1
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 June 30, 1997
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: 0-25862
AG ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
California 94-2776181
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4425 Fortran Drive, San Jose, California 95134-2300
(Address of principal executive offices and zip code)
Registrant's telephone number: (408) 935-2000
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 the Registrant's Common Stock, no par value,
was 6,028,446 at July 31, 1997.
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AG ASSOCIATES, INC.
INDEX
Description Page Number
----------- -----------
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods
Ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets as of June 30, 1997 and September 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended
June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Part II: Other Information
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Quantitative and Qualitative Disclosure About Market Risk 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signature 16
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AG ASSOCIATES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 13,380 $ 17,196 $ 33,653 $ 62,256
Cost of sales 8,445 9,961 23,508 33,337
-------- -------- -------- --------
Gross profit 4,935 7,235 10,145 28,919
Operating expenses:
Research and development 3,895 4,322 9,922 12,075
Selling, general and administrative 2,295 2,539 6,379 8,415
-------- -------- -------- --------
Total operating expenses 6,190 6,861 16,301 20,490
-------- -------- -------- --------
Income (loss) from operations (1,255) 374 (6,156) 8,429
Interest income, net 93 146 279 526
Other income, net 15 46 79 78
Equity interest in loss of unconsolidated subsidiary -- (500) -- (1,152)
-------- -------- -------- --------
Income (loss) before income taxes (1,147) 66 (5,798) 7,881
Provision (benefit) for income taxes (298) 27 (1,461) 3,231
-------- -------- -------- --------
Net income (loss) $ (849) $ 39 $ (4,337) $ 4,650
======== ======== ======== ========
Net income (loss) per share $ (0.14) $ 0.01 $ (0.73) $ 0.76
======== ======== ======== ========
Shares used in per share computations 5,985 6,027 5,967 6,142
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
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AG ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, September 30,
1997 1996
------------- -------------
(unaudited) (*)
ASSETS
Current assets:
Cash and equivalents $ 1,607 $ 1,996
Short-term investments 4,675 9,989
Accounts receivable, net 10,703 8,560
Inventories 9,623 11,668
Income taxes refundable 318 1,463
Deferred tax assets 4,320 2,859
Prepaid expenses and other current assets 879 462
-------- --------
Total current assets 32,125 36,997
Property and equipment, net 8,788 8,210
Deferred tax assets 645 645
-------- --------
Total assets $ 41,558 $ 45,852
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,854 $ 4,669
Accrued liabilities 3,499 2,571
Product warranty reserves 1,274 2,440
Current portion of capital lease obligations 186 222
Customer advances and deferred revenue -- 245
-------- --------
Total current liabilities 9,813 10,147
Capital lease obligations 316 11
Shareholders' equity
Common stock 35,703 35,640
Deferred stock compensation -- (17)
Net unrealized loss on short-term investments (19) (10)
Retained earnings (accumulated deficit) (4,255) 81
-------- --------
Total shareholders' equity 31,429 35,694
-------- --------
Total liabilities and shareholders' equity $ 41,558 $ 45,852
======== ========
(*) Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
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AG ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
Nine Months Ended June 30,
--------------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) $ (4,337) $ 4,650
Reconciliation to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,079 1,471
Equity interest in loss of unconsolidated subsidiary -- 1,152
Deferred income taxes (1,461) (671)
Deferred stock compensation 17 51
Changes in assets and liabilities:
Accounts receivable (2,142) (998)
Inventories 2,045 (3,008)
Prepaid expenses and other current assets 729 102
Accounts payable 185 (2,659)
Accrued liabilities and product warranty reserves (238) 344
Customer advances and deferred revenue (245) (740)
Income taxes payable -- 327
-------- --------
Net cash provided by (used in) operating activities (3,368) 21
Cash flows from investing activities:
Purchases of short-term investments (8,675) (28,363)
Maturities of short-term investments 13,979 32,253
Capital expenditures (2,161) (5,641)
Investment in unconsolidated subsidiary -- (1,000)
-------- --------
Net cash provided by (used in) investing activities 3,143 (2,751)
Cash flows from financing activities:
Repayment of capital lease obligations (227) (216)
Proceeds from repayment of shareholder notes -- 92
Proceeds from issuance of common stock 63 286
-------- --------
Net cash provided by financing activities (164) 162
-------- --------
Net decrease in cash and equivalents (389) (2,568)
Cash and equivalents at beginning of period 1,996 8,258
-------- --------
Cash and equivalents at end of period $ 1,607 $ 5,690
======== ========
Supplemental schedule of noncash financing activities:
Assets acquired under capital leases 496 --
======== ========
Supplemental disclosure of cash flow information
Cash paid/(refunded) during the period for:
Interest $ 59 $ 48
======== ========
Income taxes $ (1,153) $ 3,574
======== ========
See Notes to Condensed Consolidated Financial Statements.
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AG ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 1 - Basis of Presentation
The financial statements have been prepared by AG Associates, Inc. (the
"Company"), pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). While the quarterly financial information contained in this
filing is unaudited, the financial statements presented reflect all normal
recurring adjustments which the Company considers necessary for a fair
presentation of the financial position, results of operations and cash flows for
all interim periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the entire year. The
information included in this report should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in the Company's
1996 Annual Report on Form 10-K.
NOTE 2 - Per Share Information
Net loss per share information for the three and nine month periods ended June
30, 1997 are computed using the weighted average number of common shares
outstanding. Common-equivalent shares attributable to stock options outstanding
are excluded from the computation as their effect is anti-dilutive. Net income
per share information for the three and nine month periods ended June 30, 1996
are computed using the weighted average number of common and dilutive
common-equivalent shares attributable to stock options outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). The
Company is required to adopt SFAS 128 in the first quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. The Company has
determined that adoption of SFAS 128 will not have a material effect on losses
per share that have been previously reported.
NOTE 3 - Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market,
consist of:
(in thousands)
June 30, September 30,
1997 1996
--------- -------------
Raw materials $6,763 $ 7,865
Work-in-progress 2,860 3,803
------ -------
Total $9,623 $11,668
====== =======
Inventories are shown net of reserves for obsolete, slow-moving and non-salable
inventory of $4,963,000 and $3,289,000 at June 30, 1997 and September 30, 1996,
respectively.
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AG ASSOCIATES, INC.
NOTE 4 - New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131 (Disclosure about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
NOTE 5 - Renewal of Credit Line Agreement
On August 1, 1997, the Company renewed its credit line with Silicon Valley
Bank. This credit line totals $5 million, bears interest at prime plus 1%, is
subject to adjustments and expires on July 31, 1998.
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AG ASSOCIATES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and section
27A of the Securities Act of 1933, as amended. These forward-looking statements
are subject to significant risks and uncertainties, including those identified
in the section labeled "Factors That May Affect Future Results" and in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997, that may cause actual results to differ materially from those discussed in
such forward-looking statements. The Company has identified with a preceding
asterisk ("*") various sentences within this form 10-Q which contain such
forward-looking statements, and words such as "believes," "anticipates,"
"expects," "future," "intends" and similar expressions are also intended to
identify such forward-looking statements. In addition, the section labeled
"Factors That May Affect Future Results," which has no asterisks for improved
reliability, consists primarily of forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof. Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the Securities and Exchange
Commission, including its form 10-K, that attempt to advise interested parties
of the risks and factors that may affect the Company's business.
Factors That May Affect Future Results
RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company derives
substantially all of its revenue from a single line of rapid thermal processing
("RTP") products. The RTP industry is subject to rapid technological change, and
the Company and its competitors continuously seek to introduce new products that
provide improved process results and manufacturing performance at prices
acceptable to RTP customers. There can be no assurance that the Company can
develop new products more quickly than its competitors or that the Company's
products will have better price/performance characteristics than competitors'
products. During the three month period ended June 30, 1997, the Company
introduced its new Starfire(TM) and Heatpulse(R) 8800I RTP systems, which are
intended to provide previously unavailable RTP capabilities for the 0.18 and
0.25 micron linewidths. The Company is currently shipping the Heatpulse 8800I
RTP system, and it anticipates that production shipments of the Starfire RTP
system will commence in the first half of Calendar 1998. In addition, the
Company is currently developing an RTP system for processing 300mm wafers.
However, there can be no assurance that production shipments of the Starfire RTP
system will commence on schedule or that any of the Company's new products will
achieve market acceptance.
SEMICONDUCTOR INDUSTRY VOLATILITY. The semiconductor industry has historically
been cyclical and subject to unexpected periodic downturns associated with
sudden changes in supply and demand. In recent quarters, the Company has
experienced net sales that were significantly lower than net sales achieved in
respective year ago quarters, and has incurred net losses on a quarterly basis
as a result of the effects of a semiconductor industry downturn, as well as the
Company's continuation of a high level of research and development spending on
its new products and competitive pressures. Although the Company's new orders
and net sales are improving, which leads the Company to believe it will return
to profitability during the first half of fiscal 1998, and although the
semiconductor industry appears to be recovering from the current downturn, the
Company cannot predict the industry's cycle and its effect on the RTP market,
rate of orders for the Company's products or the degree to which the Company's
new products will achieve market acceptance. For these reasons, the Company's
analysts' and investors' expectations with respect to the Company's new orders,
revenues and operating results with respect to future quarters may not be met.
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AG ASSOCIATES, INC.
STOCK PRICE VOLATILITY. The Company's common stock price may be subject to
significant volatility. For any given quarter, a shortfall in the Company's
announced revenue or earnings from the levels expected by securities analysts or
investors could have an immediate and adverse effect on the trading price of the
Company's common stock. The Company may not learn of, nor be able to confirm,
revenue or earnings shortfalls until late in the quarter or following the end of
the quarter. In general, the Company participates in a very dynamic high
technology industry, which can result in significant fluctuations in the
Company's common stock price at any time.
COMPETITION. The Company's ability to compete depends upon the Company's ability
to develop new RTP product features that enhance uniformity and repeatability,
improve process capability and flexibility and reduce cost of ownership. The
Company's competitors, many of whom have substantially greater resources than
the Company, also seek to compete in these areas, and certain competitors have
introduced products that have additional functionality compared to the Company's
products or offer similar products to those of the Company at lower prices. In
addition, the Company expects to see increased competition from batch furnace
vendors as those companies increase functionality available in such machines.
INVENTORY OBSOLESCENCE. Because the Company's industry is subject to rapid
technological change, the Company has experienced, and expects to experience,
obsolescence of certain of its products as the Company and its competitors
introduce new products with improved price/performance characteristics. In
particular, the Company discontinued its Heatpulse 4100 product line in the
quarter ended March 31, 1997 and consequently wrote down $1.4 million of
inventory in that quarter. During the quarter ended June 30, 1997, the Company,
for the first time in its history, booked more orders for its Heatpulse 8800
product line than for its Heatpulse 8100 product line. To the extent sales of
new products do not offset, or generate lower margins than, sales of older
products, the Company's business, results of operation and financial condition
would be materially adversely affected.
CLAIMS OF PARENT INFRINGEMENT. On April 24, 1997 Applied Materials, Inc.
("Applied Materials") filed a complaint against the Company, AST Elektronik GmbH
and AST Elektronik U.S.A. in the United States District Court for the Northern
District of California, San Jose Division. Applied Materials alleges that the
Company infringes on two Applied Materials patents relating to RTP processes and
heater head design and seeks a permanent injunction against infringement, and
award of damages for infringement, treble damages for intentional and willful
infringement, attorneys' fees and costs of suit. On July 23, 1997 the Company
answered Applied Materials' complaint and counterclaimed for declaratory relief
that the Company does not infringe the patents and that the patents are invalid.
Management believes the claims are without merit and intends to defend
vigorously. However, there can be no assurance that this litigation will be
resolved in favor of the Company, and, in any event, litigation could result in
significant expense to the company and could divert the efforts of the Company's
technical and management personnel from other tasks, whether or not such
litigation is determined in favor of the Company. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, discontinue
the use of certain processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results are
subject to quarterly and other fluctuations due to a variety of factors,
including the volume and timing of orders received, potential cancellation or
rescheduling of orders, competitive pricing pressures, the Company's ability to
manage costs during periods of low or negative earnings growth, the availability
and cost of component parts and materials from the Company's suppliers, the
adequate forecasting of the mix of product demand due to production lead times
and capacity constraints, the timing of new product announcements and
introductions by the Company or its competitors, changes in the mix of products
sold, research and development expenses associated with new product
introductions, the timing and level of development costs, market acceptance of
new or enhanced versions of the Company's products, seasonal customer demand,
the cyclical nature of the semiconductor industry,
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AG ASSOCIATES, INC.
the impact of the company's efforts to implement its evolving long-term
strategy, the uncertainties of ongoing negotiations and economic conditions
generally or in various geographic areas. In addition, because of the relatively
high selling prices of the Company's products, a significant portion of the
Company's net sales in any given period is derived from the sale of a relatively
small number of units, and a change, even though minor, in the number of units
sold during a quarter can result in a large fluctuation in net sales for the
quarter. In particular, the Company expects net sales for the fiscal year ended
September 30, 1997 to be lower than the net sales achieved during fiscal 1996
due to the semiconductor industry's slow order rate and competitive pressures.
EMPLOYEE RISK. Competition in recruiting personnel in the semiconductor industry
is intense. The Company believes that its future success will depend in part on
its ability to recruit and retain highly skilled management, marketing and
technical personnel. The Company believes it must provide personnel with a
competitive compensation package, which necessitates the continued availability
of stock options and requires ongoing shareholder approval of such option
programs.
YEAR 2000 INFRASTRUCTURE RISK. The Company is currently in the process of
evaluating its information technology infrastructure for the Year 2000
compliance. The Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company does not currently have any information
concerning the Year 2000 compliance status of its suppliers and customers. In
the event that any of the Company's significant suppliers or customers does not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be adversely affected.
Results of Operations
The following table sets forth items in the Company's Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
- --------------------------------------------------------------------------------
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales 63 58 70 53
---- ---- ---- ----
Gross profit 37 42 30 47
Operating expenses:
Research and development 29 25 29 19
Selling, general and administrative 17 15 19 14
---- ---- ---- ----
Total operating expenses 46 40 48 33
---- ---- ---- ----
Income (loss) from operations (9) 2 (18) 14
Interest income (expense), net * 1 1 1
Other income, net * * * *
Equity interest in loss of
unconsolidated subsidiary -- (3) -- (2)
---- ---- ---- ----
Income (loss) before income taxes (9) 0 (17) 13
Provision (benefit) for income taxes (3) 0 (4) 6
---- ---- ---- ----
Net income (loss) (6)% 0% (13)% 7%
==== ==== ==== ====
- ----------------
* less than 1%
- --------------------------------------------------------------------------------
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AG ASSOCIATES, INC.
Net Sales
Net sales for the three and nine months ended June 30, 1997 were $13.4 million
and $33.7 million respectively, compared with $17.2 million and $62.3 million
for the same periods in fiscal 1996, representing a decrease of 22% and 46%
respectively. The decline in sales in the three and nine month periods ended
June 30, 1997 was due primarily to the decrease in unit sales of the Company's
Heatpulse(R) 8108 product which the Company believes was attributable to the
semiconductor industry's slow order rate and competitive pressures.
The Company utilizes distributors in certain geographic regions. All of the
Company's sales in Japan are through Canon Sales Co., Inc. ("Canon"), and those
in Europe and Korea are through Metron Technology ("Metron"). Sales to
distributors generally result in a lower gross profit, caused by lower selling
prices, which are largely offset by reduced selling and marketing expenses. For
the three and nine month periods ended June 30, 1997, Canon represented 10% and
13% of net sales, respectively, and Metron represented 12% and 10% of net sales,
respectively. For the same periods in the prior fiscal year, net sales to Canon
represented 26% and 24% of net sales, respectively, and Metron represented 17%
and 11% of net sales, respectively. International sales as a percentage of net
sales fell for the three and nine month periods ended June 30, 1997 to 32% and
32%, respectively. International sales as a percentage of net sales for the same
periods last fiscal year were 63% and 51%, respectively. The decrease in the
percentage of the Company's net sales represented by Canon, Metron, and
international customers for the three and nine month periods ended June 30, 1997
as compared to the same periods in the prior fiscal year is due to the relative
increase in the percentage of net sales represented by the Company's US
customers. *Based upon the geographic locations of semiconductor manufacturers,
the Company anticipates that international sales in general will continue to
account for a significant portion of net sales in fiscal 1997. *However,
international sales as a percentage of net sales will vary on a quarterly basis
depending on the timing of orders and the relative strength of domestic sales.
One end-user customer represented 12% of net sales in the three months
ended June 30, 1997 compared to this customer representing 18%, for the same
period last fiscal year. For the nine months ended June 30, 1997, one end-user
customer represented 17% of net sales compared to two end-user customers
representing 18% and 16% of net sales for the same period in the last fiscal
year. *The Company expects a significant portion of its future sales to remain
concentrated within a limited number of strategic customers. *The Company
expects increasing competition from a competitor who has substantially greater
resources than the Company, particularly in the sale of rapid thermal
processing ("RTP") systems designed for 0.25 micron applications and in 200mm
and 300mm applications. In addition, the Company has experienced, and continues
to experience, competition from other RTP equipment suppliers. *These
competitors' impact on future sales cannot be estimated. *As a result of
competitive pressures, there can be no assurance that the Company will be able
to retain its strategic customers or that such customers will not cancel,
reschedule or significantly reduce the volume of orders or, in the event orders
are canceled, that such orders will be replaced by other sales.
Gross Profit
Gross profit for the three and nine month periods ended June 30, 1997 was $4.9
million and $10.1 million respectively, compared with gross profit of $7.2
million and $28.9 million respectively, for the same periods in fiscal 1996.
Gross profit as a percentage of net sales for the three and nine month periods
ended June 30, 1997 decreased to 37% and 30% respectively, compared to 42% and
46% respectively for the three and nine month period ended June 30, 1996. The
decrease in gross margin for the nine month period ended June 30,
1997 compared to the same period in fiscal 1996
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AG ASSOCIATES, INC.
was primarily attributable to the impact of late delivery penalties for
shipments to a specific customer and a non-cash inventory write-down of $1.4
million in the prior quarter. The decrease in gross margin for the three month
period ended June 30, 1997 compared to the same period in fiscal 1996 was
attributable to rework, scrap and cost increases. *Continued lower margins
could have an immediate adverse effect on the Company's business and results of
operations.
Research and Development Expenses
Research and development ("R&D") expenses were $3.9 million and $9.9 million,
respectively, for the three and nine month periods ended June 30, 1997,
representing a decrease of $0.4 million (10%) and $2.2 million (18%),
respectively, when compared with the same periods in fiscal 1996. As a
percentage of net sales, R&D expenses increased to 29% for both the three and
nine months ended June 30, 1997 from 25% and 19% for the comparable periods in
the prior fiscal year, as a result of substantially lower sales that were not
met with corresponding decreases in R&D spending. R&D expenses are primarily
attributable to the continuing development of the Company's new products,
including its Starfire and Heatpulse 8800I products, as well as a new product
designed to address 300mm wafer processes. *The Company continues to believe
that significant investment in R&D is required to remain competitive.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $2.3 million and $6.4
million respectively, for the three and nine month periods ended June 30, 1997,
representing a decrease of $0.2 million (10%) and $2.0 million (24%), when
compared with the same periods in fiscal 1996. As a percentage of net sales,
SG&A spending increased to 17% and 19%, respectively, for the three and nine
month periods ending June 30, 1997, as compared to 15% and 14% respectively for
the comparable periods in the prior fiscal year, as a result of lower sales
this fiscal year that were not met with corresponding decreases in SG&A
spending. *Through the remainder of the fiscal year, SG&A spending in absolute
dollars is expected to remain in line with current levels; however, actual
spending may fluctuate depending on, among other things, the level of net sales.
*As a percentage of net sales, SG&A spending may vary from quarter to quarter.
Interest Income, Net
Interest income, net decreased to $93,000 and $280,000, respectively, for the
three and nine month periods ended June 30, 1997, from $146,000 and $526,000,
respectively, in the comparable periods in fiscal 1996, primarily due to lower
interest income earned on the Company's cash and investments as a result of
lower cash and investment balances.
Equity Interest in Loss of Unconsolidated Subsidiary
Although AG Associates (Israel) Ltd. ("AG Israel"), the Company's unconsolidated
subsidiary, incurred net losses in both the three month and nine month periods
ended June 30, 1997 and same periods in fiscal 1996, the Company was not
required to recognize its proportionate share of such net loss for the first and
second quarters of fiscal 1997 compared to $500,000 and $1.2 million,
respectively, in the same periods of the prior fiscal year as the Company's
investment in AG Israel had previously been reduced to zero during fiscal 1996.
*Additional losses from AG Israel's operations will be recorded only to the
extent of any future investments by the Company. *To the extent that the Company
fails to participate in investment round in AG Israel at a participation
percentage at least equal to its percentage ownership interest in AG Israel, the
Company's ownership interest in AG Israel will be diluted, and the Company
anticipates that it will not invest in the next
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AG ASSOCIATES, INC.
funding round. *Upon participation in any AG Israel financing, the Company would
commence recognition of its share of subsequent AG Israel losses.
Provision (Benefit) for Income Taxes
The Company has recorded a federal tax benefit as a result of its net taxable
losses during the first, second and third quarters of fiscal 1997, the effect of
which may be carried back and used to offset federal taxes paid during the
immediate three prior fiscal years or carried forward up to fifteen years to
offset future taxable income. The fiscal 1997 tax benefit rate of 25% represents
the Company's current estimate of its annual effective tax rate, which is lower
than the 41% tax expense rate in 1996 as a result of the lack of state loss
carryback provisions, foreseeable losses deductible for tax purposes and
expected limitations on the realizability of certain federal deductions. *A
significant change in income or loss from anticipated levels would have a
significant impact on this tax rate.
Backlog
The Company's system backlog (consisting of systems scheduled for delivery
within the next twelve months) as of June 30, 1997 was approximately $17.1
million as compared to approximately $10.3 million at September 30, 1996 and
March 31, 1997 respectively. The increase in backlog is attributable to the
effects of the semiconductor industry's improving order rate. The Company
includes in its backlog customer purchase orders that have been accepted and to
which shipment dates have been assigned within the next twelve months. All
orders are subject to cancellation or delay with limited or no penalty. *Because
of possible changes in delivery schedules and additions and cancellations of
orders, the Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period. *Given the increase in
backlog on a sequential basis, the Company expects revenues for the three months
ended September 30, 1997 to be somewhat higher than revenues for the three
months ended June 30, 1997; however, the Company expects its results of
operations to continue to yield a net loss, and there can be no assurance that
the Company will achieve higher net sales in the three months ended September
30, 1997. *In addition, there can be no assurance that the Company's net sales
will not decline following the three months ended September 30, 1997 or that the
Company will not incur further net losses.
Liquidity And Capital Resources
As of June 30, 1997, the Company had cash, cash equivalents and short-term
investments of $6.3 million, compared to $12.0 million as of September 30, 1996.
The decrease of $5.7 million was primarily attributable to expenditures in
support of research and development as well as the Company's operating losses.
Working capital decreased to $22.3 million at June 30, 1997 from $26.9 million
at September 30, 1996.
The Company's operating activities used cash of $3.4 million during the nine
months ended June 30, 1997. Net loss before depreciation and amortization
charges and an increase in deferred income taxes were partially offset by a
decrease in inventory. The decrease in inventory was primarily due to the
Company's efforts to reduce inventory and a non-cash inventory write-down of
$1.4 million during the second quarter of fiscal 1997. The inventory write-down
was primarily related to the excess inventory associated with the discontinuance
of the Heatpulse(R) 4100 product line. The 4100 line is limited to processing
only wafers of 150mm and smaller and also limited to processing of devices with
feature size of 0.5 micron or higher.
The Company's investing activities provided cash of $2.6 million during the nine
month period ended June 30, 1997, due to purchases and maturities of short-term
investments of $8.7 million and $14.0 million, respectively, and capital
expenditures of $2.7 million. This reflects a $3.0 million decrease in capital
expenditures from the prior year's quarter, which reflected expenditures made in
connection with the Company's move to a new facility. *The Company currently
anticipates that its capital
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AG ASSOCIATES, INC.
expenditures will be $0.5 million for the remainder of fiscal 1997, principally
to support new product development. *However, the actual level of capital
spending will be dependent on a variety of factors, including the Company's
business requirements and general economic conditions.
Cash provided by financing activities was $349,000 during the nine months ended
June 30, 1997, consisting primarily of increase in capital lease obligations and
proceeds from the issuance of common stock.
*The Company believes that current cash and short-term investment balances,
together with existing sources of liquidity, will satisfy the Company's
anticipated liquidity and working capital requirements through the next twelve
months. *However, due to the uncertain nature of the industry, competitive
market conditions and the strong commitment to developing of the Company's
next-generation products, liquidity and working capital requirements are
difficult to anticipate beyond the next twelve months. *There can be no
assurance that additional financing, when required, will be available, or if
available, can be obtained on terms satisfactory to the Company.
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AG ASSOCIATES, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On April 24, 1997 Applied Materials, Inc. ("Applied Materials") filed
a complaint against the Company, AST Elektronik GmbH and AST Elektronik U.S.A.
in the United States District Court for the Northern District of California, San
Jose Division. Applied Materials alleges that the Company infringes on two
Applied Materials' patents relating to RTP processes and heater head design and
seeks a permanent injunction against infringement, and award of damages for
infringement, treble damages for intentional and willful infringement,
attorneys' fees and costs of suit. On July 23, 1997 the Company answered Applied
Materials' complaint and counterclaimed for declaratory relief that the Company
does not infringe the patents and that the patents are invalid. Management
believes the claims are without merit and intends to defend vigorously.
Item 2. Changes in Securities
Not applicable.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit 11.01 Statement re Computation of Earnings per
Share
Exhibit 27 Financial Data Schedule
B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1997.
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AG ASSOCIATES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AG Associates, Inc.
(Registrant)
Dated: August 14, 1997 By: /s/ KIRK JOHNSON
------------------------------
Kirk Johnson
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------- --------
Exhibit 11.01 Statement re Computation of Earnings per Share
Exhibit 27 Financial Data Schedule