UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-25862
AG ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
California 94-2776181
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4425 Fortran Drive, San Jose, California 95134-2300
(Address of principal executive offices and zip code)
Registrant's telephone number: (408) 935-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
The number of shares outstanding of the Registrant's Common
Stock, no par value, was 5,885,508 at April 30, 1996.
This document consists of 15 pages, of which this is page number 1.
The index to exhibits is located at page 13.
INDEX
DESCRIPTION PAGE NUMBER
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Statements of
Income for the Three and Six Month
Periods Ended March 31, 1996 and 1995 3
Condensed Consolidated Balance Sheets
as of March 31, 1996 and September
30, 1995 4
Condensed Consolidated Statements of
Cash Flows for the Six Month
Periods Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II: Other Information
Item 1: Legal Proceedings 12
Item 2: Changes in Securities 12
Item 3: Defaults Upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
Signature 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AG ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
Net sales $23,200 $13,937 $45,060 $26,214
Cost of sales 11,971 7,636 23,376 14,488
-------- -------- -------- --------
Gross profit 11,229 6,301 21,684 11,726
Operating expenses:
Research and development 4,378 1,915 7,753 3,537
Selling, general and administrative 2,981 2,350 5,876 4,551
-------- -------- -------- --------
Total operating expenses 7,359 4,265 13,629 8,088
-------- -------- -------- --------
Income from operations 3,870 2,036 8,055 3,638
Interest income (expense), net 167 (184) 380 (265)
Other income, net 15 6 32 6
Equity interest in loss of
unconsolidated subsidiary (277) -- (652) --
-------- -------- -------- --------
Income before income taxes 3,775 1,858 7,815 3,379
Provision for income taxes 1,548 97 3,204 171
-------- -------- -------- --------
Net income $ 2,227 $ 1,761 $ 4,611 $ 3,208
======== ======== ======== ========
Net income per share $ 0.37 $ 0.47 $ 0.75 $ 0.85
======== ======== ======== ========
Shares used in per share computation 6,081 3,814 6,169 3,808
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
AG ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, September 30,
1996 1995
(unaudited) (note)
Assets
Current assets:
Cash and equivalents $ 7,242 $ 8,258
Short-term investments 7,874 10,600
Accounts receivable, net 14,292 13,508
Inventories 12,514 8,394
Deferred tax assets 4,336 3,665
Prepaid expenses and other current assets 375 556
-------- --------
Total current assets 46,633 44,981
Property and equipment, net 7,529 3,453
Deferred tax assets 239 239
Other assets -- 152
-------- --------
Total assets $54,401 $48,825
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 6,630 $ 7,041
Accrued liabilities 4,822 4,519
Warranty reserve 3,196 2,651
Current portion of long-term obligations 297 321
Income taxes payable 1,217 650
Customer advances and deferred revenue 908 1,150
-------- --------
Total current liabilities 17,070 16,332
Long-term obligations 65 193
Shareholders' equity
Common stock 35,361 35,135
Notes receivable from shareholders -- (92)
Deferred stock compensation (44) (81)
Retained earnings (Accumulated deficit) 1,949 (2,662)
-------- --------
Total shareholders' equity 37,266 32,300
-------- --------
Total liabilities and shareholders' equity $54,401 $48,825
======== ========
(note) Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
AG ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands - unaudited)
Six Months Ended
March 31,
1996 1995
Cash flows from operating activities
Net income $ 4,611 $ 3,208
Reconciliation of net income to net cash
provided by operating activities:
Interest accrued on convertible
subordinated debentures -- 29
Depreciation and amortization 905 472
Equity interest in loss of unconsolidated
subsidiary 652 --
Deferred stock compensation 37 17
Deferred income taxes (671) --
Changes in assets and liabilities:
Accounts receivable (784) (3,873)
Inventories (4,120) (1,176)
Prepaid expenses and other current assets 181 112
Accounts payable (411) 800
Accrued liabilities 848 998
Customer advances and deferred revenues (242) --
Income taxes payable 567 (209)
-------- --------
Net cash provided by operating activities 1,573 378
Cash flows from investing activities:
Purchases of short-term investments (23,819) --
Sales/maturities of short-term investments 26,545 --
Capital expenditures (4,981) (739)
Investment in unconsolidated subsidiary (500) --
Other assets -- (527)
-------- --------
Net cash used for investing activities (2,755) (1,266)
Cash flows from financing activities:
Net increase in short-term borrowings -- 1,203
Net increase in long-term debt -- 2
Reductions in obligations under capital leases (152) (154)
Proceeds from repayment of shareholder notes 92 --
Proceeds from issuance of common stock 226 117
Preferred stock dividend -- (2)
-------- --------
Net cash provided by financing activities 166 1,166
-------- --------
Net (decrease) increase in cash and equivalents (1,016) 278
Cash and cash equivalents at beginning of period 8,258 1,598
-------- --------
Cash and cash equivalents at end of period $ 7,242 $ 1,876
======== ========
Supplemental schedule of noncash financing activities:
Assets acquired under capital leases -- $ 280
======== ========
Issuance of notes receivable for common stock -- $ 92
======== ========
Conversion of minority equity interest -- $ 1,979
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 35 $ 234
======== ========
Income taxes $ 3,308 $ 510
======== ========
See Notes to Condensed Consolidated Financial Statements.
AG ASSOCIATES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
NOTE 1 - Basis of Presentation
The financial statements have been prepared by AG Associates,
Inc. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). While the
quarterly financial information contained in this filing is
unaudited, the financial statements presented reflect all normal
recurring adjustments which the Company considers necessary for a
fair presentation of the financial position, results of
operations and cash flows for all interim periods presented. The
results for interim periods are not necessarily indicative of the
results to be expected for the entire year. The information
included in this report should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in
the Company's 1995 Annual Report on Form 10-K.
NOTE 2 - Per Share Information
Net income per share information for the periods presented is
computed using the weighted average number of common and dilutive
common-equivalent shares attributable to stock options
outstanding.
NOTE 3 - Inventories
Inventories, valued at the lower of cost (first-in, first-out) or
market, consist of:
(IN THOUSANDS)
March 31, September 30,
1996 1995
Raw materials $10,245 $ 3,819
Work-in-progress 2,269 4,575
-------- --------
Total $12,514 $ 8,394
======== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and notes
thereto included in Part I -- Item 1 of this Quarterly Report and
the audited Consolidated Financial Statements and notes thereto
and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended September 30, 1995
contained in the Company's 1995 Annual Report on Form 10-K.
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 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.
Except for the historical information contained herein, the
matters discussed in this 10-Q are forward-looking statements
that involve risks and uncertainties, including the timely
availability and acceptance of new products, the impact of
competitive products and pricing, the management of growth and
the other risks detailed below and from time to time in the
Company's other SEC reports. The actual results that the Company
achieves may differ materially from any forward-looking
projections due to such risks and uncertainties. The Company
undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
FACTORS THAT MAY AFFECT FUTURE RESULTS
AG Associates, Inc. operates in a rapidly changing environment
that involves a number of risks, some of which are beyond the
Company's control. The following discussion highlights some of
these risks.
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,
availability and cost of component parts and materials from the
Company's suppliers, the adequate forecasting of the mix of
product demand due to production lead times and capacity
constraints, the timing of new product announcements and
introductions by the Company or its competitors, changes in the
mix of products sold, research and development expenses
associated with new product introductions, the timing and level
of development costs, market acceptance of new or enhanced
versions of the Company's products, seasonal customer demand, the
cyclical nature of the semiconductor industry and economic
conditions generally or in various geographic areas. The
Company's ability to compete also depends upon the Company's
ability to develop new product features that enhance uniformity
and repeatability, improve process capability and flexibility and
reduce cost of ownership. 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 often
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 that
quarter.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
Net sales 100% 100% 100% 100%
Cost of sales 52 55 52 55
----- ----- ----- -----
Gross profit 48 45 48 45
Operating expenses:
Research and development 18 14 17 14
Selling, general and administrative 13 17 13 17
----- ----- ----- -----
Total operating costs 31 31 30 31
----- ----- ----- -----
Income from operations 17 14 18 14
Interest income (expense), net 1 (1) 1 (1)
Other income, net * * * *
Equity interest in loss of
unconsolidated subsidiary (1) - (2) -
----- ----- ----- -----
Income before income taxes 17 13 17 13
Provision for income taxes 7 * 7 1
----- ----- ----- -----
Net income 10% 13% 10% 12%
===== ===== ===== =====
______________
* less than 1%
NET SALES
Net sales for the three and six months ended March 31, 1996
increased $9.3 million (66%) and $18.8 million (72%),
respectively, when compared to the same periods in fiscal 1995.
The sales growth in the three and six months ended March 31, 1996
was due primarily to the increase in unit sales of the Company's
Heatpulse(R) 8108 product and to a lesser extent, an increase in
volume of spare parts. In addition, the average selling price of
the Heatpulse 8108 was higher for the three and six months ended
March 31, 1996 than the year earlier periods primarily due to a
price increase that was effective for orders booked after
September 30, 1994. Unit sales of the Company's other products
have remained relatively stable.
The Company utilizes distributors in certain geographic regions.
All of the Company's sales in Japan are through Canon Sales Co.,
Inc. ("Canon"), and those in Europe and Korea are through Metron
Technology ("Metron"). Sales to distributors generally result in
a lower gross profit, caused by lower selling prices, which are
largely offset by reduced selling and marketing expenses. For
the three and six months ended March 31, 1996, Canon represented
29% and 23% of net sales, respectively, and Metron represented 7%
and 9% of net sales, respectively. For the same periods in the
prior fiscal year, net sales to Canon represented 24% and 18%,
respectively, and Metron represented 1% for both periods. This
increase in sales by both distributors in the three and six
months ended March 31, 1996 accounts primarily for the increase
in total international sales, which grew to 48% and 46% of net
sales, respectively, for the three and six months ended March 31,
1996, from 40% and 35% of net sales, respectively, for the same
periods of the prior fiscal year. 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 1996. However,
international sales as a percentage of net sales will vary on a
quarterly basis depending on the timing of orders and the
relative strength of domestic sales.
Three end-user customers represented 22%, 16% and 11% of net
sales in the three months ended March 31, 1996 compared to two
end-user customers representing 45% and 14% for the same period
last fiscal year. For the six months ended March 31, 1996, two
end-user customers represented 27% and 16% of net sales compared
to two end-user customers representing 35% and 11% of net sales
for the same period in the last fiscal year. The Company expects
a significant portion of its future sales to remain concentrated
within a limited number of strategic customers. As the Company
stated in its Form 10-Q for its first fiscal quarter, the Company
expects increasing competition from a competitor who has
substantially greater resources than the Company, particularly in
the sale of rapid thermal processing ("RTP") systems designed for
0.25 micron applications. This competitor's impact on future
sales cannot be estimated. For this and other reasons, there can
be no assurance that the Company will be able to retain its
strategic customers or that such customers will not cancel,
reschedule or significantly reduce the volume of orders or, in
the event orders are canceled, that such orders will be replaced
by other sales.
GROSS PROFIT
Gross profit for the three and six months ended March 31, 1996
was $11.2 million and $21.7 million, respectively, compared with
gross profit of $6.3 million and $11.7 million, respectively, for
the same periods in fiscal 1995. Gross profit as a percentage of
net sales improved to 48% for both the three and six months ended
March 31, 1996 from 45% for the same periods in the prior fiscal
year. The improved gross profit margin for the three months
ended March 31, 1996 compared to the same period in fiscal 1995
was primarily attributable to an increase in spares margin due to
a favorable product mix within spares sales and a reduction in
other manufacturing costs. This increase in gross profit margin
was partially offset by a decrease to gross margin on systems
sales, as sales to distributors increased. The improved gross
profit margin for the six months ended March 31, 1996 compared to
the same period in the prior fiscal year resulted primarily from
the previously discussed price increase of the Heatpulse 8108, as
well as the positive effect of the spares margins. Past margin
trends are not necessarily indicative of future margin
performance.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $4.4 million and
$7.8 million, respectively, for the three and six months ended
March 31, 1996, representing an increase of $2.5 million (129%)
and $4.2 million (119%), respectively, when compared with the
same periods in fiscal 1995. As a percentage of net sales, R&D
spending increased to 18% and 17%, respectively, for the three
and six months ended March 31, 1996 from 14% for the comparable
periods in the prior fiscal year. The increases in R&D expenses
in absolute dollars and as a percentage of net sales is primarily
attributable to the Company's development of two new products.
The first product is a new Heatpulse RTP system designed for
volume production environments, where process repeatability,
productivity and cost are critical considerations. This tool is
being developed to help semiconductor manufacturers increase all
three areas for the full range of RTP process applications and is
scheduled to be introduced in the third fiscal quarter of this
fiscal year. The second product in development will feature an
entirely new platform that is being designed to provide
previously unavailable RTP capabilities, both in terms of process
results and manufacturing performance for the 0.25 and 0.18
micron linewidths. This product is scheduled for introduction in
early calendar year 1997. The Company believes that significant
investment in R&D is required for the Company to maintain its
competitive position in the market and anticipates that R&D
spending for the remainder of fiscal 1996 will remain in line
with current levels; however, actual spending may fluctuate
depending on the actual level of net sales. As a percentage of
net sales, R&D spending may vary from quarter to quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $3.0
million and $5.9 million, respectively, for the three and six
months ended March 31, 1996, representing an increase of $631,000
(27%) and $1.3 million (29%), respectively, when compared with
the same periods in fiscal 1995. This increase in absolute
dollars was due primarily to the addition of personnel to support
the Company's growth, partially offset by a decrease in
commission expenses as the Company transitioned to more direct
selling and due to a change in the mix of the channels of
distribution. As a percentage of net sales, SG&A spending
decreased to 13% for both the three and six months periods ended
March 31, 1996 from 17% in the comparative periods last year,
primarily due to the result of greater sales in the most recent
fiscal year. Through the remainder of the fiscal year, SG&A
spending in absolute dollars is expected to remain in line with
current levels; however, actual spending may fluctuate depending
on the actual level of net sales. As a percentage of net sales,
SG&A spending may vary from quarter to quarter.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net increased to income of $167,000
and $380,000, respectively, for the three and six months ended
March 31, 1996 from expense of $184,000 and $265,000,
respectively, for the comparable periods in fiscal 1995,
primarily due to interest income on the Initial Public Offering
("IPO") proceeds as well as lower interest expense on the
outstanding bank line of credit, which was repaid in full with
proceeds from the IPO.
EQUITY INTEREST IN LOSS OF UNCONSOLIDATED SUBSIDIARY
Equity interest in loss of AG Associates (Israel) Ltd. ("AG
Israel"), the Company's unconsolidated subsidiary, was $277,000
and $652,000, respectively, for the three and six months ended
March 31, 1996 compared to none in the prior fiscal year as this
subsidiary was consolidated in the prior periods. The Company
invested an additional $500,000 in AG Israel in the second fiscal
quarter of 1996 and anticipates investing an additional $500,000
in the third fiscal quarter of 1996.
PROVISION FOR INCOME TAXES
The Company has a combined federal, state and foreign effective
income tax rate of 41% for the three months and six months ended
March 31, 1996, compared to 5% for the same periods last fiscal
year. The lower rate in fiscal 1995 is due to the realization of
tax benefits recognized related to the Company's operating loss
carryforwards. The Company anticipates that the 41% effective
tax rate will continue through the end of fiscal 1996.
BACKLOG
The Company's system backlog (consisting of product scheduled for
delivery within the next twelve months) as of March 31, 1996 was
approximately $17.6 million as compared to $31.8 million at
December 31, 1995 and $27.7 million at March 31, 1995. The
decrease in backlog is a result of the effects of the
semiconductor industry's slowing order rates on the Company as
customers bring production capacity in line with decreased demand
for semiconductor products as well as competitive pressures. As
a result, the Company expects that revenues for the three months
ended June 30, 1996 will be lower than revenues for the three
months ended March 31, 1996, and income from operations is
expected to be at the breakeven level. The Company includes in
its backlog customer purchase orders that have been accepted and
to which shipment dates have been assigned within the next twelve
months. All orders are subject to cancellation or delay with
limited or no penalty. Because of possible changes in delivery
schedules and additions and cancellations of orders, the
Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash, cash equivalents and
short-term investments of $15.1 million, compared to $18.9
million as of September 30, 1995. The decrease of $3.8 million
was primarily attributable to capital expenditures relating to
the Company's move to new facilities and an increase in inventory
levels. Working capital increased to $29.6 million at March 31,
1996 from $28.6 million at September 30, 1995.
The Company's operating activities provided cash of $1.6 million
during the first six months of fiscal 1996, primarily
attributable to net income before depreciation and amortization
charges and increases to accrued liabilities and income taxes
payable, partially offset by increases in accounts receivable and
inventory. The increase in receivables reflects an increase in
the volume of sales of the Company's key product in the latter
part of the quarter, while the increase in inventory was
primarily attributable to increased levels of raw materials as
well as the stocking of offsite spares inventories.
The Company's investing activities used cash of $2.8 million,
primarily for capital expenditures which were offset by the net
sale and maturity of short-term investments. Property and
equipment purchases were approximately $5.0 million for the six
months ended March 31, 1996. The Company currently anticipates
that its capital expenditures may be as much as $2.0 million for
the remainder of fiscal 1996, primarily to support the
development of new products. However, the actual level of
capital spending will be dependent on a variety of factors,
including the Company's business requirements and general
economic conditions.
Cash provided by financing activities was $166,000, consisting
primarily of proceeds from the repayment of shareholder notes and
issuance of common stock, offset by payments for capital lease
obligations.
The Company believes that current cash and short-term investment
balances, together with existing sources of liquidity and
anticipated funds from operations, will satisfy the Company's
anticipated liquidity and working capital requirements through
the end of fiscal 1996. However, due to the uncertain nature of
the industry, competitive market conditions and the successful
development of the Company's next-generation products, liquidity
and working capital requirements are difficult to anticipate
beyond the current fiscal year. 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.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1996 Annual Meeting of Shareholders on
February 29, 1996. The following matters were approved by the
shareholders by the votes indicated below:
MATTER VOTES FOR VOTES WITHHELD
Election of five directors
to serve for a one-year term
Arnon Gat 4,992,400 141,835
Anita Gat 4,991,000 143,235
Norio Kuroda 4,992,200 142,035
John C. Moore 4,991,725 142,510
Cecil Parker 4,986,725 147,510
For Against Abstain No Vote
Approval of an amendment to
the 1993 Stock Option Plan to
increase the number of Common
Stock reserved for issuance by
500,000 shares 3,786,507 100,303 60,624 1,186,801
Ratification of the selection of
Deloitte & Touche LLP as the
Company's independent auditors
for the fiscal year ending
September 30, 1996 5,077,855 9,925 46,455 0
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit 11.01 Statement re Computation of
Earnings per Share (see page 15)
Exhibit 27 Financial Data Schedule
B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AG Associates, Inc.
(Registrant)
Dated: May 9, 1996 By: /s/ Arnon Gat
Arnon Gat
Chief Executive Officer & Acting
Chief Financial Officer, (Duly
Authorized and Principal Financial
Officer)