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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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, INCLUDING AREA CODE: (408) 935-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on November 28, 1997
as reported by the Nasdaq National Market ($5.88), was approximately
$35,619,596. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such person may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The Registrant had 6,062,910 shares of Common Stock outstanding as of November
28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held on February 26, 1998 that is to be filed with the
Securities and Exchange Commission within 30 days after the date hereof.
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INDEX
Description Page Number
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PART I.
Item 1. Description of Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of 12
Shareholders
PART II.
Item 5. Market for the Registrant's Common 13
Stock and Related Shareholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis 15
of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative 22
Disclosures About Market Risk
Item 8. Consolidated Financial Statements and 22
Supplementary Data
Item 9. Changes in and Disagreements with 23
Accountants on Accounting and
Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of 23
the Registrant
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain 23
Beneficial Owners and Management
Item 13. Certain Relationships and Related 23
Transactions
PART IV.
Item 14. Exhibits, Financial Statement 23
Schedules and Reports on Form 8-K
Signatures 24
Index to Financial Statements 25
Index to Financial Statement Schedules 25
Index to Exhibits 26
Schedule II: Valuation and Qualifying Accounts 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters discussed
in this Annual Report on Form 10-K, and specifically in the Sections entitled
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are 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 within the "Factors That May Affect Future Results" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results that AG Associates, Inc. (the "Company")
achieves may differ materially from any forward-looking projections due to such
risks and uncertainties. The Company has identified with a preceding asterisk
("*") various sentences within this Annual Report on Form 10-K which contain
such forward-looking statements, and words such as "believes," "anticipates,"
"expects," "future," "intends" and similar expressions are intended to identify
forward-looking statements. In addition, the section labeled "Factors That May
Affect Future Results," which has no asterisks for improved readability,
consists primarily of forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
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 that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
THE COMPANY AND ITS PRODUCTS
AG Associates, Inc. designs, manufactures, markets and supports advanced
single-wafer rapid thermal processing ("RTP") equipment used in manufacturing
integrated circuits. The Company's products, marketed under the Heatpulse(R)
name, utilize high-intensity light to heat precisely a single silicon wafer,
causing a chemical process needed to produce an integrated circuit. In addition,
during fiscal 1997, the Company introduced its new Starfire(TM) RTP system which
is intended to provide previously unavailable RTP capabilities for the .18 and
.25 micron linewidths. *The Company 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. In October 1997, the Company announced that it had received the 1997
Editors' Choice Best Product Award from Semiconductor International magazine for
its Heatpulse 8800 RTP system. The Company was incorporated under the laws of
California in 1981.
Historically, thermal processing has been performed in conventional batch
furnaces where 100 to 200 wafers are processed at one time. However, as
integrated circuit feature size has become smaller, semiconductor manufacturers
have encountered significant technical and practical constraints which have made
thermal processing in batch furnaces impractical, and in some cases impossible
with regard to certain steps in the integrated circuit manufacturing process.
These constraints include severe limitations on how long a wafer can be held at
high temperature, the need for an impurities-free thermal processing
environment, inefficiencies of batch processing in a predominantly single wafer
processing environment and the potential significant financial loss from
processing errors.
The Company was the first to introduce products utilizing a new thermal
processing method, known as rapid thermal processing, to address many of the
limitations of traditional batch furnaces. The Company's RTP products have been
widely adopted for use by most of the manufacturers of technologically advanced
integrated circuits such as four megabit and larger dynamic memory chips, one
megabit and larger static memory chips and 486 class and higher-performance
microprocessors. The Company believes that, as integrated circuit feature size
decreases and processing power and performance increase, more process steps in
manufacturing integrated circuits will continue to be converted to RTP from
batch furnace processing, and new process steps will be made possible by RTP.
TRADITIONAL THERMAL PROCESSING
Integrated circuits are fabricated by repeating a complex series of chemical
and physical process steps on a silicon wafer. The principal steps in
manufacturing integrated circuits are heating the wafer to cause a chemical
reaction or structural
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change that modifies the electrical and physical properties on the wafer surface
(thermal processing), the deposition of insulating or conducting materials on a
wafer (deposition), the projection of a pattern through a mask onto light
sensitive materials known as photoresist (photolithography) and the etching or
removal of the deposited materials not covered by the pattern (etching). Each of
these steps is typically repeated many times during the fabrication process.
Historically, thermal processing has been performed in conventional batch
furnaces where loads of 100 to 200 wafers are processed at one time. However, as
feature size of integrated circuits has become smaller, semiconductor
manufacturers have encountered significant technical and practical constraints
which have made thermal processing in batch furnaces impractical, and in some
cases, impossible. These constraints include:
- Limited thermal budget. Thermal budget is the total number of minutes that
a wafer can be held at high temperature during the fabrication process. As
integrated circuits have become more complex, their thermal budget has
decreased dramatically. Certain furnace heating steps require exposure of
between 30 to 90 minutes at high temperature, while the total thermal
budget for certain more complex integrated circuits is on the order of five
minutes.
- Inability to achieve pure wafer environment. Large batch furnace chambers
reduce the ability to eliminate contaminants, such as oxygen, that may be
present in the chamber during the heating process. These contaminants
produce defects in the processed wafer, reducing yield.
- Inefficiencies of batch processing in a single wafer environment. Most
integrated circuit fabrication equipment processes individual wafers in a
cassette of 25 wafers at a time. Diffusion furnaces process wafers in
batches of up to 200 (eight cassettes) at a time, resulting in bottlenecks
and inefficiencies in the integrated circuit manufacturing process.
- Cost of processing failure. As the cost of a wafer has increased to several
thousand dollars, manufacturers have focused increasingly on minimizing
wafer loss in the fabrication cycle. Batch furnace processing creates a
significant risk of loss in the case of misprocessing or equipment
malfunction, since up to 200 wafers may need to be scrapped as a result of
one error.
These limitations, which became critical in the early 1990's, have driven
semiconductor manufacturers to search for alternative thermal processing
methods.
RAPID THERMAL PROCESSING -- THE AG ASSOCIATES SOLUTION
The Company was the first to introduce a product utilizing a new thermal
processing method, known as rapid thermal processing, which addresses many of
the limitations of traditional batch furnaces. Since its introduction, RTP has
become integrated into the production of many advanced integrated circuits. The
Company's RTP products have been widely adopted for use by many of the
manufacturers of technologically advanced integrated circuits such as four
megabit and larger dynamic memory chips, one megabit and larger static memory
chips and 486 class and higher-performance microprocessors.
RTP involves radiating a single wafer with high intensity light in a precise
manner. During RTP processing, individual wafers are rapidly heated from room
temperature to steady state temperatures between 400 degrees centigrade and 1200
degrees centigrade, held there for a short time and then rapidly cooled.
Typically, the entire heating and cooling process takes between 30 to 100
seconds per wafer. The Company's RTP systems have enabled its customers to
overcome the limitations of traditional thermal processing and to process
today's complex devices by:
- Meeting thermal budget limitations. RTP permits the thermal processing of
advanced integrated circuits to be completed within their limited thermal
budgets. By heating and cooling a wafer more rapidly than a furnace, RTP
permits processing at higher temperatures for a shorter duration than a
furnace. This reduces thermal budget demands and improves performance
characteristics at approximately the same cost of ownership.
- Providing superior contamination control. The small size and ambient purge
capabilities of RTP processing chambers permit the removal of unwanted
gases from the wafer processing environment, thereby reducing the
possibility of contamination. For the past six years, RTP has been used
extensively to heat wafers with metal layers that are sensitive to residual
oxygen. Such precise contamination control is impractical in a batch
furnace.
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- Improving wafer process flow. RTP's single wafer technology is well matched
to the single wafer cassette processes used in modern wafer fabrication
facilities. Since most other integrated circuit process steps are single
wafer processes, RTP streamlines the process flow of wafers, avoiding
bottlenecks in production, and enables users to reduce work-in-process.
- Reducing cost of processing errors. RTP's single wafer processing
technology has dramatically reduced the cost of processing errors. In the
event of a malfunction, self-tests and interlock mechanisms shut down the
processing equipment, generally limiting loss to one or two wafers. The
reduced wafer loss also enables cost-efficient testing of new technologies.
RTP has been widely adopted for use by most manufacturers of integrated
circuits and is a necessary ingredient in the production of certain integrated
circuits. The Company believes that with the production of 486 microprocessors,
most static memory chips larger than one megabit and most dynamic memory chips
greater than four megabits utilize at least one RTP step. More powerful
integrated circuits such as advanced microprocessors and very large memories
often require multiple RTP steps in the manufacturing process.
PRODUCTS
AG Associates' products, marketed under the Heatpulse name, use a processing
chamber which includes two arrays of linear lamps that supply the heating energy
to the wafer, advanced temperature measurement and control subsystems and an
ultra clean gas delivery system. The wafer is positioned inside a quartz tube,
which ensures the purity of the chamber atmosphere during the heating process.
The wafer is then heated between the two banks of lamps. The heating cycle
typically includes a short purge step to drive contaminants out of the quartz
tube, a ramp-up to the processing temperature, a steady state step at the
processing temperature of between 10 to 60 seconds and a cool-down period prior
to removing the wafer from the processing chamber. In fiscal 1997 the Company
introduced the Starfire RTP system which utilizes a totally new design and will
be able to be used on .18 and .25 micron linewidths. The Company did not ship
any of this new product in fiscal 1997.
The Company's products also incorporate an automated wafer-handling robotic
subsystem and software for advanced system and process control and host
communication that, except for the operating system and certain module
components, are designed, developed and tested by the Company. The Company
believes, based upon comments by its customers, that its Heatpulse products are
reliable and compare favorably with other products in the market.
Heatpulse 8800. The Company's Heatpulse 8800 Rapid Thermal Processing
system is the most recent model of the Company's production systems and was
introduced to the market at Semicon West in July 1996. This system is based on
the Company's previous model, the Heatpulse 8108, with significant cost and
performance improvements. This model incorporates an individual lamp power
supply which is controlled by sophisticated closed-loop AG lamp power modules
that provide fine control of wafer temperature uniformity. An additional feature
is a high throughput purge system that allows a 30% savings of the heating
cycle, thereby increasing throughput and reducing cost per wafer. The Heatpulse
8800 system is targeted for R&D and production of devices utilizing .25 micron
technology.
Heatpulse 8108. The Company's Heatpulse 8108 rapid thermal processing system
was first shipped in October 1992. *This machine has been the Company's flagship
product targeted for volume production processes that utilize wafer sizes from
125 to 200 millimeters (5 to 8 inches) for feature sizes as small as .35 micron,
but the Company expects that sales of the Heatpulse 8108 will decline in favor
of the Heatpulse 8800 as customer technology requirements increase. This system
is designed to accommodate periodic upgrades to meet evolving customer needs.
Heatpulse 8108 incorporates a number of unique features that offer semiconductor
manufacturers improved thermal processing capability, reliability and
performance. These features include patented adjustable lamp heating zones to
provide process and temperature uniformity, a patented temperature measurement
method to ensure process accuracy and repeatability, as well as a proprietary
automation package for equipment-to-host communication. These and other product
features of the Heatpulse 8108 typically enable the device manufacturer to
improve throughput, uniformity and repeatability and to reduce wafer particle
contamination.
Heatpulse 4100 Series. The Heatpulse 4100S, first shipped in February 1988,
is the successor to the Heatpulse 4100 and was the first through-the-wall,
environmentally isolated automatic RTP system for the manufacture of 100 to 150
millimeter (4 to 6 inches) wafers. The Heatpulse 4100S is used in the processing
of wafers with sizes up to 150 millimeters and with feature sizes as small as .6
micron. This product currently accounts for a small percentage of net sales. In
March of 1997 the
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Company announced that it was discontinuing the Heatpluse 4100 RTP system. *In
fiscal 1998, product shipments will be phased out, even though many of the units
shipped are still in use throughout the world.
Heatpulse 610. The Heatpulse 610, the successor to the Company's first
table-top manual system, is the Company's current RTP tool targeted for research
and development and small-scale production applications. The Heatpulse 610 is
suitable for processing wafers of up to 150 millimeters (6 inches). Although
this product currently accounts for a small percentage of the Company's net
sales, many of the units shipped are still in use throughout the world.
Upgrades. The Company currently offers a variety of upgrades that improve
throughput and yield for its products. In fiscal 1997, the Company released it's
Ceramic Shield and Enhanced Z-axis Direct Thermocouple Control ("ez-DTC")
upgrades to the Heatpluse 8000 series of RTP systems. This upgrade allows
semiconductor manufacures to lower their cost of ownership and achieve better
yield with higher throughput and improved temperatue measurement and control
with their existing systems.
RTP TECHNOLOGY
During the fabrication process, wafers undergo between 100 to 200 principal
steps, nine to fifteen of which are thermal process steps. The following two
examples are only a subset of a number of processes in which RTP provides
significant technical and economic advantages to its users. The processes
described below were among the first processes in which RTP gained widespread
acceptance as an industry standard.
A significant portion of all current RTP applications involve titanium
silicide, an important step in manufacturing integrated circuits with reduced
feature size and the step that first led to widespread acceptance of RTP in the
wafer fabrication process. In integrated circuit manufacturing, a thin titanium
layer is used to assure adequate conductivity between the silicon material and
the overlaying metal conductor. To create a good contact between the titanium
and the silicon it must be heated to approximately 650(Degree)C in an inert gas
(creating a thin conductive alloy called titanium silicide). Since titanium is
very sensitive to even minute traces of oxygen, it is impossible to perform this
operation in a conventional large batch furnace. RTP allows quick heating of
individual wafers in a small quartz chamber that ensures an extremely low level
of residual oxygen. The Company believes that titanium silicide processes will
become increasingly important since titanium silicide permits extremely small
contact areas while maintaining low contact resistance.
Another critical thermal process which is limited by conventional furnaces is
the activation of foreign dopants introduced into the wafer to build the
transistor (the switching element in the circuit). The high temperatures, 950 to
1,050(Degree)C, necessary to activate the dopants and complete the creation of
the transistor, when achieved in a furnace, cause the dopants to propagate
(diffuse) into the material, adversely affecting transistor speed. The use of a
very short and precise high temperature RTP step, 1,100(Degree)C for 10 seconds,
allows the needed activation but prevents diffusion of the dopants, resulting in
a significantly faster transistor.
RESEARCH AND DEVELOPMENT
Rapid Thermal Processing. The market served by the Company is characterized
by rapid technological change. The Company believes that continued and timely
development of new products and enhancements to existing products are necessary
for it to maintain its competitive position. Accordingly, the Company devotes a
significant portion of its resources to sustaining and upgrading the Company's
existing products to improve serviceability or add new capabilities and
features, to decreasing the cost of owning and operating such products, to
developing new products with improved capabilities and to maintaining close
relationships with its customers in order to identify their product needs. From
time to time, the Company enters into joint development efforts with other
organizations.
Product Development. In August 1995, the Company undertook a major
development program to design and manufacture a .18 micron capable RTP system.
To properly execute this plan, the Company increased its R&D and engineering
personnel dedicated and focused on this program. In fiscal 1997, the Company
announced the introduction of it's next generation of products, the Starfire
product series, for .18 and .25 micron and 200mm (8" wafer size) and 300mm (12"
wafer size) applications. *The Company expects to spend approximately $12
million to develop the 200mm system and $6 million to develop the 300mm system,
which uses much of the same technology as the 200mm system. *The Company could
begin shipping Beta units in early calendar 1998.
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Integrated Processing. In 1992, the Company became involved in the
development of integrated chemical vapor deposition ("CVD") processing systems
through its acquisition of Rapro Technology, Inc. ("Rapro"), a research and
development stage company. Integrated processing involves the use of more than
one process chamber that permits wafers to undergo two or more sequential
process steps without removing the wafer from a clean vacuum environment. In May
1995, the Company's CVD cluster tool development activities were transferred to
AG Associates (Israel) Ltd. ("AG Israel"). The Company currently owns a 28%
voting interest of AG Israel.
During the fiscal years ended September 30, 1997, 1996 and 1995, the Company
expended $14.3 million, $16.7 million and $8.9 million, respectively, on
research and development, representing approximately 29%, 23% and 14% of net
sales for such periods. See Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
There can be no assurance that the Company's research and development efforts
will be successful or that any new products will achieve significant market
acceptance.
SALES, SERVICE AND MARKETING
The Company believes that close working relationships with leading integrated
circuit manufacturers help to ensure that the Company's products are technically
advanced and designed in conjunction with the development of the semiconductor
manufacturers' advanced process requirements. These relationships typically
involve exchange of material and information to develop processes and equipment
needed to manufacture state of the art integrated circuits or to lower the
semiconductor manufacturer's cost of ownership. The Company's close working
relationships with customers involve working with the customer in a continuous
improvement process on selected technical aspects of the Company's products.
Such improvements, after testing with selected customers, often become standard
on all the Company's products sold worldwide. Financial support for these
development programs is generally not provided by the customer.
The Company's sales cycle is between three and nine months. The shorter
cycles relate to existing customers who desire to gradually increase the
capacity of their existing fabrication lines. The longer cycles are related to
customers who have long-term plans for constructing new production facilities,
which are typically planned at least a year in advance. Historically, the
Company has worked with potential customers for long periods of time prior to
their acceptance of the Company's products, in some cases as long as five years.
Since RTP has gained increased acceptance, this period of time has decreased.
Nonetheless, customers generally purchase evaluation units prior to making
substantive commitments to purchase the Company's products.
Acceptance periods vary widely from customer to customer.
Warranty periods vary from customer to customer, but generally average 15
months. A limited number of training classes is included in the purchase price
of the Company's products. Subsequent training is provided for a nominal fee.
The Company markets its products both directly, through in-house sales
personnel in conjunction with independent sales representatives, or indirectly
through independent distributors. To promote its products, the Company uses
demonstration laboratories in its San Jose, California facility. The Company and
its sales representatives and distributors have sales and support centers
located in the United States, Japan, Korea, Taiwan, Singapore, Europe and
Israel. When a higher level of technical expertise is needed, the sales effort
is supported by product marketing managers and process engineers who work
closely with customers and potential customers to find solutions to their
current and future processing challenges. The Company has established
relationships with key international distributors, including among others, Canon
Sales Co., Inc. ("Canon") and MSE Metron Semiconductors Europa, B.V. and MSA
Metron Semiconductors Asia Ltd. (collectively, "Metron"). Canon has represented
the Company in Japan since 1985, and Metron has represented the Company in
Europe and Korea since 1989 and 1994, respectively. Canon is a principal
shareholder of the Company and provides a representative on the Company's Board
of Directors.
The Company's distributors and independent representatives provide essential
pre- and post-sale support for the Company's products in their territories and
account for a substantial percentage of the Company's sales worldwide. The
Company believes that strong sales in the major semiconductor manufacturing
markets internationally are important to its future success. All of the
Company's sales in Japan are through Canon and those in Europe and Korea are
through Metron. Metron and Canon both sell the Company's products under their
own warranties and provide service and support to their customers. Canon also
customizes systems purchased from the Company for redelivery according to
Canon's customers' specifications. Sales to Canon amounted to 12%, 25% and 15%
of the Company's net sales for the years ended September
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30, 1997, 1996 and 1995, respectively. Sales to Metron amounted to 14% of the
Company's net sales for the year ended September 30, 1996. Sales to Metron for
the years ended September 30, 1997 and 1995 accounted for less than 10% of the
Company's net sales for each of those fiscal years.
International sales represented 31%, 54% and 32% of the Company's net sales
for the years ended September 30, 1997, 1996 and 1995, respectively. Because of
the magnitude of its international sales, the Company is subject to the normal
risks of conducting business internationally. The Company is also subject to
general geopolitical risks in connection with its international operations.
Because sales of the Company's products are denominated in United States
dollars, fluctuations in the value of the dollar could increase or decrease the
prices in local currencies of the Company's products in foreign markets and make
the Company's products relatively more or less expensive than competitors'
products that are denominated in local currencies. See Note 12 of Notes to
Consolidated Financial Statements.
Other than its distributor agreements, the Company currently has no long-term
contracts with any of its customers and sales are generally made pursuant to
purchase orders. None of the Company's distributors or independent sales
representatives has the power to enter into contracts on the Company's behalf or
otherwise bind the Company.
CUSTOMERS
The Company's end-user customers include most of the leading semiconductor
manufacturers worldwide. For the year ended September 30, 1997, Intel
Corporation ("Intel") accounted for 25% of net sales and Micron Technology, Inc.
("Micron") accounted for 10% of net sales. For the year ended September 30,
1996, Intel accounted for 20% of net sales and NEC accounted for 17% of net
sales. Sales to International Business Machines Corporation ("IBM") accounted
for 12% of net sales for the year ended September 30, 1995. No other end-user
customer accounted for more than 10% of the total sales for the fiscal years
ended September 30, 1997, 1996 and 1995.
The Company's business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. No assurance
can be given that the Company's revenue and operating results will not continue
to be adversely affected if downturns in the semiconductor industry continue to
occur.
BACKLOG
The Company's systems backlog (consisting of product scheduled for delivery
within the next six months) as of September 30, 1997, 1996 and 1995 was
approximately $14.6 million, $8.4 million and $29.6 million, respectively. The
Company includes in its backlog customer purchase orders that have been accepted
and to which shipment dates have been assigned within the next six months. All
orders are subject to cancellation or delay with limited or no penalty. Because
of possible changes in delivery schedules and cancellations of orders, the
Company's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period.
COMPETITION
The semiconductor equipment industry, including the Company's segment of the
market, is intensely competitive and is characterized by rapid technological
change, product obsolescence and heightened competition in many markets. The
Company competes with several major domestic and international semiconductor
equipment companies, most of which have substantially greater financial,
technical, marketing, distribution and other resources than the Company, as well
as broader product lines. Additionally, the Company competes with several small
semiconductor equipment companies.
The Company's principal RTP competitors compete based upon both price and
performance, having incorporated features similar to those offered by the
Company into their RTP products, as well as features such as cluster tool
performance, which the Company did not offer in fiscal 1997. The Company
competes by providing complete process solutions to customers, including
training for customer personnel, helping identify and resolve process problems
on a continuous basis and emphasizing customer service and product quality and
reliability. Some competitors attempt to gain market share primarily through
pricing products with features similar to the Company's products at prices below
those typically offered by the Company. *Such competitive pricing pressure has
in certain cases necessitated and may continue to necessitate significant price
reductions by the Company and has and may continue to result in lost orders
which could adversely affect the Company's business. For example, the Company
has experienced intensifying price competition from AST Elektronik
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("AST"), a German-based competitor. In addition, many companies, particularly
certain Japanese and United States companies, have the financial and technical
resources to participate in these markets and have broader product lines than
the Company. For example, Applied Materials, Inc. ("Applied Materials"), a large
manufacturer of semiconductor manufacturing equipment located in the United
States, entered the RTP segment of the thermal processing market in which the
Company competes, and in fiscal 1997 has captured the dominate share of the RTP
market. Other manufacturers have also announced their intention to enter the RTP
market. *Some integrated circuit manufacturers may attempt to consolidate all
their capital equipment purchases through a single or a small number of vendors.
There can be no assurance that companies with broader product lines and greater
resources will not become more formidable competitors in the future.
The Company also competes with manufacturers of batch diffusion furnaces for
application of their differing technologies in various steps of the integrated
circuit fabrication process. The Company believes that its ability to compete
depends upon its continued success in developing new product features. Moreover,
the ability to achieve process uniformity and repeatability, improve breadth of
process capability and flexibility, reduce the overall cost of ownership and
protect the Company's proprietary technology play an important role in the
Company's ability to compete.
MANUFACTURING
Production is based upon firm customer commitments and anticipated orders and
is generally planned six months in advance. The Company's manufacturing
operations consist primarily of assembly, integration and final testing of parts
and subassemblies supplied by third-party suppliers, all of which are conducted
at the Company's manufacturing facility. Once the manufacturing department has
completed final testing of all electronic and electromechanical subassemblies
which make up one of the Company's products, the completed system is tested by
the Company's test engineers. To test each product, the Company's engineers
process wafers in the system to ensure that each system meets the customer's
process specifications. To increase the efficiency of the Company's
manufacturing process, the Company selectively utilizes outside contractors to
assemble subassemblies and components. The use of subcontractors enables the
Company to focus on its design strengths, minimize fixed costs and capital
expenditures and access diverse manufacturing technologies without bearing the
full risk of obsolescence. This has allowed the Company to increase production
rates while avoiding investment in additional facilities and minimizing
inventory growth.
Certain components and subassemblies included in the Company's products are
obtained from a single source or a limited group of suppliers and subcontractors
in order to assure overall quality and timeliness of delivery. The Company's
reliance on sole or a limited group of suppliers involves several risks,
including a potential inability to obtain adequate supplies of certain
components and reduced control over pricing and timely delivery of components.
*Although the timeliness, quality and pricing of deliveries to date from the
Company's suppliers have been acceptable and the Company believes that
additional sources of supply will be available should one or more of its
suppliers be unable to meet the Company's needs, there can be no assurance that
supplies will be available on an acceptable basis. Inability to obtain adequate
supplies of components or to manufacture such components internally could delay
the Company's ability to ship its products, which could result in the loss of
customers who may seek alternative sources of supply.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. The Company believes
that the duration of its patents generally exceeds the life cycles of the
technologies disclosed and claimed therein. Though the Company has additional
patent applications pending in various foreign countries, there can be no
assurance that any patents will result from these applications. In addition, the
Company has registered the name "Heatpulse" with the U.S. Patent and Trademark
Office, restricts access to its technology and enters into confidentiality
agreements with its employees and consultants. Finally, the Company relies on
copyright protection for the software imbedded in its Heatpulse systems.
However, the Company has not registered any portion of the software with any
domestic or foreign copyright office.
There can be no assurance that the Company's patents or other means of
intellectual property protection, including the Company's confidentiality
agreements and applicable trade secret laws, will provide adequate protection
for the Company's intellectual property rights. Further, it is possible that
others will develop, copyright or patent similar technology or reverse engineer
the Company's products. In addition, the laws of certain territories in which
the Company's products are or may be developed, manufactured or sold, including
Asia, Europe or Latin America, may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. While the Company intends to continue to
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seek patent, copyright, trademark and trade secret protection for its products
and manufacturing technology where appropriate, the Company believes that its
success depends more on the technical expertise and innovative abilities of its
personnel, rather than the protections that these laws can provide.
The Company is currently involved in intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. in the United States District Court
for Northern California, San Jose Division. Applied Materials alleges that the
Company's products infringe on two of Applied Materials patents relating to RTP
process 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's products do not infringe the two
Applied Materials patents and that the patents are invalid. On October 3, 1997,
the Company filed a counterclaim in United States District Court for Northern
California, San Jose Division against Applied Materials for infringement of one
of the Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and counterclaims
is set for March 1, 1999. Management cannot predict the outcome of litigation
and believes Applied Materials' claims are without merit and intends to defend
the Company 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 efforts of the
Company's technical 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.
There can be no assurance that other third parties will not assert claims
against the Company with respect to existing or future products or technologies
or that, in case of a dispute, licenses will be available on commercially
reasonable terms, or at all, with respect to disputed third-party technology.
See Item 3, "Legal Proceedings."
The Company has licensed to Canon certain of the Company's proprietary
technology to design and manufacture modifications to its products for resale in
Japan. In addition, the Company has transferred joint ownership of the CVD
cluster tool technology to AG Israel, together with a license of the Company's
RTP temperature measurement technology. See Part III, Item 13 "Certain
Relationships and Related Transactions."
EMPLOYEES
As of September 30, 1997, the Company had 257 full-time employees, including
89 in engineering, research and development, 53 in manufacturing, 63 in service,
26 in marketing and sales and 26 in administration. None of the Company's
employees is subject to a collective bargaining agreement, and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.
Many of the Company's employees are highly skilled, and the Company believes
its future success will depend in part upon its ability to identify, attract and
retain such employees, particularly highly skilled design engineers involved in
new product development, for whom competition is intense. In addition, the
Company is highly dependent on the skill and experience of its Chairman of the
Board, Arnon Gat.
ITEM 2. PROPERTIES
In October 1995, the Company moved its headquarters from Sunnyvale,
California to a facility in San Jose, California. The leased San Jose facility
houses the Company's management, administrative, manufacturing, engineering,
marketing, sales and customer support personnel in two buildings in
approximately 115,000 square feet. An option to expand the San Jose facilities
by approximately 38,000 square feet is available to the Company within three
years. Currently the Company is negotiating to exercise the option. In August
1997, the Company entered into a one-year lease for 5,000 square feet of
manufacturing space adjacent to it's San Jose facility. The Company also leases
approximately 1,500 square feet of office space for its customer support
personnel in Austin, Texas, through April 1999.
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In addition, the Company leases approximately 2,800 square feet of office
space for its sales and customer support personnel in Hsin-Chu, Taiwan, Republic
of China, under a lease which expires in July, 1998 with a 3 year extension
option.
The Company believes that its existing facilities are suitable and adequate
to meet the Company's current requirements. The Company will continue to
consider leasing additional facilities as necessary to support its operations in
the future.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. in the United States District Court
for Northern California, San Jose Division. Applied Materials alleges that the
Company's products infringe on two of Applied Materials patents relating to RTP
process 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's products do not infringe the two
Applied Materials patents and that the patents are invalid. On October 3, 1997,
the Company filed a counterclaim in United States District Court for Northern
California, San Jose Division against Applied Materials for infringement of one
of the Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and counterclaims
is set for March 1, 1999. Management cannot predict the outcome of litigation
and believes Applied Materials' claims are without merit and intends to defend
the Company 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 efforts of the
Company's technical 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 certian processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor industry. General Signal
Corporation has made a claim against at least two manufacturers of cluster tools
that have resulted in litigation to the effect that certain of their cluster
tool technologies infringe on General Signal patents. In 1991, at the time that
General Signal first raised patent claims in the cluster tool area, the Company
joined with six major semiconductor process tool equipment manufacturers in
forming an "Ad Hoc Committee for Defense against General Signal Cluster Tool
Patents" (the "Ad Hoc Committee"). Based in part on an opinion of patent
counsel, the members of the Ad Hoc Committee notified General Signal that the
member companies were of the opinion that the General Signal patents were
invalid based on (a) prior art, (b) inequitable conduct before the Patent &
Trademark Office and (c) estoppel as a result of General Signal's activities in
establishing standards for cluster tools and interfaces within the semiconductor
industry. The Company believes that the position taken by the Ad Hoc Committee
remains valid. Previously, the Company approached General Signal to explore
interest in licensing the same patents at issue in the General Signal
litigation. The general conditions of the license discussed by General Signal
were unacceptable to the Company. Based upon a review of the subject patents,
the Company believes that the subject patents are invalid or, if somehow found
to be valid, that the Company's cluster tool technology does not infringe.
Additionally, the Company has received an opinion of its patent counsel, to the
same effect. However, if such a claim were successfully enforced against the
Company regarding the cluster tool technology transferred to AG Israel, the
value of the Company's investment in AG Israel could diminish. The Company could
also be adversely affected as a result of the Company's liability under an
indemnity provision with AG Israel for any resulting royalties and other damages
payable.
From time to time, the Company may receive or initiate claims or inquiries
against third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Such claims or
inquiries may result in litigation and could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from other tasks, whether or not such claims or inquiries are
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.
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On April 30, 1997, an action was filed against the Company alleging wrongful
termination and discrimination in violation of California Fair Employment and
Housing Act and the Americans with Disabilities Act. The matter is in the early
discovery stage of litigation. The Company believes that the claims are invalid
and will defend itself vigorously.
On October 6, 1997, the Company was served with a demand for arbitration by
Cook & Weil, Inc. ("Cook & Weil"), a small manufacturer's representative firm
located in New Jersey, which the Company engaged as manufacturer's
representative but terminated in 1996. Cook & Weil asserts that the Company owes
it approximately $250,000 in unpaid commissions. The Company believes that it
has fully paid all commissions due to Cook & Weil. The Company believes that
such claim is invalid and will defend itself vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK TRADING RANGE
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol AGAI since the company's initial public offering on May 16,
1995. The following table sets forth for the Company's Common Stock, the range
of high and low closing prices on the Nasdaq National Market for the period from
the Company's initial public offering until the end of fiscal 1997.
HIGH LOW
---- ---
Fiscal 1995
3rd Quarter $17.75 $13.00
4th Quarter 36.81 17.00
Fiscal 1996
1st Quarter $31.00 $13.25
2nd Quarter 15.00 6.38
3rd Quarter 9.00 6.50
4th Quarter 7.25 4.75
Fiscal 1997
1st Quarter $7.13 $4.75
2nd Quarter 7.00 4.88
3rd Quarter 5.98 4.38
4th Quarter 7.94 5.75
The closing price of the Company's Common Stock on November 28, 1997, as
reported by the Nasdaq National Market, was $5.88.
COMMON SHAREHOLDERS OF RECORD AND DIVIDENDS
At November 28, 1997, there were approximately 170 shareholders of
record of the Company's Common Stock, as shown in the records of the Company's
transfer agent, excluding shareholders whose stock is held in nominee or street
name by brokers. The Company has never paid dividends on its Common Stock and
its present policy is to retain earnings to finance it's future operations.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ---------
Consolidated Statement of Income Data:
Net sales $49,604 $71,089 $62,725 $40,251 $27,792
Gross profit $16,907 $31,725 $29,028 $17,578 $ 7,074
Research and development $14,329 $16,653 $ 8,893 $ 6,078 $ 7,665
Selling, general and administrative $ 9,247 $10,204 $10,562 $ 7,035 $ 5,894
Restructuring charges -- -- -- -- $ 2,645
Income (loss) from operations $(6,669) $ 4,867 $ 9,573 $ 4,465 $(9,130)
Income (loss) before income taxes $(6,236) $ 4,487 $ 9,221 $ 3,361 $(9,467)
Net income (loss) $(4,687) $ 2,743 $ 9,753 $ 3,224 $(9,496)
Net income (loss) per share $ (0.78) $ 0.45 $ 2.05 $ 0.87 $ (2.52)
Shares used in per share calculation 5,981 6,137 4,770 3,772 3,755
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ---------
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 4,157 $11,985 $18,858 $ 1,598 $899
Working capital (deficiency) $22,867 $26,851 $28,649 $(1,257) $(4,817)
Total assets $42,947 $45,852 $48,825 $14,676 $14,142
Long-term obligations $ 275 $ 11 $ 193 $ 691 $ 422
Convertible subordinated debentures -- -- -- $ 2,107 $ 2,045
Minority interest in subsidiary -- -- -- $ 1,979 $ 1,979
Shareholders' equity (deficiency) $31,522 $35,694 $32,300 $(3,740) $(7,445)
QUARTER ENDED
-------------------------------------------
(in thousands, except per share data) SEP 30 JUNE 30 MARCH 31 DEC. 31
---------- ---------- --------- ---------
Consolidated Statement of Income Data: (unaudited)
1997
Net sales $15,951 $13,380 $11,140 $9,133
Gross profit 6,762 4,935 1,811 3,399
Income (loss) from operations (514) (1,255) (3,033) (1,867)
Income (loss) before income taxes (439) (1,147) (2,923) (1,727)
Net income (loss) (351) (849) (2,192) (1,295)
Net income (loss) per share $ (0.06) $ (0.14) $ (0.37) $(0.22)
1996
Net sales $8,833 $17,196 $23,200 $21,860
Gross profit 2,805 7,235 11,229 10,455
Income (loss) from operations (3,562) 374 3,870 4,185
Income (loss) before income taxes (3,394) 66 3,775 4,040
Net income (loss) (1,907) 39 2,227 2,384
Net income (loss) per share $(0.32) $ 0.01 $ 0.37 $ 0.38
Gross profit 9,349 7,953 6,301 5,425
Income from operations 3,490 2,445 2,036 1,602
Income before income taxes 3,398 2,444 1,858 1,521
Net income 2,876 3,669 1,761 1,447
Net income per share $ 0.46 $ 0.75 $ 0.47 $ 0.38
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's common stock price may be subject to significant volatility.
For any given period, a shortfall in the Company's announced revenue or earnings
from the levels expected by securities analysts 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 period or following the end of the period. 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.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K, and specifically in the Sections
entitled "Description of Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", are 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 within the "Factors That May Affect Future Results"
section of "Managements Discussions and Analysis of Financial Condition and
Results of Operations." The actual results that the Company achieves may differ
materially from any forward-looking projections due to such risks and
uncertainties. The Company has identified with a preceding asterisk ("*")
various sentences within this Annual Report on Form 10-K which contain such
forward-looking statements, and words such as "believes," "anticipates,"
"expects," "future," "intends" and similar expressions are intended to identify
forward-looking statements. In addition, the section labeled "Factors That May
Affect Future Results," which has no asterisks for improved readability,
consists primarily of forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
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 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
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 fiscal 1997, the Company introduced its new Starfire RTP
system, which is intended to provide previously unavailable RTP capabilities for
the .18 and .25 micron linewidths. The Company 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 equipment 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. In particular,
the semiconductor industry may experience a cyclical downturn over the next few
quarters as a result of economic
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instability in Asia. For these reasons, the Company's analysts' and investors'
expectations with respect to the Company's new orders, net sales and operating
results with respect to future quarters may not be met.
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 increased functionality available in
such machines. Applied Materials has made significant gains in the Company's
market and has offered certain functionality the Company was not able to provide
with it's products, allowing Applied Materials to capture significant customers.
Applied Materials and AST are significantly larger companies with greater
resources than the Company. There are also larger Japanese and domestic
companies that possess the technical resources to enter the RTP market.
CLAIMS OF PATENT INFRINGEMENT. The Company is currently involved in an
intellectual property litigation. On April 24, 1997, 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's products infringe 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's products do not infringe the patents and that the patents are invalid.
On October 3, 1997, the Company filed a counterclaim in the United States
District Court for Northern California, San Jose Division against Applied
Materials for infringement of one of the Company's RTP process patents. On
October 27, 1997, Applied Materials answered the counterclaim by alleging that
it does not infringe the Company's patent and that the patent is invalid. The
trial on all claims and counterclaims is set for March 1, 1999. Management
believes Applied Materials' claims are without merit and intends to defend the
Company 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 particular, the
Company expects to incur significant legal expenses in fiscal 1999 in the event
Applied Materials' claims are not resolved by then. 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.
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 and this trend continued
in the fourth quarter of fiscal 1997. 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. In addition, the Company believes that the Heatpulse 8100
product line will become obsolete as acceptance of the Heatpulse 8800 and
Starfire products increases.
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
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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, 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.
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 compliance 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 certain items in the Company's Consolidated
Statements of Operations as a percentage of net sales for the periods indicated.
YEARS ENDED SEPTEMBER 30,
1997(tau) 1996(tau) 1995
--------- --------- ----
Net sales 100% 100% 100%
Cost of sales 66 55 54
---- ---- ----
Gross profit 34 45 46
---- ---- ----
Operating expenses:
Research and development 29 23 14
Selling, general and administrative 19 14 17
---- ---- ----
Total operating expenses 48 37 31
---- ---- ----
Income (loss) from operations (13) 7 15
Other income (expense), net 1 1 *
Equity in loss of unconsolidated
subsidiary -- (2) *
---- ---- ----
Income (loss) before income taxes (12) 6 15
Provision (benefit) for income taxes (3) 2 (1)
---- ---- ----
Net income (loss) (9)% 4% 16%
==== ==== ====
* Less than 1 percent
(tau) Percentages may not total 100% due to rounding
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Net sales decreased to $49.6 million in fiscal 1997 from $71.1 million in
fiscal 1996, a decrease of 30%. Substantially all net sales were derived from
RTP operations for both periods. The sales decline in the current fiscal year
was primarily due to the decrease in unit sales of the Company's Heatpulse
products, as reflected in a decrease in sales to Intel, the Company's largest
customer in fiscal 1997 and 1996, which accounted for $12.0 million of the
Company's net sales in fiscal
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1997 compared to $14.0 million in fiscal 1996. The sales decline reflects the
global semiconductor industry's slowing order rate at the end of fiscal 1996 and
the beginning of fiscal 1997 and competition from two competitors with greater
financial resources than the Company.
Sales to distributors were $9.8 million in fiscal 1997 compared to $27.0
million in the prior fiscal year. The Company utilizes distributors in certain
geographic regions. All of the Company's sales in Japan are through Canon, and
those in Europe and Korea are through 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. In fiscal 1997, Canon
represented 12% of net sales, compared to 24% of net sales in fiscal 1996, and
Metron represented 8% of net sales, compared to 14% of net sales in fiscal 1996.
The decrease in sales to distributors was primarily due the decline of the
global semiconductor industry's order rate at the end of fiscal 1996 and the
beginning of fiscal 1997. Domestic sales for the Company increased to $34.0
million in the current fiscal year from $32.5 million in fiscal 1996. The
increase in domestic sales is primarily due increased revenues from Micron.
International sales for the Company decreased to $15.6 million in the current
fiscal year from $38.6 million in fiscal 1996, a decrease of 60 percent. The
decrease of international sales results from the decline of the global
semiconductor industry's order rate at the end of fiscal 1996 and the beginning
of fiscal 1997. *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 1998.
*However, international sales as a percentage of net sales will vary on a
quarterly basis depending on the impact of the economic instability in Asia, the
timing of orders and the relative strength of domestic sales. International
sales are typically denominated in United States dollars. *Because sales of the
Company's products are denominated in United States dollars, fluctuations in the
value of the dollar could increase or decrease the prices in local currencies of
the Company's products in foreign markets and make the Company's products
relatively more or less expensive than competitors' products that are
denominated in local currencies. Inflation has not had a material impact on the
Company's net sales or results of operations.
The Company's end-user customers include most of the leading semiconductor
manufacturers worldwide. For the year ended September 30, 1997, Intel accounted
for 24% of total net sales and Micron accounted for 10% of total net sales. For
the year ended September 30, 1996, Intel Corporation accounted for 20% of total
net sales and NEC accounted for 17% of total net sales. Sales to IBM accounted
for 12% of total net sales for the year ended September 30, 1995. No other
end-user customer accounted for more than 10% of the total net sales for fiscal
years ended September 30, 1997, 1996 and 1995. *The Company expects increasing
competition from a competitor who has substantially greater resources than the
Company, particularly in the sale of RTP systems designed for .18 and .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. *The loss
of any significant end-user customer, even if replaced by a different
significant end-user customer, could have a material adverse effect on the
Company's business, results of operations and financial condition.
Gross profit decreased to $16.9 million in fiscal 1997 from $31.7 million in
the prior fiscal year, a decrease of 47%. However, gross profit for the fourth
quarter of fiscal 1997 increased to $6.8 million as compared to $2.8 million in
the fourth quarter of fiscal 1996. This increase reflects the global
semiconductor industry's gradual recovery over the course of fiscal 1997. Gross
profit decreased from fiscal 1996 to fiscal 1997 primarily as a result of
decreased sales volume. Gross profit as a percentage of net sales declined to
34% in the current fiscal year from 45% in fiscal 1996. The reduced gross profit
percentage resulted primarily from a decline in sales volume and a one time
charge in the second quarter for obsolete inventory related to the Heatpulse
4108 product. *As the Company pursues volume production of Heatpulse 8800
systems, the Company expects gross margins on sales of such systems to improve.
However, attaining such improved gross margins requires the Company to decrease
manufacturing costs as production of Heatpulse 8800 systems ramps, to increase
the number of systems it produces and sells, and to keep average selling prices
of Heatpulse 8800 systems constant. There can be no assurance that the Company
will be successful in these efforts.
Research and Development ("R&D") expenses decreased to $14.3 million in the
current fiscal year from $16.7 million in the prior fiscal year, a decrease of
14%. As a percentage of net sales, R&D expenses increased to 29% in fiscal 1996
from 23% in fiscal 1996, reflecting the Company's commitment to bring new
products to market and the decrease in net sales from fiscal 1996 to fiscal
1997. During fiscal year 1997, the Company announced the Starfire .18 micron
platform for 200mm and 300mm RTP products. *Because the Starfire platform is not
fully developed for production status, the Company plans to continue to expend a
significant portion of it's R&D dollars on this platform in fiscal 1998, and
expects Beta testing
18
19
in early calendar 1998 with production in 1999. *The Company also expects
development of 300mm RTP product platforms to account for a significant portion
of R&D expenses. *The Company expects that total R&D spending related to its
Starfire product and technology (including amounts spent to date) to reach $10
million and that total R&D spending related to its 300mm platforms and
technology (including amounts spent to date) to reach $6 million. *The failure
of the Company to timely develop new platforms, the failure of new platforms to
meet customer expectations regarding performance and cost or the failure of new
platforms to achieve market acceptance following product introduction would each
have a material adverse effect on the Company's business, results of operations
and financial condition. *The Company continues to believe that significant
investment in R&D is required to remain competitive, thought the Company expects
that R&D as a percentage of net sales will decrease if it's sales expectations
are met. All R&D costs are expensed as incurred.
Selling, general and administrative ("SG&A") expenses decreased to $9.2
million in fiscal 1997 from $10.2 million in fiscal 1996, a decrease of 9%. As a
percentage of net sales, SG&A expenses increased to 19% in fiscal 1997 from 14%
in fiscal 1996, reflecting lower sales in the more recent period. The decrease
in absolute dollars for the current fiscal year was due primarily to the
Company's management of expenses in response to the decline in sales, most
notably the decrease in payroll expenditures realized from the work force
reduction in July 1996, and reduced direct commissions resulting from lower net
sales in fiscal 1997 compared to fiscal 1996. *In fiscal 1998, SG&A spending in
absolute dollars is expected to increase; 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.
Other income (expense), net was $432,000 in fiscal 1997 and $772,000 in
fiscal 1996, and decreased in fiscal 1997 primarily as a result of lower
interest income earned on the Company's reduced cash and investment balances.
Other income also included commissions on quartz sales of $134,000 earned in
fiscal 1997 and $190,000 in fiscal 1996.
Equity in loss of unconsolidated subsidiary was $1.2 million for fiscal 1996.
This represents the Company's share of the losses of AG Associates (Israel) Ltd.
("AG Israel") during fiscal 1996. In May 1995, a 51% interest in AG Israel was
acquired by Clal Electronics Industries Ltd. ("Clal Electronics"), and from June
1, 1995 to November 1997, the Company retained a 49% interest in AG Israel. The
Company has accounted for its investment on the equity method since June 1,
1995. Prior to that, AG Israel was accounted for as a wholly-owned subsidiary of
the Company and its results of operations were included in the consolidated
financial statements of the Company. In November 1997, AG Israel completed a
private placement of $13.0 million, in which the Company did not participate.
The effect of this financing was to dilute the Company's voting interest to 28%.
*Additional losses from AG Israel's operations will be recorded only to the
extent of any future investments by the Company.
For fiscal 1997, the Company recorded an income tax benefit of $1.5 million
compared to an income tax expense of $1.7 million in fiscal 1996. In fiscal
1997, the effective income tax rate used to compute the Company's income tax
benefit was lower than the federal statutory rate due both to an increase in the
Company's valuation allowance as a result of management's estimate that deferred
tax assets were more likely than not to be recognized and other permanent items
not being deductible for tax purposes.
The Company's systems backlog (consisting of product scheduled for delivery
within the next six months) as of September 30, 1997 was approximately $14.6
million, as compared to $8.4 million at September 30, 1996. The increase in
backlog was a result of the global semiconductor industry's gradual recovery
over fiscal 1997. The Company includes in its backlog customer purchase orders
that have been accepted and to which shipment dates have been assigned within
the next six months. All orders are subject to cancellation or delay with
limited or no penalty. *Because of possible changes in the delivery schedules
and additions or cancellations of orders, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Net sales increased to $71.1 million in fiscal 1996 from $62.7 million in
fiscal 1995, an increase of 13 percent. Substantially all net sales were derived
from RTP operations for both periods. The sales growth in the current fiscal
year was primarily due to the increase in unit sales of the Company's Heatpulse
8108 product and included sales to one customer of $14.0 million compared to
$18.1 million in fiscal 1995. However, sales for the fourth quarter of fiscal
1996 declined to $8.8 million as compared to $17.2 million in the third quarter
of fiscal 1996 and $19.7 million in the fourth quarter of fiscal 1995. This
decline reflected the semiconductor industry's slowing order rate and
competitive pressures. The average selling price
19
20
of the Heatpulse 8108 decreased in fiscal 1996 due primarily to an increasing
proportion of distributor sales, which generally have lower selling prices than
direct sales.
Sales to distributors were $27.0 million in fiscal 1996 compared to $12.3
million in the prior fiscal year. The Company utilizes distributors in certain
geographic regions. All of the Company's sales in Japan are through Canon, and
those in Europe and Korea are through 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. In fiscal 1996, Canon
represented 24% of net sales, compared to 14% of net sales in fiscal 1995, and
Metron represented 14% of net sales, compared to 5% of net sales in fiscal 1995.
The increase in sales to distributors was primarily due to increased
international sales both in terms of actual sales and as a percent of total
sales, as most international sales of the Company are made through distributors.
Domestic sales for the Company decreased to $32.5 million in the current fiscal
year from $42.9 million in fiscal 1995, a decrease of 24 percent. The decrease
in domestic sales is primarily due to the semiconductor industry's slowing order
rate and the loss of sales from a major customer to a competitor. International
sales for the Company increased to $38.6 million in the current fiscal year from
$19.8 million in fiscal 1995, an increase of 95 percent. As a percentage of net
sales, international sales increased to 54% for the current fiscal year from 32%
in the prior fiscal year. This increased percentage of international sales
results primarily from substantially increased sales in terms of absolute
dollars, combined with declining domestic sales in terms of absolute dollars.
The increase in absolute dollars for international sales in fiscal 1996 was
primarily due to increased sales to Europe and Asia, including Japan.
The Company's end-user customers include most of the world's leading
semiconductor manufacturers. For the year ended September 30, 1996, Intel
accounted for 20% of total net sales and NEC accounted for 17% of total net
sales. For the year ended September 30, 1995, Intel accounted for 29% of total
net sales, and IBM accounted for 12% of total net sales.
Gross profit increased to $31.7 million in fiscal 1996 from $29.0 million in
the prior fiscal year, an increase of 9 percent. However, gross profit for the
fourth quarter of fiscal 1996 declined to $2.8 million as compared to $7.2
million in the third quarter of fiscal 1996 and $9.3 million in the fourth
quarter of fiscal 1995. This decline reflects the semiconductor industry's
slowing order rate and competitive pressures. Gross profit increased from fiscal
1995 to fiscal 1996 as a result of increased sales volume. Gross profit as a
percentage of net sales declined to 45% in the current fiscal year from 46% in
fiscal 1995. The reduced gross profit percentage resulted primarily from a
decline in systems margin as the number of systems sold to distributors
increased, an increase in cost incurred on systems sold in Europe that required
additional customization to meet more stringent European electronics regulatory
standards, and an increase in overhead costs as a result of the Company's move
to a new facility. This decrease in systems margin was partially offset by an
improvement in spares margin.
Research and Development ("R&D") expenses increased to $16.7 million in the
current fiscal year from $8.9 million in the prior fiscal year, an increase of
87%. As a percentage of net sales, R&D expenses increased to 23% in fiscal 1996
from 14% in fiscal 1995, reflecting the Company's commitment to bring new
products to market. During fiscal year 1996, the Company introduced its
Heatpulse 8800 system. The Heatpulse 8800 product was a new RTP system designed
for volume production environments, where process repeatability, productivity
and cost are critical considerations. This product was developed to help
semiconductor manufacturers improve performance in all three areas for the full
range of RTP process applications. All R&D costs are expensed as incurred.
Selling, general and administrative ("SG&A") expenses decreased to $10.2
million in fiscal 1996 from $10.6 million in fiscal 1995, a decrease of 3
percent. As a percentage of net sales, SG&A expenses decreased to 14% in fiscal
1996 from 17% in fiscal 1995, reflecting higher sales in the more recent period.
The decrease in absolute dollars for the current fiscal year was due primarily
to increased sales to distributors, which have lower selling and marketing
expenses than direct sales, and the Company's management of expenses in response
to the decline in sales during the second half of fiscal 1996, as well as a
reduction in sales commissions as a result of lower sales.
Other income (expense), net was $772,000 of income in fiscal 1996 and $12,000
of income in fiscal 1995. Interest income (net of interest expense) was $649,000
in fiscal 1996, reflecting interest earned on investment of the Company's cash
and investments. Other income also included commissions on quartz sales of
$190,000 earned in fiscal 1996.
Equity in loss of unconsolidated subsidiary was $1.2 million for fiscal 1996.
This represents the Company's share of the losses of AG Israel during fiscal
1996 as compared to $364,000 from May 1995 through the end of fiscal 1995.
20
21
For fiscal 1996, the Company recorded income tax expense of $1.7 million
compared to a benefit for income taxes of $532,000 in fiscal 1995. As a result
of the significant increase in profitability during fiscal 1995, the completion
of the Company's initial public offering and the closing of the AG Israel
transaction with Clal Electronics, the Company reversed its valuation allowance
for deferred income taxes, resulting in a tax benefit for fiscal 1995. In fiscal
1996, the effective tax rate of 39% more closely approximates the statutory
rates of the jurisdictions in which the Company operates. The impact of AG
Israel losses, which are not deductible on the U.S. federal tax return of the
Company (9.0%), were offset in part by the tax benefits received from the
Company's export sales (4.9%).
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash, cash equivalents and
short-term investments of $4.2 million, compared to $12.0 million as of
September 30, 1996 and $18.9 million as of September 30, 1995. The decrease of
$7.8 million from fiscal 1996 to fiscal 1997 was primarily attributable to
capital expenditures relating to the Company's upgrade of it's facility to build
the Starfire products and to build internal Starfire tools for engineering
development. The increase of $17.3 million from fiscal 1994 to fiscal 1995 was
primarily due to the Company's initial public offering in May 1995. Working
capital decreased to $22.9 million at September 30, 1997 from $26.9 million at
September 30, 1996 from $28.6 million at September 30, 1995. During fiscal 1997,
the Company renewed a $5 million revolving line of credit, which is available
through July 31, 1998. The line is collateralized by primarily all assets of the
Company. Borrowings bear interest at prime plus 1% per annum when the Company
has a net loss and prime plus 0.5% per annum when the Company has net income.
There were no outstanding borrowings at September 30, 1997.
The Company's operating activities used cash of $4.6 million during fiscal
1997. Net loss of $4.7 million, increases in accounts receivable of $4.9 million
and prepaids of $434,000, and decreases in accrued liabilities of $327,000,
customer advances of $245,000 and income taxes payable/refundable of $189,000
were offset by increases in accounts payable of $1.6 million, loss on disposal
of fixed assets of $919,000 and a decrease in deferred income taxes of $846,000.
The increase in accounts receivable was due to increasing sales in the fourth
quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996. The
increase in prepaids was primarily due to the addition of an asset exchanged for
services. The decrease in customer advances was primarily due to the return of
an experimental tool and subsequent refund to the customer. The decrease in
accrued liabilities was primarily due to a decrease in the reserve for warranty
parts and labor, resulting from the decrease in the number of tools under
warranty coverage, and in a change in the calculation method of reserve
requirements. The decrease in deferred income taxes was due primarily to an
increase in the valuation allowance to reduce net deferred tax assets to an
amount expected more likely than not to be recognized. The increase in payables
was primarily due to an increase in fixed asset purchases and R&D spending in
the fourth quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996.
The loss on disposal of fixed assets was primarily due to the decommission of
engineering systems. In addition, inventories remained constant despite a
write-down of $1.4 million in inventory during fiscal 1997 related to the
discontinuance of the Heatpulse 4100 product line, as the Company increased
inventories during the fourth quarter of fiscal 1997 to support anticipated Beta
testing of its Starfire products and potential net sales growth.
Cash provided by operating activities was $673,000 during fiscal 1996. Net
income of $2.7 million, a decrease in accounts receivable of $4.9 million and
losses from equity in AG Israel of $1.2 million were offset by increases in
inventory of $3.3 million along with decreases in accounts payable of $2.4
million, accrued liabilities of $2.2 million and refundable income taxes of $2.1
million. The decrease in accounts receivable was due to increased collection
activity and declining sales during the fourth quarter of fiscal 1996. The
increase in inventory was primarily due to increased levels of raw materials in
preparation for meeting the Company's shipment targets for fiscal 1996, as well
as the stocking of offsite spares inventories. The decrease in payables was
primarily due to a decrease in purchases during the second half of fiscal 1996.
The decrease in accruals was primarily due to reduced commission expense and
other payroll accruals and lower level of operations during the second half of
1996. Cash provided by operating activities was $1.4 million in fiscal 1995, as
net income of $9.8 million and an increase in accounts payable of $3.2 million,
due largely to increased purchases of inventory and the growth in operating
expenses, were partially offset by an increase in accounts receivable of $7.3
million, reflecting an increase in net sales, an increase in inventories of $4.1
million to support higher production volumes and an increase in deferred tax
assets of $3.9 million, principally due to increased profitability resulting in
a reversal of the valuation allowance.
Cash provided by (used in) investing activities was $4.9 million in fiscal
1997, ($7.3) million in fiscal 1996 and ($13.5) million in fiscal 1995. Capital
expenditures and purchases of short-term investments totaling $12.9 million were
the principal uses of cash in investment activities in fiscal 1997 and were
offset by maturities of short term investments of $17.8 million. Capital
expenditures, purchases of short term investments and a required $1 million
equity investment in AG Israel
21
22
were the principal uses of cash in investment activities in fiscal 1996.
Purchases of short term investments, capital expenditures and an equity
investment in AG Israel were the principal uses of cash in investment activities
in fiscal 1995. Capital expenditures were approximately $3.5 million in fiscal
1997, $6.9 million in fiscal 1996 and $2.2 million in fiscal 1995. The Company
leased assets with a cost of $496,000 in fiscal 1997; the Company did not enter
into any lease agreements in fiscal 1996; the Company leased assets with a cost
of $280,000 in fiscal 1995. Capital expenditures in fiscal 1997 were made
primarily to support Starfire engineering and manufacturing requirements.
Capital expenditures in fiscal 1996 were made primarily to support increased
personnel levels and facilities upgrades. The Company relocated its entire
operations from Sunnyvale, California to San Jose, California during October
1995. The cost of leasehold improvements for this relocation was $2.2 million.
*The Company expects that capital expenditures will be approximately $4.0
million in fiscal 1998, principally to support facilities and new product
development.
Financing activities provided cash of $239,000 in fiscal 1997 from the sale
of common stock to employees, partially offset by the reduction in long-term
lease obligations. Financing activities provided cash of $316,000 in fiscal 1996
primarily from the sale of common stock to employees and collections of employee
notes receivable, partially offset by the reduction in long-term lease
obligations. Financing activities provided cash of $18.8 million in fiscal 1995
principally from net proceeds of $20.2 million resulting from the Company's
initial public offering of Common Stock and short-term borrowings to support the
cash used by operating activities during the period partially offset by
repayments of short-term borrowings.
*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 the Company's
next-generation products, liquidity and working capital 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. The Company reserves the right to
obtain funds for working capital or other purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of September 30, 1997
and 1996 and for the Three Years in the period ended September 30, 1997 and
Independent Auditors' Report follow. The pages of the Company's Consolidated
Financial Statements are independently numbered from this Form 10-K.
22
23
AG ASSOCIATES, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1997 AND 1996 AND FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1997
AND INDEPENDENT AUDITORS' REPORT
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
AG Associates, Inc.:
We have audited the accompanying consolidated balance sheets of AG Associates,
Inc. and its subsidiary (the Company) as of September 30, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AG Associates, Inc. and its
subsidiary at September 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
November 4, 1997
25
AG ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
----------------------
ASSETS 1997 1996
-------- --------
Current assets:
Cash and equivalents $ 2,485 $ 1,996
Short-term investments 1,672 9,989
Receivables (net of allowances of $903 in 1997 and 1996) 13,415 8,560
Inventories 11,676 11,668
Income taxes refundable 1,652 1,463
Deferred income taxes 2,221 2,859
Prepaid expenses and other current assets 896 462
-------- --------
Total current assets 34,017 36,997
Property and equipment - net 8,493 8,210
Deferred income taxes 437 645
-------- --------
Total $ 42,947 $ 45,852
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,272 $ 4,669
Accrued liabilities 4,684 5,011
Current portion of capital lease obligations 194 222
Customer advances -- 245
-------- --------
Total current liabilities 11,150 10,147
Capital lease obligations 275 11
Commitments and contingences (Notes 7, 13 and 14)
Shareholders' equity:
Common stock, no par value: 25,000,000 shares authorized;
shares outstanding: 1997 - 6,061,196; 1996 - 5,943,503 36,139 35,640
Deferred stock compensation -- (17)
Net unrealized loss on short-term investments (10) (10)
Retained earnings (accumulated deficit) (4,607) 81
-------- --------
Total shareholders' equity 31,522 35,694
-------- --------
Total $ 42,947 $ 45,852
======== ========
See notes to consolidated financial statements.
F-2
26
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
Net sales (including sales to a shareholder/distributor
of $5,719, $17,333 and $9,132) $ 49,604 $ 71,089 $ 62,725
Cost of sales 32,697 39,365 33,697
-------- -------- --------
Gross profit 16,907 31,724 29,028
-------- -------- --------
Operating expenses:
Research and development 14,329 16,653 8,893
Selling, general and administrative 9,247 10,204 10,562
-------- -------- --------
Total 23,576 26,857 19,455
-------- -------- --------
Income (loss) from operations (6,669) 4,867 9,573
-------- -------- --------
Other income and expense:
Interest income 377 708 352
Interest expense (71) (59) (370)
Equity in loss of unconsolidated subsidiary -- (1,152) (364)
Other, net 126 123 30
-------- -------- --------
Income (loss) before provision (benefit) for income taxes (6,237) 4,487 9,221
Provision (benefit) for income taxes (1,549) 1,744 (532)
-------- -------- --------
Net (loss) income $ (4,688) $ 2,743 $ 9,753
======== ======== ========
Net (loss) income per share $ (0.78) $ 0.45 $ 2.05
======== ======== ========
Shares used in per share calculations 5,981 6,140 4,770
======== ======== ========
See notes to consolidated financial statements.
F-3
27
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (DOLLARS IN
THOUSANDS)
NOTES
CONVERTIBLE RECEIVABLE
PREFERRED STOCK COMMON STOCK FROM
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS
---------- ---------- ---------- ---------- ------------
BALANCES, September 30, 1994 31,250 $ 50 2,927,328 $ 8,765 $ (14)
Conversion of minority equity interest -- -- 271,739 1,979 --
Initial public offering of common stock -- -- 2,070,000 20,232 --
Conversion of preferred stock (31,250) (50) 7,813 50 --
Conversion of subordinated debentures -- -- 271,739 2,000 --
Exercise of warrants -- -- 173,750 1,529 --
Common stock issued for services -- -- 18,750 170 --
Exercise of options -- -- 95,280 410 (78)
Amortization of deferred stock compensation -- -- -- -- --
Preferred stock dividends -- -- -- -- --
Net income -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCES, September 30, 1995 -- $ -- 5,836,399 35,135 (92)
---------- ========== ---------- ---------- ----------
Common stock issued under employee stock
purchase plan 52,694 310 --
Exercise of options 54,410 195 --
Amortization of deferred stock compensation -- -- --
Net unrealized loss on short-term investments -- -- --
Cancellation of notes receivable -- -- 92
Net income -- -- --
---------- ---------- ----------
BALANCES, September 30, 1996 5,943,503 35,640 --
---------- ---------- ----------
Common stock issued under employee stock
purchase plan 61,781 256 --
Exercise of options 55,912 243 --
Amortization of deferred stock compensation -- -- --
Net loss -- -- --
---------- ---------- ----------
BALANCES, September 30, 1997 6,061,196 $ 36,139 $ --
========== ========== ==========
NET
UNREALIZED
LOSS ON RETAINED TOTAL
DEFERRED SHORT- EARNINGS SHAREHOLDERS'
STOCK TERM (ACCUMULATED EQUITY
COMPENSATION INVESTMENTS DEFICIT) (DEFICIENCY)
------------- ------------ ---------- -----------
BALANCES, September 30, 1994 $ (128) $ -- $ (12,413) $ (3,740)
Conversion of minority equity interest -- -- -- 1,979
Initial public offering of common stock -- -- -- 20,232
Conversion of preferred stock -- -- -- --
Conversion of subordinated debentures -- -- -- 2,000
Exercise of warrants -- -- -- 1,529
Common stock issued for services -- -- -- 170
Exercise of options -- -- -- 332
Amortization of deferred stock compensation 47 -- -- 47
Preferred stock dividends -- -- (2) (2)
Net income -- -- 9,753 9,753
---------- ---------- ---------- ----------
BALANCES, September 30, 1995 (81) -- (2,662) 32,300
---------- ---------- ---------- ----------
Common stock issued under employee stock
purchase plan -- -- -- 310
Exercise of options -- -- -- 195
Amortization of deferred stock compensation 64 -- -- 64
Net unrealized loss on short-term investments -- (10) -- (10)
Cancellation of notes receivable -- -- -- 92
Net income -- -- 2,743 2,743
--------- --------- --------- ---------
BALANCES, September 30, 1996 (17) (10) 81 35,694
--------- --------- --------- ---------
Common stock issued under employee stock
purchase plan -- -- -- 256
Exercise of options -- -- -- 243
Amortization of deferred stock compensation 17 -- -- 17
Net loss -- -- (4,688) (4,688)
--------- --------- --------- ---------
BALANCES, September 30, 1997 $ -- $ (10) $ (4,607) $ 31,522
========= ========= ========= =========
See notes to consolidated financial statements
F-4
28
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (4,688) $ 2,743 $ 9,753
Reconciliation to net cash provided by (used in) operating activities:
Depreciation and amortization 2,746 2,078 1,073
Loss on disposal of fixed assets 662 -- --
Equity in loss of unconsolidated subsidiary -- 1,152 364
Deferred income taxes 846 400 (3,904)
Deferred stock compensation and stock issued for services rendered 17 64 217
Interest accrued (paid) on convertible subordinated debentures -- -- (107)
Other -- 17 105
Changes in assets and liabilities:
Receivables (4,855) 4,948 (7,276)
Inventories (8) (3,274) (4,071)
Prepaid expenses and other current assets (177) 94 (327)
Accounts payable 1,603 (2,372) 3,201
Accrued liabilities (327) (2,159) 2,164
Customer advances (245) (905) (259)
Income taxes payable/refundable (189) (2,113) 441
-------- -------- --------
Net cash provided by (used in) operating activities (4,615) 673 1,374
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (9,474) (3,199) (10,600)
Maturities of short-term investments 17,791 3,800 --
Investment in AG Israel -- (1,000) (782)
Other assets -- -- 15
Capital expenditures (3,452) (6,852) (2,173)
-------- -------- --------
Net cash provided by (used in) investing activities 4,865 (7,251) (13,540)
-------- -------- --------
Cash flows from financing activities:
Short-term borrowing -- -- 2,000
Repayments of short-term borrowing -- -- (4,400)
Reductions in long-term obligations (260) (281) (865)
Proceeds from initial public offering -- -- 20,232
Sales of common stock 499 505 1,861
Collection of notes receivable -- 92 --
Preferred stock dividends -- -- (2)
-------- -------- --------
Net cash provided by financing activities 239 316 18,826
-------- -------- --------
Net increase (decrease) in cash and equivalents 489 (6,262) 6,660
Cash and equivalents at beginning of period 1,996 8,258 1,598
-------- -------- --------
Cash and equivalents at end of period $ 2,485 $ 1,996 $ 8,258
======== ======== ========
(Continued)
F-5
29
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
---- ---- ----
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital leases $ 496 $ -- $ 280
====== ======= ======
Exchange of equipment for services $ 257 $ -- $ --
====== ======= ======
Conversion of subordinated debentures, preferred stock and minority
interests $ -- $4,029
======= ======
Conversion of minority equity interest $ -- $ -- $1,979
====== ======= ======
Exercise of stock options in exchange for notes receivable $ -- $ -- $ 78
====== ======= ======
Transfer of net liabilities to unconsolidated subsidiary:
Property $ 101
Current liabilities (285)
Capital leases (82)
------
Net $ (266)
======
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 71 $ 50 $ 369
====== ======= ======
Income taxes $ -- $ 3,207 $2,930
====== ======= ======
See notes to consolidated financial statements.
F-6
30
AG ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - AG Associates, Inc. (the Company) was incorporated in
California in October 1981. The Company designs, manufactures, markets and
supports advanced single-wafer, rapid thermal processing (RTP) equipment
used in the manufacture of integrated circuits. The Company's products,
marketed under the Heatpulse(R) and StarfireTM names, utilize high
intensity light to precisely heat a single silicon wafer which results in a
chemical process needed to produce an integrated circuit. These products
are manufactured at the Company's California location and sold primarily to
semiconductor manufacturers through a direct sales force in the United
States and through foreign distributors.
CONSOLIDATION - The consolidated financial statements include the accounts
of AG Associates, Inc. and its wholly-owned subsidiary, Rapro Technology,
Inc. (Rapro). All significant intercompany balances and transactions have
been eliminated. The consolidated financial statements of the Company also
include the results of operations of AG Associates (Israel) Ltd. (AG
Israel) for the period through May 31, 1995. As a result of the sale of the
controlling interest of AG Israel (see Note 13), the Company has accounted
for its remaining minority interest in AG Israel using the equity method
since June 1, 1995.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to a concentration of credit risk consist primarily of
cash, cash equivalents and short-term investments, as well as accounts
receivable. The Company has placed the majority of its cash and cash
equivalents and short-term investments with high-quality financial
institutions.
The Company sells its products primarily to large companies in the
semiconductor industry. Credit risk is further mitigated by the Company's
credit evaluation process. The Company does not require collateral or other
security to support receivables. While the Company maintains allowances for
potential credit losses, actual bad debt losses to date have not been
material.
FINANCIAL STATEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Such estimates
include the level of the allowance for potentially uncollectible
receivables, inventory reserves for obsolete, slow moving or nonsalable
inventory, certain accruals and estimated costs for installation, warranty
and other customer support obligations. Actual results could differ from
these estimates.
CASH EQUIVALENTS - Cash equivalents are highly liquid debt investments
acquired with a maturity of three months or less at date of purchase.
SHORT-TERM INVESTMENTS - The Company has classified its short-term
corporate debt securities and its adjustable rate preferred stock
investments as "available for sale" securities, and the carrying value of
these securities is fair market value, as determined by quoted market
prices. Net unrealized losses on these investments have been recorded as a
separate component of shareholders' equity, net of related tax.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market. The Company reviews the levels of its inventories in
light of current and forecasted demand to identify and provide reserves for
obsolete, slow-moving, or nonsalable inventory.
F-7
31
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over estimated
useful lives of three to five years. Equipment under capital lease and
leasehold improvements are amortized over the shorter of their estimated
useful lives or the lease term.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock-Based Compensation".
REVENUE RECOGNITION - Sales are generally recognized upon shipment.
Estimated costs for installation, warranty and other customer support
obligations which are considered insignificant, are accrued in the period
that sales are recognized. Services outside the warranty period are
generally provided to customers on a "time and materials" basis, and are
recognized when the services are performed.
RESEARCH AND DEVELOPMENT - All research and development costs are expensed
as incurred. The Company's products include certain software applications
which are integral to the operation of the product. The costs to develop
such software have not been capitalized as the Company believes its current
software development process is essentially completed concurrent with the
establishment of the technological feasibility of the software and/or
development of the related hardware.
INCOME TAXES - The Company provides for income taxes using the asset and
liability approach defined by Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes."
NET INCOME (LOSS) PER SHARE - Net income per share is based upon the
weighted average number of common and dilutive common equivalent shares
(common stock options, warrants and securities convertible into the
Company's common stock) outstanding.
Net loss per share excludes common equivalents as such amounts are
anti-dilutive.
In February 1997, the Financial Accounting Standard Board (FASB) issued
SFAS No. 128, "Earnings per Share." 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.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
Pro forma amounts for basic and diluted EPS assuming SFAS 128 had been in
effect for the periods presented are as follows:
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
---- ---- ----
Basic EPS $ (0.78) $ 0.47 $ 2.22
Diluted EPS $ (0.78) $ 0.45 $ 2.05
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total , the change in its net
assets during the period from nonowner sources; and No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting
F-8
32
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 financial
position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997.
2. INVESTMENTS
Short-term investments at September 30 consist of (in thousands):
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUE
------- ------- ------- -------
Available-for-sale investments:
Adjustable rate preferred stocks $ 500 $ -- $ -- $ 500
Corporate debt securities 1,182 -- (10) 1,172
------- ------- ------- -------
$ 1,682 $ -- $ (10) $ 1,672
======= ======= ======= =======
1996
Available-for-sale investments:
Adjustable rate preferred stocks $ 2,500 $ -- $ -- $ 2,500
Corporate debt securities 7,499 10 (20) 7,489
------- ------- ------- -------
$ 9,999 $ 10 $ (20) $ 9,989
======= ======= ======= =======
There were no realized gains or losses for the years ended September 30,
1997 and 1996. All corporate debt securities held at September 30, 1997
mature within one year.
3. INVENTORIES
Inventories consist of (in thousands):
SEPTEMBER 30,
-------------------
1997 1996
------- -------
Raw materials $ 7,500 $ 7,865
Work-in-process 4,176 3,803
------- -------
$11,676 $11,668
======= =======
Inventories are shown net of reserves for obsolete, slow-moving, and
nonsalable inventory of $3,666,000 and $3,289,000 at September 30, 1997 and
1996, respectively.
F-9
33
4. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
Machinery and equipment $ 10,289 $ 9,534
Furniture and fixtures 888 643
Leasehold improvements 2,893 2,273
Construction in progress 1,315 235
-------- --------
Total 15,385 12,685
Accumulated depreciation and amortization (6,892) (4,475)
-------- --------
Property and equipment - net $ 8,493 $ 8,210
======== ========
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
SEPTEMBER 30,
-----------------
1997 1996
------ ------
Warranty reserve $1,687 $2,440
Compensation and benefits 1,354 1,186
Commissions 473 502
Other 1,170 883
------ ------
$4,684 $5,011
====== ======
6. BORROWING ARRANGEMENTS
The Company has a line of credit with a bank which provides for borrowings
of up to $5,000,000, limited to outstanding accounts receivable, as
defined, which expires July 31, 1998. The line of credit is collateralized
by primarily all of the Company's assets. Advances bear interest at the
bank's prime rate plus 1.0% per annum when the Company has a net loss and
prime rate plus 0.5% per annum when the Company has net income (as
defined). There were no outstanding borrowings at September 30, 1997. The
line of credit is subject to certain financial covenants. At September 30,
1997, the Company is in compliance with these covenants.
7. LEASES
Equipment with a cost and accumulated amortization of $1.3 million and
$818,000 at September 30, 1997, respectively, ($714,000 and $499,000 at
September 30, 1996) has been leased under capital leases.
In 1995, the Company entered into a seven-year lease, with an option for a
five-year extension, for a 115,000 square foot office and manufacturing
facility, located in San Jose, California. An option to expand the San Jose
facilities by approximately 38,000 square feet is available to the Company
within three years. Currently the Company is negotiating to exercise the
option.
On August 25, 1997 the Company entered into a one-year lease for an
additional 5,000 square foot manufacturing space adjacent to its
manufacturing facility in San Jose, California.
F-10
34
Future minimum annual capital and operating lease commitments at September
30, 1997 are as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
----------- ---------
1998 $ 869 $ 210
1999 897 188
2000 931 123
2001 966 -
2002 1,001 -
------- -----
Total minimum lease payments $ 4,664 $ 521
=======
Amount representing interest (52)
Present value of minimum lease payments $ 469
=====
Rent expense for operating leases was approximately $1,240,000, $1,134,000
and $684,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
8. SHAREHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
Upon consummation of the Company's initial public offering in May 1995, all
Series A convertible preferred stock was automatically converted into 7,813
shares of common stock.
COMMON STOCK
In May 1995, the Company completed an initial public offering of 2,070,000
shares of common stock, including the underwriter's overallotment of
270,000 shares, resulting in total proceeds to the Company of $20,232,000,
net of issuance costs.
During fiscal 1993, the Company issued $2,000,000 in convertible
subordinated debentures (the Debentures) to the Investment Company of Bank
of Hapoalim Ltd. (Hapoalim Investment Co.). In May 1995, at the election of
Hapoalim Investment Co. and upon consummation of the Company's initial
public offering, principal on the Debentures was converted into 271,739
shares of the Company's voting common stock at a price of $7.36 per share.
In addition, Hapoalim Investment Co. had a warrant to purchase 173,750
shares of the Company's common stock. In connection with the public
offering in May 1995, the warrant was exercised, resulting in proceeds to
the Company of $1,529,000.
NOTES RECEIVABLE FROM SHAREHOLDERS
Certain notes had been received from officers for the acquisition of shares
of common stock. All notes were canceled as of September 30, 1997.
F-11
35
STOCK OPTION AND PURCHASE PLANS
Under the Company's stock option plans (the Plans), 1,500,000 shares of
Common Stock are reserved for the grant of incentive or non-statutory stock
options and the direct award or sale of shares to employees, directors,
contractors and consultants. Under the Plans, options are granted at fair
value at the date of grant as determined by the Board of Directors.
Generally, such options become exercisable over periods of one to four
years and expire ten years from the grant date.
Option activity under the Plans was as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ---------------
Outstanding, October 1, 1995 462,780 $ 4.06
Granted 414,824 $ 15.92
Exercised (95,280) $ 4.04
Canceled (63,347) $ 4.56
--------
Outstanding, September 30, 1995 (132,481 exercisable
at a weighted average price of $11.04) 718,977 $ 10.70
Granted (weighted average fair value of $3.19 per share) 868,363 $ 8.87
Exercised (54,410) $ 4.01
Canceled (725,014) $ 13.85
--------
Outstanding, September 30, 1996 (229,979 exercisable
at a weighted average price of $6.44) 807,916 $ 6.31
Granted (weighted average fair value of $2.43 per share) 385,680 $ 6.09
Exercised 55,912 $ 4.14
Canceled (170,777) $ 6.59
--------
Outstanding, September 30, 1997 (194,426 exercisable
at a weighted average price of $5.91) 966,907 $ 6.31
=======
At September 30, 1997, 487,775 options were available for future grant.
As of September 30, 1997, nonqualified options to purchase 100,084 shares
were outstanding to consultants and directors at prices ranging from $5.88
to $29.94.
In June 1996, the Company canceled options to purchase 495,439 shares of
common stock exercisable at $7.38 to $33.19 per share and issued
replacement options with an exercise price of $7.21 per share.
In connection with certain grants of certain stock options to employees in
fiscal 1994, the Company had recorded $230,000 for the difference between
the deemed fair value for accounting purposes and the option price as
determined by the Board at the date of grant. Of such amount, $102,000
related to option grants which had previously vested and accordingly were
expensed in fiscal 1994; the remaining $128,000 was presented as a
reduction of shareholders' equity and is being amortized over the 48-month
vesting period of the related stock options. Amortization of deferred stock
compensation for 1997 and 1996 was $17,000 and $64,000, respectively.
F-12
36
In November 1994, the Company reserved 50,000 shares for a directors stock
option plan. Options to purchase 8,000 shares at prices ranging from $5.88
to $17.50 have been issued under this plan at September 30, 1997.
Additional information regarding options outstanding as of September 30,
1997 is as follows:
OPTIONS OUTSTANDING
------------------------
WEIGHTED OPTIONS EXERCISABLE
------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
---------------- ----------- ------------ --------- ----------- ---------
$2.40 - $5.25 260,479 6.62 $4.21 71,746 $3.83
$5.31 - $7.02 216,099 8.92 $6.21 10,400 $6.49
$7.13 - $7.13 343,062 7.90 $7.13 106,184 $7.13
$7.13 - $25.79 147,267 8.65 $8.05 6,096 $8.31
----- ------ ------- ---- ----- ----- -----
$2.40 - $25.79 966,907 7.91 $6.31 194,426 $5.91
ADDITIONAL STOCK PLAN INFORMATION - The Company continues to account for
its stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma
net income (loss) as if the Company had adopted the fair value method as of
the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 4 years; risk-free interest rates, 6.14% in
1997 and 6.04% in 1996; volatility, 40% in 1997 and 40% in 1996 and no
dividends during the expected term. The Company's calculations are based on
a single option valuation approach, and forfeitures are recognized as they
occur. If the computed fair values of the 1997 and 1996 awards had been
amortized to expense over the vesting period for the awards, pro forma net
income (loss) would have been ($5,097,000) in 1997 or ($0.85) per share and
$2,222,000 in 1996 or $0.36 per share. However, the impact of outstanding
non-vested stock options granted prior to 1996 has been excluded from the
pro forma calculation; accordingly, the 1997 and 1996 pro forma adjustments
are not indicative of future period pro forma adjustments when the
calculation will apply to all applicable stock options.
EMPLOYEE STOCK PURCHASE PLAN - In November 1994, the Company reserved
250,000 shares for sale under the 1994 Employee Stock Purchase Plan,
designed to qualify under Internal Revenue Code Section 423(b). Stock may
be offered for purchase by employees at a price equal to 85% of the lower
of the market value of the stock at the beginning or end of each six-month
offer period, subject to annual limitation. In fiscal 1997 and 1996, 61,781
and 52,694 shares were issued at weighted average prices of $4.15 and $5.87
under this Plan for net proceeds to the Company of $243,000 and $310,000.
The weighted average fair market value of the fiscal 1997 and 1996 awards
was $1.54 and $4.57 per share, respectively. No shares had been issued
under this Plan in fiscal 1995.
F-13
37
9. INCOME TAXES
Income (loss) before provision (benefit) for income taxes consists of the
following (in thousands):
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
Domestic $ (6,237) $ 5,639 $ 10,043
Foreign -- (1,152) (822)
-------- -------- --------
Total $ (6,237) $ 4,487 $ 9,221
======== ======== ========
The provision (benefit) for income taxes consists of (in thousands):
YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
------- ------- -------
Federal:
Current $(2,197) $ 1,253 $ 2,650
Deferred 772 334 (3,200)
------- ------- -------
(1,425) 1,587 (550)
State:
Current (198) 91 722
Deferred 74 66 (704)
------- ------- -------
Provision (benefit) for income taxes $(1,549) $ 1,744 $ (532)
======= ======= =======
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows (in thousands):
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
------- ------- -------
Tax at federal statutory rate $(2,121) $ 1,570 $ 3,227
State taxes (1) 87 436
Foreign sales corporation benefit -- (220) (238)
Foreign losses not deductible -- 403 177
Other (302) (28) 95
Tax impact of AG Israel transaction -- -- 2,136
Increase (decrease) in valuation allowance 875 (68) (6,365)
------- ------- -------
Provision (benefit) for income taxes $(1,549) $ 1,744 $ (532)
======= ======= =======
The tax impact of the AG Israel transaction arises primarily from the
transfer of technology, assets and liabilities of Rapro to AG Israel;
preacquisition net operating loss carryforwards of Rapro were utilized as a
result of this transaction.
F-14
38
The components of the net deferred tax assets as of September 30 were as
follows (in thousands):
1997 1996
------- -------
Deferred tax assets:
Net operating loss and credit carryforwards of Rapro $ 1,408 $ 1,408
Credit carryforwards 861 106
Reserves not currently deductible for tax purposes 2,235 2,753
Book depreciation over tax depreciation 437 645
------- -------
4,941 4,912
Gross deferred tax assets:
Valuation allowances :
Rapro net operating loss and credit carryforwards (1,408) (1,408)
Other (875) --
------- -------
Net deferred tax assets $ 2,658 $ 3,504
======= =======
Realization of the tax benefits related to the Company's deferred tax
assets is dependent upon the generation of future taxable income. The
valuation allowance at September 30, 1997 of $875,000 reduces gross
deferred tax assets to the amount determined by management more likely than
not to be recognized. The valuation allowance at September 30, 1997 and
1996 of $1,408,000 relates to amounts arising from Rapro's preacquisition
carryforwards. The credit carryforwards expire in 2006.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which participants
may contribute up to 15% of their compensation, subject to certain Internal
Revenue Service limitations. The Company has not contributed to the Plan to
date.
11. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
The Company leased a facility during fiscal years 1996 and 1995 from a
shareholder. Rent expense related to this lease for 1996 and 1995 was
$72,000 and $396,000, respectively. The Company did not lease from this
shareholder in 1997.
Sales and accounts receivable related to significant customers were:
SALES AS A PERCENTAGE
ACCOUNTS OF NET REVENUES
RECEIVABLE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -------------------------
1997 1996 1997 1996 1995
Distributor/shareholder * * 12% 25% 15%
Distributor * 37% * 14 *
Intel 15% * 25 20 29
NEC * * * 17 *
IBM * * * * 12
Micron 23 * 10 * *
Masca 10 * * * *
* Less than 10% of net revenues or accounts receivable
F-15
39
12. GEOGRAPHIC AND CUSTOMER INFORMATION
Information concerning the Company's operations by geographic area as of
and for the three years ended September 30, 1997 follows (in thousands).
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
Net sales:
From the United States to:
United States $ 34,007 $ 32,460 $ 42,882
Japan 5,719 19,263 9,132
Europe 3,566 10,108 3,078
Taiwan 2,785 7,044 7,134
Other Far East countries 3,527 2,214 274
Other -- -- 225
-------- -------- --------
$ 49,604 $ 71,089 $ 62,725
Operating income (loss): ======== ======== ========
United States $ 10,319
Middle East (746)
--------
$ 9,573
========
Export revenues as a percentage of net sales were 31%, 54% and 32% in 1997,
1996 and 1995, respectively.
13. AG ISRAEL
In 1992, the Company established AG Israel for the purpose of developing,
manufacturing and marketing platforms for moving and controlling silicon
wafers for the semiconductor industry. During fiscal 1993, the Company sold
an approximate 49.9% interest in AG Israel to Hapoalim Investment Co. and
Yozma Venture Capital (Yozma). The Company retained a 50.1% voting
interest. Hapoalim Investment Co. and Yozma had the right to convert all of
their interests in AG Israel to shares of the Company's common stock.
Accordingly, the Company had recognized 100% of AG Israel's losses since
its inception.
In April 1994, the Company obtained the right to induce conversion of this
minority interest at any time. In return, Hapoalim Investment Co. purchased
the shares held by Yozma and the Company revised the exchange rate at which
Hapoalim Investment Co. could exchange its interest in AG Israel from $9.20
to $7.36 per share, and also revised the conversion rate of the debentures
from $9.20 to $7.36. The Company also modified the terms of the warrant
held by Hapoalim Investment Co., decreasing the exercise price to the lower
of $9.15 or 80% of the price of the shares in an initial public offering.
The fair value at April 1994 of these revisions to the exchange rate,
conversion rate and warrant price were estimated to be $400,000 and was
included in other expense.
F-16
40
In February 1995, the Company exercised its exchange right and issued
271,739 shares of common stock to acquire all of the outstanding shares of
AG Israel. Also, in February 1995, the Company entered into an agreement
for the sale of the controlling interest in the research, development and
other business operations of its Rapro and AG Israel operations. Under the
agreement, effective upon the close of the Company's initial public
offering in May 1995, the Company contributed rights to the chemical vapor
deposition (CVD) and cluster tool technologies, certain assets and
liabilities of Rapro and cash of $500,000 to AG Israel. AG Israel issued
stock equal to a 51% interest to Clal Electronics Industries Ltd. (Clal
Electronics) in exchange for $2,500,000. In addition, Clal Electronics had
agreed to permit reimbursement to the Company for advances made to AG
Israel subsequent to September 30, 1994 through the closing of this
transaction in May 1995; such reimbursements totaled $521,000. AG Israel is
devoting its principal efforts to the development of cluster tools using
the technologies received from the Company; the Company and Clal
Electronics paid AG Israel an additional $1,000,000 and $2,000,000,
respectively, under the agreement. The Company had a right for a five-year
period to repurchase Clal Electronics interest in AG Israel and to
terminate the joint ownership of the technology for a repurchase price
equal to 100% of amounts contributed to AG Israel by Clal Electronics plus
simple interest at 25% of such contributions for each year from the date
the contribution was made, plus, under certain circumstances, $500,000 (the
"Clal" option). The Company also entered into a voting agreement with Clal
Electronics that covers, among other items, rights to elect directors of AG
Israel and rights of each of the parties to acquire additional shares of AG
Israel.
Pursuant to the terms of the agreement, Clal Electronics acquired
approximately 544,000 shares (9.9%) of the Company's outstanding shares of
common stock from existing shareholders of the Company. After three years,
Clal Electronics may increase its ownership in the Company up to 12% and,
if its ownership exceeds 10%, Clal Electronics has the right to nominate a
member for election to the Company's Board of Directors.
As a result of AG Israel's stock sale, the Company accounted for its 49%
investment in AG Israel using the equity method from June 1, 1995. In
November 1997, AG Israel completed a private placement equity financing of
$13 million in which the Company did not participate. As a result of the
financing, the Company's voting interest was diluted to 28% and its fully
diluted ownership interest to 25.2%. Also at that time, the Clal option was
terminated, the Company, Clal Electronics and new AG Israel investors
entered into a new shareholders agreement containing, among other things,
the rights of the parties to elect directors of AG Israel and terminated
the prior voting agreement between the Company and Clal Electronics.
Results of operations of AG Israel and Rapro prior to June 1, 1995 have
been included in the consolidated statement of operations. These operations
had combined net sales of $339,000 and a net loss of $822,000 for the eight
months ended May 31, 1995.
Condensed summary financial information (unaudited) of AG Israel is as
follows (in thousands):
As of September 30, 1997:
Current assets $ 7,961
Total assets $ 11,919
Current liabilities $ 5,407
Noncurrent liabilities $ 1,977
For the year ended September 30, 1997:
Net sales $ 199
Total expenses $ 5,442
--------
Net loss $ (5,243)
========
F-17
41
14. CONTINGENCIES
The Company is currently involved in intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company,
AST Elektronik GmbH and AST Elektronik U.S.A. in the United States District
Court for Northern California, San Jose Division. Applied Materials alleges
that the Company's products infringe on two of Applied Materials patents
relating to RTP process 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's products do not infringe the two Applied Materials patents and
that the patents are invalid. On October 3, 1997, the Company filed a
counterclaim in United States District Court for Northern California, San
Jose Division against Applied Materials for infringement of one of the
Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and
counterclaims is set for March 1, 1999. Management cannot predict the
outcome of litigation and believes Applied Materials' claims are without
merit and intends to defend the Company 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 efforts of the Company's technical 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.
There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor industry. General Signal
Corporation has made a claim against at least two manufacturers of cluster
tools that have resulted in litigation to the effect that certain of their
cluster tool technologies infringe on General Signal patents. In 1991, at
the time that General Signal first raised patent claims in the cluster tool
area, the Company joined with six major semiconductor process tool
equipment manufacturers in forming an "Ad Hoc Committee for Defense against
General Signal Cluster Tool Patents" (the "Ad Hoc Committee"). Based in
part on an opinion of patent counsel, the members of the Ad Hoc Committee
notified General Signal that the member companies were of the opinion that
the General Signal patents were invalid based on (a) prior art, (b)
inequitable conduct before the Patent & Trademark Office and (c) estoppel
as a result of General Signal's activities in establishing standards for
cluster tools and interfaces within the semiconductor industry. The Company
believes that the position taken by the Ad Hoc Committee remains valid.
Previously, the Company approached General Signal to explore interest in
licensing the same patents at issue in the General Signal litigation. The
general conditions of the license discussed by General Signal were
unacceptable to the Company. Based upon a review of the subject patents,
the Company believes that the subject patents are invalid or, if somehow
found to be valid, that the Company's cluster tool technology does not
infringe. Additionally, the Company has received an opinion of its patent
counsel, to the same effect. However, if such a claim were successfully
enforced against the Company regarding the cluster tool technology
transferred to AG Israel, the value of the Company's investment in AG
Israel could diminish. The Company could also be adversely affected as a
result of the Company's liability under an indemnity provision with AG
Israel and Clal Electronics Industries, Ltd. for any resulting royalties
and other damages payable.
From time to time, the Company may receive or initiate claims or inquiries
against third parties for infringement of the Company's proprietary rights
or to establish the validity of the Company's proprietary rights. Such
claims or inquiries may result in litigation and could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from other tasks, whether or not such
claims or inquiries are determined in favor of the Company. In the event of
an adverse
F-18
42
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.
On April 30, 1997 an action was filed against the Company alleging wrongful
termination and discrimination in violation of California Fair Employment
and Housing Act and the American withDisabilities Act. The matter is in the
early discovery stage of litigation. The Company believes that the claims
are invalid and will defend itself vigorously.
On October 6, 1997, the Company was served with a demand for arbitration by
Cook & Weil, Inc., a small manufacturer's representative firm located in
New Jersey, whom the Company engaged as manufacturer's representative but
terminated in 1996. Cook & Weil asserts that the Company owes it
approximately $250,000 in unpaid commissions. The Company believes that it
has fully paid all commissions due to Cook & Weil. The Company believes
that such claim is invalid and will defend itself vigorously.
F-19
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission (the "Proxy Statement") under the headings "Election of Directors"
and "Compliance with Section 16(a) of the Securities Exchange Act of 1934." The
information concerning the Company's executive officers required by this Item is
incorporated by reference to the Proxy Statement under the headings "Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See Index to Financial Statements,
page 25.
(2) Financial Statement Schedules: See Index to Financial
Statement Schedules, page 25.
(3) Exhibits: See Index to Exhibits, pages 26-28.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997. However, the Company previously reported that
it had filed no reports on Form 8-K during the quarter ended June
30, 1997, when, in fact, the Company did file a report on Form
8-K on June 4, 1997 reporting, under Item 5, Other Events, that
Applied Materials has made patent infringement allegations
against the Company and another leading supplier of rapid thermal
processing systems.
23
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California, on the 29th day of December, 1997.
AG ASSOCIATES, INC.
By: /s/ KIRK W. JOHNSON
-----------------------------------------------
Vice President, Finance & Chief Financial Officer
(Duly Authorized and Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ ARNON GAT Director, Chairman of the Board and December 29, 1997
- -------------------------------
Arnon Gat, Ph.D. Chief Executive Officer (Principal
Executive Officer)
/s/ KIRK W. JOHNSON Vice President, Finance & Chief Financial December 29, 1997
- -------------------------------
Kirk W. Johnson Officer (Principle Financial and Accounting
Officer)
/s/ ANITA GAT Director, Vice President Administration December 29, 1997
- -------------------------------
Anita Gat and Secretary
/s/ NORIO KURODA Director December 29, 1997
- -------------------------------
Norio Kuroda
/s/ CECIL PARKER Director December 29, 1997
- -------------------------------
Cecil Parker
24
45
AG ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
Page(s) in
Consolidated
Financial
Statements
----------
Independent Auditors' Report F-1
Consolidated Balance Sheets - September 30,1997 and 1996 F-2
Consolidated Statements of Operations - Years Ended September 30, 1997, 1996 F-3
and 1995
Consolidated Statements of Shareholders' Equity (Deficiency) - Years Ended F-4
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended September 30, 1997, 1996 F-5 - F-6
and 1995
Notes to Consolidated Financial Statements F-7 - F-19
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Schedule II: Valuation and Qualifying Accounts 29
Report of Independent Auditors on Financial Statement Schedule 30
25
46
AG ASSOCIATES, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- --------- --------
3.01 (1) Registrant's Amended and Restated Articles of Incorporation
3.02 (1) Certificates of Amendment to Registrant's Articles of Incorporation
3.03 (1) Form of Registrant's Amended and Restated Articles of Incorporation filed upon
closing of initial public offering
3.04 (1) Registrant's Amended and Restated Bylaws
4.01 (1) Form of Specimen Certificate for Registrant's Common Stock
10.01 (1)(*) Registrant's 1982 Stock Option Plan, as amended, and forms of related documents
10.02 (2)(*) Registrant's 1993 Stock Option Plan and related documents
10.03 (1)(*) Registrant's 1994 Directors Stock Option Plan and related documents
10.04 (1)(*) Registrant's 1994 Employee Stock Purchase Plan
10.05 (1) Form of Indemnification Agreement entered into by Registrant with each of its
directors and executive officers
10.06 (1) Separation Agreement, dated September 30, 1994, by and between Registrant and
Mickey Margalit
10.07 (1) Letter Agreement with David Yoffie, dated February 23, 1995
10.08 (1) Lease Agreement, dated June 4, 1985, by and between
Registrant and Menlo Caspian Investment Company, including
amendments one and two thereto, all related letter agreements and
a related stock purchase agreement
10.09 (1) Lease Agreement, dated August 11, 1994, by and between Registrant and RREEF USA
FUND-II Inc.
10.10 (1) Line of Credit Agreement by and between Registrant and the Fuji Bank, Ltd. dated
February 28, 1992, and all modifications and extensions relating thereto
10.11 (1) Contract by and between Registrant, AG Associates (Israel) Limited and Investment
Company of Bank of Hapoalim, Ltd. dated January 8, 1993, as amended
10.12 (1) Form of Convertible Debenture issued by Registrant to Investment Company of Bank
Hapoalim on January 8, 1993 and February 21, 1993
10.13 (1) Security Agreement, dated January 8, 1993 by and between Registrant and Investment
Company of Bank Hapoalim
10.14 (1) Investment Representation Letter, dated February 21, 1995, from Investment Company
of Bank Hapoalim, Ltd. to Registrant
10.15 (1) Registration Rights Agreement, dated February 26, 1995, by and among Investment
Company of Bank Hapoalim, Clal Electronics Industries, Ltd. and Registrant
10.16 (1) Voting Agreement, dated February 26, 1995, by and among Registrant, Investment
Company of Bank Hapoalim, Arnon Gat and Anita Gat
10.17 (1) International Distributor Agreement, dated December 10, 1993, by and between
Registrant's wholly owned subsidiary, AG Associates Foreign Sales, Inc. and MSA
Metron Semiconductors Asia Ltd
10.18 (1) International Distributor Agreement, dated February 1, 1994,
by and between AG Associates Foreign Sales, Inc. and MSE Metron
Semiconductors Europa B.V.
10.19 (1) International Distributor Agreement, dated December 12, 1985, by and between AG
Associates Foreign Sales, Inc. and Canon Sales Co., Inc as amended
10.20 (1) Stock Purchase Agreement, dated July 28, 1989, by and among Registrant, Canon
a Sales Co., Inc. and Nippon Typewriter Corporation
26
47
EXHIBIT
NUMBER EXHIBITS
- ------ --------
10.21 (1) Stock Purchase Agreement, dated August 30, 1989, by and between Registrant and Appex
Corporation
10.22 (1) Technology Transfer and License Agreement by and between Registrant and Canon Sales
Co., Inc. dated July 28, 1989, as amended
10.23 (1) Improvement License Agreement, dated March 14, 1994, by and between Registrant and
Canon Sales Co., Inc.
10.24 (1) Purchase Agreement, dated June 23, 1993, by and between Registrant and Equipe
10.25 (1) Technologies Letter Agreement between Fuji Bank, Limited and Registrant,
dated April 11, 1995
10.26 (1) Agreement, dated February 27, 1995, by and among, Registrant,
Clal Electronics Industries Ltd., AG Associates (Israel) Ltd.,
Arnon Gat, Anita Gat and Rapro Technology Inc.
10.27 (1) Amendments and PreClosing Agreement among the parties to the Agreement filed as
Exhibit 10.26 to the Registration Statement, dated April 13, 1995, April 18, 1995,
April 20, 1995, and April 24, 1995, respectively
10.28 (1) Amendment to Convertible Debentures, dated April 25, 1995, between Investment
Company of Bank Hapoalim and Registrant
10.29 (3) Lease Agreement, dated July 21, 1995, by and between
Registrant and South Bay/Fortran, including amendment one, dated
October 6, 1995
10.30 (3) Separation Agreement, dated November 8, 1995, by and between Registrant and
David Yoffie
10.31 (3)(*) Letter Agreement and Promissory Note with Julio L. Guardado, dated July 20, 1995
10.32 (3)(*) Letter Agreement with Susan Salvesen, dated December 6, 1995
10.33 (4)(*) Executive Bonus Plan
10.34 (4) Transition Services Agreement, dated as of March 25, 1996, by and between Registrant, AG Israel and
AGI, Inc.
10.35 (4) Sublease, for reference purposes only, dated August 20, 1996, by and between Registrant, AGI, Inc. and
AG Israel
10.36 (4) Separation Agreement, dated July 29, 1996, by and between Registrant and Patrick B. Halahan
10.37 (4) Separation Agreement, dated July 29, 1996, by and bewteen Registrant and Ronald G. Manley
10.38 (4) Loan Agreement, dated August 2, 1996, by and between Registrant and Silicon Valley Bank
10.39 (5)(*) Employment Agreement, dated February 10, 1997, between the Registrant and Patrick Verderico
10.40 (6) Amendment to Loan & Security Agreement, dated August 1, 1997, by and between Registrant and Silicon Valley Bank
10.41 (6) Amendment to Loan & Security Agreement, August 25, 1997, by and between Registrant and Silicon Valley Bank
10.42 (6)(*) 1998 Executive Bonus Plan
10.43 (6) Technology Agreement, dated January 28, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.44 (6) Amendment Agreement, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.45 (6) Clarification of Field of Use, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.46 (6) Shareholders Agreement, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.47 (6) Registration Rights Agreement, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.48 (6)(*) Form of Executive Employment Agreement with the Registrants Executive Officers
27
48
10.49 (6) Sublease of Manufacturing Space, dated August 25, 1997, by and between the Registrant and 3DFX
Interactive
11.01 (6) Computation of Earnings Per Share
23.02 (6) Consent of Deloitte & Touche LLP, Independent Auditors
27 (6) Financial Data Schedule
- -------------------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-90382) filed with and declared effective by
the Securities and Exchange Commission on May 15, 1995.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 333-02360) filed with and declared effective by
the Securities and Exchange Commission on March 14, 1996.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended September 30, 1995.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended September 30, 1996.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarterly Period Ended March 31, 1997.
(6) Filed herewith
(*) Management contract or compensatory plan or arrangement
28
49
AG ASSOCIATES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- End
Description of Period Expenses Describe Deductions of Period
- ------------------------------ ----------- ------------ ------------ ------------ ------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year Ended September 30, 1997 $903 $0 $0 $0 $903
Year Ended September 30, 1996 1,456 0 0 553 (1) 903
Year Ended September 30, 1995 534 1,161 0 239 (1) 1,456
- ------------------------------
INVENTORY RESERVES
Year Ended September 30, 1997 $3,289 $2,377 $0 $2,000 (5) $3,666
Year Ended September 30, 1996 2,669 1,385 0 765 (4) 3,289
Year Ended September 30, 1995 1,517 2,304 0 1,152 (4) 2,669
- ------------------------------
WARRANTY RESERVES
Year Ended September 30, 1997 $2,440 $2,710 $0 $3,463 (3) $1,687
Year Ended September 30, 1996 2,651 3,713 0 3,924 (3) 2,440
Year Ended September 30, 1995 2,313 3,420 0 3,082 (2) 2,651
- ------------------------------
(1) Represents writeoffs of uncollectible accounts
(2) $2,832 represents actual warranty expense incurred,
$250 represents transfer to AG Associates (Israel), Ltd.
(3) Represents actual warranty expense incurred
(4) Represents write offs of inventories
(5) Represents scrap of obsolete parts and devaluation of inventory
29
50
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
We have audited the consolidated financial statements of AG Associates, Inc. as
of September 30, 1997 and 1996 and for each of the three years in the period
ended September 30, 1997 and have issued our report thereon dated November 4,
1997; such financial statements and report are included in this 1997 Annual
Report on Form 10-K. Our audits also included the financial statement schedule
of AG Associates, Inc., listed in Item 14(a)2. Such financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statements schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
November 4, 1997
30