, among other things, have a material adverse effect on the Company's supplies and orders. At this time, the Company is unable to estimate the nature or extent of any potential adverse impact resulting from the failure of third parties, such as its suppliers, service providers and customers, to achieve year 2000 compliance. Moreover, such third parties, even if year 2000 compliant, could experience difficulties resulting from year 2000 issues that may affect its suppliers, service providers and customers. As a result, although the Company does not currently anticipate that it will experience any material shipment delays from its major product suppliers or any material sales delays from its major customers due to year 2000 issues, there can be no assurance that these third parties will not experience year 2000 problems or that any problems would not have an adverse material effect on the Company's business, results of operations and financial condition. Because the cost and timing of year 2000 compliance by third parties such as suppliers, service providers and customers is not within the Company's control, the Company cannot give any assurance with respect to the cost or timing of such efforts or any potential adverse effects on the Company of any failure by these third parties to achieve year 2000 compliance. The Company has no contingency plan in the event year 2000 problems relating to its operations arise. The Company's failure to develop a contingency plan could have a material adverse effect on the Company's business, results of operations and financial condition. To the extent that the Company does not identify any material non-compliant IT systems or non-IT systems operated by the Company or by third parties, such as the Company's suppliers, service providers and customers, the most reasonably likely worst case year 2000 scenario is a systematic failure beyond the control of the Company, such as a prolonged telecommunications or electrical failure, or a general disruption in United States or global business activities that could result in a significant economic downturn. The Company believes that the primary business risks, in the event of such failure or other disruption, would include but not be limited to, loss of customers or orders, increased operating costs, inability to obtain inventory on a timely basis, disruptions in product shipments, or other business interruptions of a material nature, as well as claims of mismanagement, misrepresentation, or breach of contract, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. Page 11 of 18
BROOKS AUTOMATION, INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE EXPOSURE Based on the Company's overall interest exposure at December 31, 1998, including all interest rate sensitive instruments, a near-term change in interest rates within a 95% confidence level based on historical interest rate movements would not materially affect the consolidated results of operations or financial position. CURRENCY RATE EXPOSURE The Company's foreign revenues are generally denominated in United States dollars. Accordingly, foreign currency fluctuations have not had a significant impact on the comparison of the results of operations for the periods presented. The costs and expenses of the Company's international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of the Company's international subsidiaries is the local currency, foreign currency translation adjustments are reflected as a component of stockholders' equity. To the extent that the Company expands its international operations or changes its pricing practices to denominate prices in foreign currencies, the Company will be exposed to increased risk of currency fluctuation. STOCK PRICE The stock prices of semiconductor equipment companies are subject to significant fluctuations. The stock price may be affected by a variety of factors that could cause the price of the Company's Common Stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company's business; quarterly fluctuations in the Company's actual or anticipated operating results and order levels; general conditions in the semiconductor and flat panel display industries or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; developments in patents or other intellectual property rights and litigation; and developments in the Company's relationships with its customers and suppliers. In addition, in recent years the stock market in general and the market for shares of small capitalization and semiconductor industry-related companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of the Company's Common Stock. There can be no assurance that the market price of the Common Stock of the Company will not decline. Page 12 of 18
BROOKS AUTOMATION, INC. RISK FACTORS FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company or statements made by its employees may contain forward-looking information that involve substantial risks and uncertainties that could cause actual results to differ materially from targets or projected results. Quarterly Fluctuations in Operating Results and Market Price of Securities The Company's operating results have in the past fluctuated and may in the future continue to fluctuate significantly depending upon a variety of factors. Such factors may include: the demand for semiconductors in general; cyclicality in the market for semiconductor manufacturing equipment and software products; the timing and size of orders from the Company's customer base; the ability of the Company to manufacture, test and deliver products in a timely and cost effective manner; the ability of the Company's competitors to obtain orders from the Company's customers; the timing of new product announcements and releases by the Company and its competitors; the mix of products sold by the Company; and competitive pricing pressures. The Company has historically derived a substantial portion of its quarterly and annual revenues from the sale of a relatively small number of semiconductor and flat panel display substrate handling systems, which have relatively high selling prices compared to its other products. As a result, the precise timing of the recognition of revenue from an order for one or a small number of systems can have a significant impact on the Company's total revenues and operating results for a particular period. The Company's operating results for a particular period could be adversely affected if orders for a small number of systems are canceled or rescheduled by customers or cannot be filled in time to recognize revenue during that period due to, for example, unanticipated manufacturing, testing, shipping or product acceptance delays. The Company's expense levels are based, in large part, on the Company's expectations as to future revenues and are, therefore, relatively fixed in the short term. If revenue levels fall below expectations, net income will be disproportionately and adversely affected. The impact of these and other factors on the Company's revenues and operating results in any future period cannot be forecast with any degree of certainty. These factors could have a material adverse effect on the Company's business, future financial condition, revenues and results of operations. Dependence on Semiconductor Industry The Company's business is significantly dependent on capital expenditures by manufacturers of semiconductors. The semiconductor industry is highly cyclical and is presently experiencing a period of oversupply, resulting in significantly reduced demand for capital equipment, including the products manufactured and marketed by the Company. The Company's financial condition, revenues and results of operations have been materially and adversely affected by the semiconductor industry downturns and may be materially adversely affected by future downturns. The Company believes that downturns in the semiconductor manufacturing industry will occur in the future, and will result in decreased demand for semiconductor manufacturing equipment. In addition, the Company believes (on the basis of its experience during the course of the present downturn) that its ability to reduce expenses in a future downturn will be constrained by the need for continual investment in research and development, and the need to maintain ongoing customer service and support capability. Accordingly, any downturn in the semiconductor industry could have a material adverse effect on the Company's business, future financial condition and results of operations. Customer Concentration Relatively few customers account for a substantial portion of the Company's revenues. Sales to the Company's ten largest customers in the three months ended December 31, 1998, and in fiscal 1998 and fiscal 1997 accounted for 66%, 61%, and 60% of total revenues, respectively. In the three months ended December 31, 1998, sales to two customers (not related parties) accounted for 20% and 16% of total revenues. In fiscal 1998 and fiscal 1997, sales to Lam Research Corporation (a related party), accounted Page 13 of 18
for 16% and 17% of the Company's total revenues, respectively. The Company's customers generally do not enter into long-term agreements obligating them to purchase the Company's products. A reduction or delay in orders from any significant customer including reductions or delays due to market, economic or competitive conditions in the semiconductor or flat panel display industries, could have a material adverse effect on the Company's business, financial condition and results of operations. Reliance on OEM Customers; Lengthy Sales Cycle The Company's products are principally sold to OEMs, which incorporate the Company's products into their equipment. Due to the significant capital commitments usually incurred by semiconductor and flat panel display manufacturers in their purchases of these OEMs' equipment, these manufacturers demand highly reliable products which may require several years for OEMs to develop. The Company's revenues are therefore primarily dependent upon the timing and effectiveness of the efforts of its OEM customers in developing and marketing equipment incorporating the Company's products. The Company's new products are generally incorporated into an OEM customer's process tools at the design stage. However, customer decisions to use the Company's products, which can often require significant expenditures by the Company without any assurance of success, often precede the generation of volume sales, if any, by a year or more. There can be no assurance that the Company will continue to achieve design wins, that the process tools manufactured by the Company's customers will be introduced in a timely manner or that such systems will achieve market acceptance. The Company's or its customers' failure to develop and introduce new products successfully and in a timely manner could materially and adversely affect the Company's business, financial condition and results of operations. Risks of International Sales and Operations During the three months ended December 31, 1998, and in fiscal 1998 and fiscal 1997, the Company derived 60%, 41%, and 38% of its revenues from customers located outside the United States. The Company anticipates that international revenues will continue to account for a significant portion of its revenues. To support its international customers, the Company maintains subsidiaries in Japan, South Korea, Taiwan, and Singapore. There can be no assurance that the Company will be able to manage these operations effectively or that the Company's investment in these activities will enable it to compete successfully in international markets or to meet the service and support needs of its customers. The Company will continue to be affected, for the foreseeable future, by unstable Asian economies, particularly in Japan and South Korea. As a result, there are uncertainties that may affect future operations. It is not possible to determine the future effect a continuation of the Asian economic crisis may have on the Company's liquidity and earnings. Additionally, a significant portion of the Company's revenues and operations could be subject to certain risks, including tariffs, foreign government standards and regulations and other barriers, difficulties in staffing and managing foreign subsidiary operations, currency exchange risks and exchange controls, adverse tax consequences and difficulty in accounts receivable collection. International trade regulations, such as United States export controls, could change in the future and make it more difficult for the Company to export its products to various countries. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Highly Competitive Industry The markets for the Company's products are highly competitive and subject to rapid technological change. The Company believes that its primary competition is from integrated OEMs that satisfy their semiconductor and flat panel display handling needs in-house rather than by purchasing systems or modules from an independent supplier such as the Company. Many of these other potential competitors have substantially greater resources than the Company. There can be no assurance that the Company will be successful in selling its products to OEMs that currently satisfy their substrate handling needs in-house, regardless of the performance or the price of the Company's products. Moreover, there can be no assurance that integrated OEMs will not begin to commercialize their handling capabilities. Competitors may develop superior products or products of similar quality at the same or lower prices. Other technical Page 14 of 18
innovations may impair the Company's ability to market its products. There can be no assurance that the Company will be able to compete successfully. New Products and Rapid Technological Change The semiconductor and flat panel display manufacturing industries have been characterized by rapid technological change and evolving industry requirements and standards. The Company believes that these trends will continue. The Company's success will depend upon its ability to enhance its existing products and to develop and market new products to meet customer requirements. Successful product development and introduction depends on a number of factors, including accurate new product definition, timely completion and introduction of new product designs and market acceptance of the Company's products and its customers' products. Currently, the Company's major development programs include expanding its product offerings of semiconductor substrate handling systems to address emerging industry requirements for 300mm wafer and fourth generation flat panel substrates, as well as wafer handling systems and modules for atmospheric process tools. In addition, the Company continues to develop and enhance its MES and process control software product offerings. There can be no assurance that the Company will adjust to changing market conditions or be successful in introducing products or product enhancements on a timely basis, if at all, or that the Company will be able to market successfully these products and product enhancements once developed. Further, there can be no assurance that the Company's products will not be rendered obsolete by new industry standards or changing technology. Attraction and Retention of Key Personnel Due to the level of technical and marketing expertise necessary to support its existing and new customers, the Company must attract and retain highly qualified and well trained domestic and international personnel. There are a limited number of persons with the requisite skills to serve in these positions, and it may become increasingly difficult for the Company to hire such personnel. Competition for such personnel is intense, and there can be no assurance that the Company will attract and retain personnel necessary for the development of its business. Risks Associated with Acquisitions The Company completed the acquisition of FASTech on September 30, 1998, and intends to pursue, from time to time, potential acquisitions of businesses, products, and technologies that could complement or expand the Company's business. The combination of the Company and FASTech will require, among other things, integration of the companies' respective products, technologies, management information systems, distribution channels and key personnel, and the coordination of their sales, marketing and research and development efforts. There can be no assurance that such integration will be accomplished smoothly or successfully, if at all. If significant difficulties are encountered in the integration of the existing products or technologies or the development of new products and technologies, resources could be diverted from new product development; and delays in new product introductions could occur. The integration of operations and technologies will require the dedication of management and other personnel which may distract their attention from the day- to-day business of the Company, the development or acquisition of new technologies, and the pursuit of other business acquisition opportunities. Failure to successfully accomplish the integration and development of the two companies' operations and technologies would likely have a material adverse effect on the Company's business, financial condition, and results of operations. The Company currently has no commitments or agreements with respect to any material potential acquisitions. There can be no assurance that the Company will be able to successfully negotiate the terms of any such acquisition, finance such acquisition or integrate such acquired businesses, products or technologies into the Company's existing business and products. The negotiation of potential acquisitions as well as the integration of an acquired business could cause diversion of management's time and resources. Acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses. If any such acquisition were to occur, there can be no assurance that, whether or not consummated, any such acquisition would not have a material adverse effect on the Company's business, future financial condition and results of operations. Page 15 of 18
Intellectual Property Protection and Related Contingency The Company relies upon trade secrets and patents to protect its technology. Due to the rapid technological change that characterizes the semiconductor and flat panel display process equipment industries, the Company believes that the improvement of existing technology, reliance upon trade secrets and unpatented proprietary know-how and the development of new products may be more important than patent protection in establishing and maintaining a competitive advantage. It is the Company's policy to require all technical and management personnel to enter into nondisclosure agreements. Nevertheless, the Company has obtained patents and will continue to make efforts to obtain patents, when available, in connection with its product development program. There can be no assurance that any patent obtained will provide protection or be of commercial benefit to the Company, or that its validity will not be challenged. Despite these efforts, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology or that the Company can meaningfully protect its trade secrets. There can be no assurance that the Company's pending patent applications or any future applications will be approved, that any patents will provide it with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. There can be no assurance that others will not independently develop similar products, duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company. Others may have filed and in the future may file patent applications that are similar or identical to those of the Company. No assurance can be given that any such patent application will not have priority over patent applications filed by the Company. There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor related industries. The Company had received notice from General Signal Corporation ("General Signal") alleging infringement of patents then owned by General Signal, relating to cluster tool architecture, by certain of the Company's products. The notification advised the Company that General Signal was attempting to enforce its rights to those patents in litigation against Applied Materials, Inc. ("Applied Materials"). According to a press release issued by Applied Materials, Applied Materials settled its litigation with General Signal by acquiring ownership of five General Signal patents. Although not verified, these five patents would appear to be the patents referred to by General Signal in its prior notice to the Company. Applied Materials has not contacted the Company regarding these newly acquired patents. The Company has in the past been, and may in the future be, notified that it may be infringing intellectual property rights possessed by other third parties. Any patent litigation would be costly and could divert the efforts and attention of the Company's management and technical personnel, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that infringement claims by third parties or other claims for indemnification by customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially and adversely affect the Company's business, financial condition and results of operations. If any such claims are asserted against the Company's intellectual property rights it may seek to enter into a royalty or licensing arrangement. There can be no assurance, however, that a license will be available on reasonable terms or at all. The Company could decide, in the alternative to resort to litigation to challenge such claims or to design around the patented technology. Such actions could be costly and would divert the efforts and attention of the Company's management and technical personnel, which would materially and adversely affect the Company's business, financial condition and results of operations. Volatility of Stock Price The Company believes that a variety of factors could cause the price of the Company's Common Stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company's business; quarterly fluctuations in the Company's actual or anticipated operating results and order levels; general conditions in the semiconductor and flat panel display industries or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; developments in patents or other intellectual property rights and litigation; and developments in the Company's relationships with its customers and suppliers. In addition, in recent years the stock market in general and the market for shares of small capitalization and semiconductor industry-related companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of the Company's Common Stock. There can be no assurance that the market price of the Common Stock of the Company will not decline. Page 16 of 18
BROOKS AUTOMATION, INC. PART II. OTHER INFORMATION Item 6 (a) EXHIBITS Exhibit No. ----------- 27.01 Financial Data Schedule Item 6 (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K dated October 15, 1998, reporting the acquisition of FASTech Integration, Inc. Page 17 of 18
SIGNATURES 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. BROOKS AUTOMATION, INC. February 15, 1999 /s/ Robert J. Therrien - ---------------- -------------------------------- [Date] Robert J. Therrien Director and President (Principal Executive Officer) February 15, 1999 /s/ Ellen B. Richstone - ----------------- -------------------------------- [Date] Ellen B. Richstone Senior Vice President and Chief Financial Officer (Principal Financial Officer) Page 18 of 18