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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, 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, 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 December 2, 1996
as reported by the Nasdaq National Market ($6.25), was approximately
$18,702,219. 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 5,945,264 shares of Common Stock outstanding as of December
2, 1996.
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 1997 Annual Meeting of
Shareholders to be held on January 30, 1997 that is to be filed with the
Securities and Exchange Commission within 30 days after the date hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY AND ITS PRODUCTS
AG Associates, Inc. (the "Company") designs, manufactures, markets and
supports advanced single-wafer rapid thermal processing ("RTP") equipment used
in manufacturing integrated circuits and, based on both unit sales and revenue,
is the leader in the RTP market. 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.
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 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 and 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.
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- 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 five 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.
- 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 megabit 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
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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.
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, therefore increasing throughput and reducing cost per wafer. The
Heatpulse 8800 system is targeted for R&D and production of devices utilizing
.25 micron technology. The initial first three beta systems were shipped during
the fourth quarter of fiscal 1996 with a price range of $550,000 to $750,000
depending upon options and configuration.
Heatpulse 8108. The Company's Heatpulse 8108 rapid thermal processing system
was first shipped in October 1992. The 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 0.35
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. Current end-user selling prices for Heatpulse 8108
systems typically range from $500,000 to $700,000, depending upon configuration
and options.
Heatpulse 4100 Series. The Heatpulse 4100S, first shipped in April 1994, 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
0.6 micron. The Heatpulse 4100S improves on both the reliability and performance
of the Heatpulse 4100. Current end-user selling prices for Heatpulse 4100 Series
systems typically range from $350,000 to $450,000, depending upon configuration
and options. 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.
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). Current
end-user selling prices for Heatpulse 610 systems typically range from $60,000
to $65,000, depending upon configuration and options. 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. During its fourth fiscal quarter, the Company introduced a number
of performance upgrades to all of its 200mm production systems. Among those are
a high performance ceramic shield which improves systems' repeatability and
reduces their sensitivity to the type of wafers that are being processed. Other
upgrades include a throughput package and an individual lamp control package
that could allow a user to achieve Heatpulse 8800 performance on earlier models.
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.
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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
1050(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, 1100(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. For example, the Company has previously engaged in a joint
development effort with the Massachusetts Institute of Technology and Sematech,
Inc., an industry consortium, on chamber modeling and optimization.
Product Development. In August 1995, the Company undertook a major
development program to design and manufacture a .18 micron rapid thermal
processing system. This system was intended to provide the Company with a next
generation product. To properly execute this plan, the Company increased its R&D
and engineering personnel dedicated and focused on this program. Currently, the
Company has approximately 45 professionals working in the following disciplines:
hardware, mechanical, computer, control algorithm, software and simulation. This
program is headed by the Company's Vice President Product Development and is
expected to last approximately two years.
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's 49%-owned subsidiary.
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.
During fiscal years ended September 30, 1996, 1995 and 1994, the Company
expended $16,653,000, $8,893,000 and $6,078,000, respectively, on research and
development, representing approximately 23%, 14% and 15% of revenues for such
periods. See Part II, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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
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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. For example, customer-requested
projects have included (a) improving long-term stability of temperature
measurement gauges and (b) identifying requirements for, and executing, a remote
control software package to allow a specific customer to control the Company's
equipment from a remote centralized computer. 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 increase gradually the
capacity of their existing fabrication lines. The longer cycles are related to
customers who have long-term plans for constructing new production facilities
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 product. 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 and maintains an
adequate amount of parts inventory. 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,
potential customers and groups of 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 to Canon's
customers' specifications. Net sales to Canon amounted to 25%, 15% and 13% of
the Company's net sales for the years ended September 30, 1996, 1995 and 1994,
respectively. Net sales to Metron amounted to 14% and 15% for the years ended
September 30, 1996 and 1994, respectively. Net sales to Metron for the year
ended September 30, 1995 accounted for less than 10% of the Company's net sales.
International sales represented 54%, 32% and 48% of the Company's net sales
for the years ended September 30, 1996, 1995 and 1994, 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.
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CUSTOMERS
The Company's end-user customers include most of the leading semiconductor
manufacturers worldwide. 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. For the year ended September 30, 1995, Intel Corporation
accounted for 29% of total net sales. Sales to International Business Machines
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, 1996, 1995 and 1994.
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, 1996 and September 30, 1995 was
approximately $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 does not offer. 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, a German-based competitor,
which has resulted in a loss of some market share for the Company, predominantly
in Europe. 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. For example, Applied Materials,
Inc., a large manufacturer of semiconductor manufacturing equipment located in
the United States, has entered the RTP segment of the thermal processing market
in which the Company competes and has reported sales of an RTP cluster tool for
throughput enhancement to certain of the Company's existing customers. During
the second quarter of fiscal 1996, the Company announced that one of its major
customers had chosen an Applied Materials system to perform 75% of its RTP
steps. The Company was notified that it will continue to receive the remaining
25% of this customer's business for the .25 micron technology. At the time that
this competition took place, the Heatpulse 8800 was not yet available for
evaluation. 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, including Applied Materials, Inc., 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
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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 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 not currently involved in any intellectual property
litigation. However, there can be no assurance that 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
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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, 1996, the Company had 222 full-time employees, including
73 in engineering, research and development, 51 in manufacturing, 58 in service,
23 in marketing and sales and 17 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.
9
<PAGE> 10
ITEM 2. PROPERTIES
In October 1995, the Company moved its headquarters from Sunnyvale,
California to a new 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. The Company also leases approximately 1,500 square feet of office space
for its customer support personnel in Austin, Texas.
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.
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 expanding
operations in the future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any intellectual property
litigation. However, 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Not applicable.
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<PAGE> 11
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 Nasdag 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.
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
The closing price of the Company's Common Stock on December 2, 1996, as
reported by the Nasdaq National Market, was $6.25.
COMMON SHAREHOLDERS OF RECORD
At October 31, 1996, there were approximately 188 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 anticipated future growth.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
---------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994 1993 1992
------------------ -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Net sales $71,089 $62,725 $40,251 $27,792 $23,883
Gross profit $31,725 $29,028 $17,578 $7,074 $9,698
Research and development $16,653 $8,893 $6,078 $7,665 $6,138
Selling, general and administrative $10,204 $10,562 $7,035 $5,894 $6,243
Restructuring charges - - - $2,645 $4,102
Income (loss) from operations $4,867 $9,573 $4,465 ($9,130) ($6,785)
Income (loss) before income taxes $4,487 $9,221 $3,361 ($9,467) ($6,961)
Net income (loss) $2,743 $9,753 $3,224 ($9,496) ($7,216)
Net income (loss) per share $0.45 $2.05 $0.87 ($2.52) ($1.93)
Shares used in per share calculation 6,137 4,770 3,772 3,755 3,746
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
---------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
------------------ -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $11,985 $18,858 $1,598 $899 $157
Working capital (deficiency) $26,851 $28,649 ($1,257) ($4,817) $756
Total assets $45,852 $48,825 $14,676 $14,142 $14,749
Long-term obligations $11 $193 $691 $422 $1,220
Convertible subordinated debentures - - $2,107 $2,045 -
Minority interest in subsidiary - - $1,979 $1,979 -
Shareholders' equity (deficiency) $35,694 $32,300 ($3,740) ($7,445) $1,994
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------
(in thousands, except per share data) Sep 30 June 30 March 31 Dec. 31
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Consolidated Statement of Income Data: (unaudited)
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
1995
Net sales $19,731 $16,780 $13,937 $12,277
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
</TABLE>
12
<PAGE> 13
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.
Except for the historical information contained herein and in the Annual Report
of which this Form 10-K is a part, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Form 10-K and the Annual Report 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, that involve risks and
uncertainties, including the rate of orders for the Company's products, the
timely availability and acceptance of new products, the impact of competitive
products and pricing, the management of growth, the impact of the Company's
efforts to implement its evolving long-term strategy and the other risks
detailed below and from time to time in the Company's other reports filed with
the Securities and Exchange Commission. 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 but are not the exclusive means of identifying such statements. In
addition, the section labeled "Factors That May Affect Future Results" and
portions of the Annual Report, which all have no asterisks for improved
readability, consist 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.
FACTORS THAT MAY AFFECT FUTURE 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,
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 expense 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.
In recent quarters, the Company has experienced declining net sales and has
begun to incur net losses on a quarterly basis as a result of the effects of the
semiconductor industry's slowing order rate, continuation of a high level of
research and development spending on the Company's next generation products and
competitive pressures. The Company's ability to reduce the trend of declining
net sales, which have started to yield net losses, is dependent on several
factors including increased order rates for the Company's products, successful
and timely development and market acceptance of the Company's next generation
products and successful competition with the Company's competitors on a price
and performance basis. Many of these factors are not within the Company's
control, and if order rates for the Company's products fail to increase, if the
Company's next generation products are not successfully and timely developed and
accepted by the Company's customers, or if the Company cannot successfully
compete with its competitors, many of whom have substantially greater resources
than the Company, the Company's net sales will continue to decline and the
Company would
13
<PAGE> 14
experience further net losses, which would have a material adverse effect on the
Company's financial condition and results of operations. *In particular, the
Company expects net sales for the fiscal year ending September 30, 1997 to be
lower than the net sales achieved during fiscal 1996 due to the semiconductor
industry's slowing order rate and competitive pressures.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated Statement of
Income as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1996(tau) 1995 1994
--------- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 55 54 56
---------- ---------- ----------
Gross profit 45 46 44
---------- ---------- ----------
Operating expenses:
Research and development 23 14 15
Selling, general and administrative 14 17 18
---------- ---------- ----------
Total operating expenses 37 31 33
---------- ---------- ----------
Income from operations 7 15 11
Other income (expense), net 1 * (2)
Equity in loss of unconsolidated
subsidiary (2) * ---
Income before income taxes 6 15 9
---------- ---------- ----------
Provision (benefit) for income taxes 2 (1) 1
========== ========== ==========
---------- ---------- ----------
Net income 4% 16% 8%
========== ========== ==========
</TABLE>
* Less than 1 percent
(tau) Percentages may not total 100% due to rounding
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
rapid thermal processing (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(R) 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 reflects the semiconductor industry's slowing order
rate and competitive pressures. The average selling price 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.
*The Company expects net sales for fiscal 1997, which will be generated
predominantly from the sale of the Company's Heatpulse 8800 and Heatpulse 8108
products, to be lower than the net sales achieved during fiscal 1996 due to the
semiconductor industry's slowing order rate and competitive pressures. *The
Company also believes that unit sales of the Company's 610 and 4100 Series
products will stay at a low and constant level of 3 to 5 systems per quarter
combined for these two products as they have for fiscal 1996 and fiscal 1995.
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 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. 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
14
<PAGE> 15
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. *Based upon the geographic locations of semiconductor
manufacturers, the Company anticipates that international sales will continue to
account for a significant portion of net sales in fiscal 1997. *However, the
percentage of sales will vary on a quarterly basis depending on 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 income from operations.
The Company's end-user customers include most of the world's leading
semiconductor manufacturers. 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. For the year ended September 30, 1995, Intel Corporation
accounted for 29% of total net sales, and International Business Machines
Corporation accounted for 12% of total net sales. *The Company expects that a
limited number of end-user customers will account for a significant percentage
of net sales in fiscal 1997, and there can be no assurance that any significant
end-user customer will continue to purchase the Company's products. *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. *In this regard, the
Company notes that Intel Corporation will be less significant to the Company in
fiscal 1997 than in fiscal 1996.
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. *The Company expects that the gross profit
percentage for fiscal 1997 will be lower than in prior years due to the impact
of fixed overhead costs on lower expected sales volume.
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 newest
product, the Heatpulse 8800, which is expected to replace the current model
Heatpulse 8108 during fiscal 1997. The Heatpulse 8800 product is 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. The Company is also developing its next
generation 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. *The next generation products are
scheduled for introduction in the second or third quarter of calendar 1997. *The
failure of the Company to timely develop this new platform, the failure of this
new platform to meet customer expectations regarding performance and cost or the
failure of this new platform 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;
however, it anticipates that such expenses in terms of absolute dollars will
decline toward the end of fiscal 1997, although such expenses as a percentage of
net sales may fluctuate. 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
15
<PAGE> 16
reduction in sales commissions as a result of lower sales. *The Company
anticipates that SG&A expenses will decrease in absolute dollars throughout
fiscal 1997 due to lower sales commissions and the Company's continued cost
control measures, but will vary as a percentage of net 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 Associates (Israel) Ltd.
("AG Israel") during fiscal 1996 as compared to $364,000 from May 1995 through
the end of fiscal 1995. In May 1995, a 51 percent interest in AG Israel was
acquired by Clal Electronics Industries Ltd. ("Clal Electronics"). The Company
retains a 49% interest in AG Israel and thus 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. As of
September 30, 1996, the Company's investment in AG Israel had been reduced to
zero. *Additional losses from AG Israel's operations will be recorded only to
the extent of any future investments by the Company. *The Company is considering
a proposal to invest additional amounts in AG Israel in conjunction with
proposed investments by other investors.
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%). *The Company anticipates the fiscal 1997
effective tax rate to be similar to the rate experienced during fiscal 1996.
The Company's system backlog (consisting of product scheduled for delivery
within the next twelve months) as of September 30, 1996 was approximately $10.3
million as compared to $31.5 million at September 30, 1995. The decrease in
backlog was a result of the effects of the semiconductor industry's slowing
order rates as customers drastically slowed down their expansion plans, as well
as competitive pressures. 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 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, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1994
Net sales increased to $62.7 million in fiscal 1995 from $40.2 million in fiscal
1994, an increase of 56 percent. Substantially all net sales were derived from
rapid thermal processing (RTP) operations for both periods. The sales growth in
fiscal 1995 was primarily due to the increase in unit sales of the Company's
Heatpulse 8108 product and included sales to one customer of $18.1 million
versus $3.4 million in fiscal 1994. The average selling price of the Heatpulse
8108 increased in fiscal 1995 due primarily to an increasing proportion of
direct sales, which generally have higher selling prices than sales to
distributors. Unit sales of the Company's other products remained relatively
stable from fiscal 1994 to fiscal 1995.
Sales to distributors were $12.3 million in fiscal 1995 compared to $11.3
million in the prior fiscal year. Sales to distributors generally resulted in
lower gross profit, caused by lower selling prices, which were largely offset by
reduced selling and marketing expenses. International sales for the Company
increased to $19.8 million in fiscal 1995 from $19.2 million in fiscal 1994, an
increase of 3%. As a percentage of net sales, international sales decreased to
32% for the current fiscal year from 48% in the prior fiscal year. This
declining percentage of international sales resulted primarily from U.S. sales
rising more rapidly during these periods. The increase in absolute dollars for
international sales in fiscal 1995 was primarily due to increased sales to the
Far East, primarily to Japan and Taiwan, and partially offset by a decrease in
sales by the Company's European distributor, principally as a result of
increased price competition.
Gross profit increased to $29.0 million in fiscal 1995 from $17.6 million in the
prior fiscal year, an increase of 65%. Gross profit as a percentage of net sales
improved to 46% in the fiscal 1995 from 44% in fiscal 1994. The improved gross
margin
16
<PAGE> 17
percentage resulted primarily from an increasing proportion of direct sales,
which generally have higher gross margins than sales to distributors, and an
increase in sales to one manufacturer with specific feature requirements and to
customers selecting systems with more complex features.
Research and development ("R&D") expenses increased to $8.9 million in fiscal
year 1995 from $6.1 million in the prior fiscal year, an increase of 46%. As a
percentage of net sales, R&D expenses decreased to 14% in fiscal 1995 from 15%
in fiscal 1994, reflecting higher sales in the more recent period. The Company
continued its efforts to remain competitive through investments in the
development of new features for its current products. The increase in R&D
expenses in absolute dollars was primarily attributable to the addition of
personnel.
Selling, general and administrative ("SG&A") expenses increased to $10.6 million
in fiscal 1995 from $7.0 million in fiscal 1994, an increase of 50%. As a
percentage of net sales, SG&A expenses decreased to 17% in fiscal 1995 from 18%
in fiscal 1994, reflecting higher sales in the more recent period. The increase
in absolute dollars for fiscal 1995 was due primarily to the addition of
personnel to support the Company's growth.
Other income (expense), net was $12,000 of income in fiscal 1995 and $1.1
million of expense in fiscal 1994. Interest expense decreased to $370,000 in
fiscal 1995 from $570,000 in fiscal 1994 due primarily to lower average debt
balances and the repayment of all outstanding indebtedness under the line of
credit following the Company's initial public offering in fiscal 1995. Interest
income was $352,000 in fiscal 1995, reflecting interest earned on investment of
the proceeds from the Company's initial public offering. Other expense in fiscal
1994 included a charge of $400,000 for the revision of the terms of the
Investment Company of Bank Hapoalim Ltd.'s ("Hapoalim Investment Co.") minority
interest conversion rate, debenture conversion price and warrant price and
$190,000 related to a financing transaction that was not completed.
Equity in loss of unconsolidated subsidiary was $364,000 for fiscal 1995. This
represents the Company's share of the losses of AG Israel from May of 1995, when
a 51% interest in AG Israel was acquired by Clal Electronics, through September
30, 1995. The Company retains a 49% interest in AG Israel and thus has accounted
for its investment on the equity method since June 1, 1995. Prior to June 1,
1995, 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.
For fiscal 1995, the Company recorded a benefit for income taxes of $532,000
compared to an expense of $137,000 in fiscal 1994. As a result of the
significant increase in profitability during the current fiscal year, 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 year
1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash, cash equivalents and short-term
investments of $12.0 million, compared to $18.9 million as of September 30, 1995
and $1.6 million as of September 30, 1994. The decrease of $6.9 million from
fiscal 1995 to fiscal 1996 was primarily attributable to capital expenditures
relating to the Company's move to a new facility, an increase in inventory
levels and its required $1 million investment in AG Israel. 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 $26.9 million
at September 30, 1996 from $28.6 million at September 30, 1995 and a deficiency
of $1.3 million as of September 30, 1994. During fiscal 1996, the Company
negotiated a $5 million revolving line of credit, which is available through
August 1, 1997. The line is collateralized by all assets of the Company except
intellectual property. Borrowings bear interest at prime plus 1.25% per annum.
There were no outstanding borrowings at September 30, 1996.
The Company's operating activities provided cash of $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
17
<PAGE> 18
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 operating activities was $4.2 million in fiscal 1994, as net income of $3.2
million and an increase in accrued liabilities of $1.4 million, due to increased
commission and payroll accruals, were offset by a decrease in customer advances
and deferred revenues.
Cash used in investing activities was $7.3 million in fiscal 1996, $13.5 million
in fiscal 1995 and $649,000 in fiscal 1994. Capital expenditures, purchases of
short term investments and a required $1 million equity investment in AG Israel
were the principal uses of cash in investment activities in fiscal 1996,
partially offset by maturities of short term investments. 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 $6.9 million in fiscal 1996, $2.2 million in
fiscal 1995 and approximately $800,000 in fiscal 1994; the Company did not enter
into any new lease agreements in fiscal 1996; the Company leased assets with a
cost of $880,000 in fiscal 1995 and $912,000 in fiscal 1994. 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 $3.2 million in fiscal
1997, principally to support new product development. *The Company is
considering a proposal to invest additional amounts in AG Israel in conjunction
with proposed investments by other investors.
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. Financing activities used cash of $2.8 million in fiscal 1994
principally reflecting the repayment of short-term borrowings, obligations under
capital leases and reductions in long-term debt.
*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.
CHANGE IN INDEPENDENT AUDITORS
Effective in June 1994, the Company selected Deloitte & Touche LLP to
replace Ernst & Young LLP as independent auditors for the Company. The decision
to change auditors was approved by the Company's Board of Directors. The reports
of Ernst & Young LLP on the financial statements of the Company for the fiscal
year ended September 30, 1993 did not contain any adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During the fiscal year ended September 30, 1993 and
subsequent interim periods through June 1994, there were no disagreements with
the former auditors on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, with
disagreements (if not resolved to the satisfaction of the former auditors) would
have caused them to make reference in connection with their report to the
subject matter of disagreement.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of September 30,
1996 and 1995 and for the Three Years in the Period Ended September 30, 1996 and
Independent Auditors' Report follow. The pages of the Company's Consolidated
Financial Statements are independently numbered from this Form 10-K.
18
<PAGE> 19
AG ASSOCIATES, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1996 AND 1995 AND FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1996
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 20
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, 1996 and 1995 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1996. 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 did not audit the fiscal 1994 income statement of AG Associates
(Israel) Ltd. (a consolidated subsidiary in fiscal 1994) which statement
reflects total costs and expenses of $1,170,000 for the year ended September 30,
1994. That statement was audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for AG Associates (Israel) Ltd. for fiscal 1994 is based solely on the report of
such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the auditors of AG
Associates (Israel), Ltd. as described above, such consolidated financial
statements present fairly, in all material respects, the financial position of
AG Associates, Inc. and its subsidiary at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
October 25, 1996
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
AG Associates (Israel) Ltd.
We have examined the balance sheet of AG Associates (Israel) Ltd. as of
September 30, 1993 and 1994 and the related statements of loss, changes in
shareholders' equity and cash flows for the period from inception (April 2,
1992) to September 30, 1992 and for the years ended September 39, 1993 and 1994
(not presented separately herein). Our examinations were made in accordance with
generally accepted auditing standards, including those prescribed by the Israeli
Auditors (Mode of Performance) Regulations, 1973, and accordingly we have
applied such auditing procedures as we considered necessary in the
circumstances.
In our opinion, the aforementioned financial statements present fairly, in
conformity with accounting principles generally accepted in Israel and in the
United States (as applicable to the aforementioned financial statements, such
accounting principles are practically identical), the financial position of the
company at September 30, 1993 and 1994, and the results of its operations and
its cash flows for the period ended September 30, 1992 and for the years ended
September 30, 1993 and 1994.
Without qualifying our opinion, we draw attention to the fact that the company
has suffered losses in considerable amounts since incorporation and is dependent
on its parent company in the United States.
KESSELMAN & KESSELMAN
Haifa, Israel
November 8, 1994
<PAGE> 22
AG ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,996 $ 8,258
Short-term investments 9,989 10,600
Receivables (net of allowances of $903 and $1,456) 8,560 13,508
Inventories 11,668 8,394
Income taxes refundable 1,463 --
Deferred income taxes 2,859 3,665
Prepaid expenses and other current assets 462 556
-------- --------
Total current assets 36,997 44,981
Property and equipment - net 8,210 3,453
Deferred income taxes 645 239
Investment in AG Israel -- 152
-------- --------
Total $ 45,852 $ 48,825
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,669 $ 7,041
Accrued liabilities 5,011 7,170
Current portion of capital lease obligations 222 321
Income taxes payable -- 650
Customer advances and deferred revenues 245 1,150
-------- --------
Total current liabilities 10,147 16,332
Capital lease obligations 11 193
Commitments (Notes 7 and 14)
Shareholders' equity:
Common stock, no par value: 25,000,000 shares authorized;
shares outstanding: 1996 - 5,943,503; 1995 - 5,836,399 35,640 35,135
Notes receivable from shareholders -- (92)
Deferred stock compensation (17) (81)
Net unrealized loss on short-term investments (10) --
Retained earnings (accumulated deficit) 81 (2,662)
-------- --------
Total shareholders' equity 35,694 32,300
-------- --------
Total $ 45,852 $ 48,825
======== ========
</TABLE>
See notes to consolidated financial statements.
- -3-
<PAGE> 23
AG ASSOCIATES, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (including sales to a shareholder/distributor of $17,333,
$9,132 and $5,321) $ 71,089 $ 62,725 $ 40,251
Cost of sales 39,365 33,697 22,673
-------- -------- --------
Gross profit 31,724 29,028 17,578
-------- -------- --------
Operating expenses:
Research and development 16,653 8,893 6,078
Selling, general and administrative 10,204 10,562 7,035
-------- -------- --------
Total 26,857 19,455 13,113
-------- -------- --------
Income from operations 4,867 9,573 4,465
-------- -------- --------
Other income and expense:
Interest income 708 352 --
Interest expense (59) (370) (570)
Equity in loss of unconsolidated subsidiary (1,152) (364) --
Other, net 123 30 (534)
-------- -------- --------
Income before provision (benefit) for income taxes 4,487 9,221 3,361
Provision (benefit) for income taxes 1,744 (532) 137
-------- -------- --------
Net income $ 2,743 $ 9,753 $ 3,224
======== ======== ========
Net income per share $ 0.45 $ 2.05 $ 0.87
======== ======== ========
Shares used in per share calculations 6,140 4,770 3,772
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- -4-
<PAGE> 24
AG ASSOCIATES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCES, October 1, 1993 31,250 $ 50 2,946,329 $ 8,153
Issuance of common stock -- -- 1,583 8
Exercise of options -- -- 7,562 30
Revision of warrants and debenture terms -- -- -- 400
Deferred stock compensation -- -- -- 230
Preferred stock dividends -- -- -- --
Stock released from Rapro escrow -- -- (28,146) (56)
Net income -- -- -- --
---------- ---------- ---------- ----------
BALANCES, September 30, 1994 31,250 50 2,927,328 8,765
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
Amortization of deferred stock compensation -- -- -- --
Preferred stock dividends -- -- -- --
Net income -- -- -- --
---------- ---------- ---------- ----------
BALANCES, September 30, 1995 -- -- 5,836,399 35,135
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 -- -- -- --
Collection of notes receivable -- -- -- --
Net income -- -- -- --
---------- ---------- ---------- ----------
BALANCES, September 30, 1996 -- $ -- 5,943,503 $ 35,640
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NET
UNREALIZED
NOTES LOSS ON RETAINED TOTAL
RECEIVABLE DEFERRED SHORT- EARNINGS SHAREHOLDERS'
FROM STOCK TERM (ACCUMULATED EQUITY
SHAREHOLDERS COMPENSATION INVESTMENTS DEFICIT) (DEFICIENCY)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, October 1, 1993 $ (14) $- $ -- $(15,634) $ (7,445)
Issuance of common stock -- -- -- -- 8
Exercise of options -- -- -- -- 30
Revision of warrants and debenture terms -- -- -- -- 400
Deferred stock compensation -- (128) -- -- 102
Preferred stock dividends -- -- -- (3) (3)
Stock released from Rapro escrow -- -- -- -- (56)
Net income -- -- -- 3,224 3,224
------------ ------------ ------------ ------------ ------------
BALANCES, September 30, 1994 (14) (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 (78) -- -- -- 332
Amortization of deferred stock compensation -- 47 -- -- 47
Preferred stock dividends -- -- -- (2) (2)
Net income -- -- -- 9,753 9,753
------------ ------------ ------------ ------------ ------------
BALANCES, September 30, 1995 (92) (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)
Collection of notes receivable 92 -- -- -- 92
Net income -- -- -- 2,743 2,743
------------ ------------ ------------ ------------ ------------
BALANCES, September 30, 1996 $ -- $ (17) $ (10) $ 81 $ 35,694
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
- -5-
<PAGE> 25
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,743 $ 9,753 $ 3,224
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 2,078 1,073 608
Equity in loss of unconsolidated subsidiary 1,152 364 --
Deferred income taxes 400 (3,904) --
Deferred stock compensation and stock issued for services rendered 64 217 102
Interest accrued (paid) on convertible subordinated debentures -- (107) 97
Revision of warrant and debenture terms -- -- 400
Other 17 105 (56)
Changes in assets and liabilities:
Receivables 4,948 (7,276) (810)
Inventories (3,274) (4,071) 206
Prepaid expenses and other current assets 94 (327) (55)
Accounts payable (2,372) 3,201 19
Accrued liabilities (2,159) 2,164 1,445
Customer advances and deferred revenues (905) (259) (1,037)
Income taxes payable/refundable (2,113) 441 12
-------- -------- --------
Net cash provided by operating activities 673 1,374 4,155
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (3,199) (10,600) --
Maturities of held-to-maturity investments 3,800 -- --
Investment in AG Israel (1,000) (782) --
Other assets -- 15 160
Capital expenditures (6,852) (2,173) (809)
-------- -------- --------
Net cash used for investing activities (7,251) (13,540) (649)
-------- -------- --------
Cash flows from financing activities:
Short-term borrowing -- 2,000 1,600
Repayments of short-term borrowing -- (4,400) (3,700)
Reductions in long-term obligations (281) (865) (742)
Proceeds from initial public offering -- 20,232 --
Sales of common stock 505 1,861 38
Collection of notes receivable 92 -- --
Preferred stock dividends -- (2) (3)
-------- -------- --------
Net cash provided by (used for) financing activities 316 18,826 (2,807)
-------- -------- --------
Net increase (decrease) in cash and equivalents (6,262) 6,660 699
Cash and equivalents at beginning of period 8,258 1,598 899
-------- -------- --------
Cash and equivalents at end of period $ 1,996 $ 8,258 $ 1,598
======== ======== ========
(Continued)
</TABLE>
- -6-
<PAGE> 26
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing
activities:
Assets acquired under capital leases $- $ 280 $ 435
======= ======= =====
Deferred stock compensation $- $- $ 230
======= ======= =====
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 $ 50 $ 369 $ 471
======= ======= =====
Income taxes $ 3,207 $ 2,930 $ 104
======= ======= =====
</TABLE>
See notes to consolidated financial statements.
- -7-
<PAGE> 27
AG ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
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) name, 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
foreign distributors.
CONSOLIDATION - The consolidated financial statements for fiscal 1996
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 for fiscal 1995 and 1994 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 49% 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.
- -8-
<PAGE> 28
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.
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.
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.
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 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 income for fiscal 1994 is adjusted for the
interest on convertible debentures assumed converted.
2. INVESTMENTS
Short-term investments at September 30 consist of (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUE
-------- -------- -------- --------
Available-for-sale investments:
<S> <C> <C> <C> <C>
Adjustable rate preferred stocks $ 2,500 $ -- $ -- $ 2,500
Corporate debt securities 7,499 10 (20) 7,489
-------- -------- -------- --------
$ 9,999 $ 10 $ (20) $ 9,989
======== ======== ======== ========
1995
Available-for-sale investments -
Adjustable rate preferred stocks $ 6,800 $ -- $ -- $ 6,800
Held-to-maturity investments -
Corporate debt securities 3,800 3 (26) 3,777
-------- -------- -------- --------
$ 10,600 $ 3 $ (26) $ 10,577
======== ======== ======== ========
</TABLE>
There were no realized gains or losses for the years ended September 30,
1996 and 1995. All corporate debt securities held at September 30, 1996
mature within one year.
- -9-
<PAGE> 29
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 7,865 $ 3,819
Work-in-process 3,803 4,575
---------- -------
$ 11,668 $ 8,394
========== =========
</TABLE>
Inventories are shown net of reserves for obsolete, slow-moving, and
nonsalable inventory of $3,289,000 and $2,669,000 at September 30, 1996
and 1995, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Machinery and equipment $ 9,534 $ 5,535
Furniture and fixtures 643 1,698
Leasehold improvements 2,273 1,221
Construction in progress 235 499
-------- --------
Total 12,685 8,953
Accumulated depreciation and amortization (4,475) (5,500)
-------- --------
Property and equipment - net $ 8,210 $ 3,453
======== ========
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1995
------ ------
<S> <C> <C>
Warranty reserve $2,440 $2,651
Compensation and benefits 1,186 1,630
Commissions 502 850
Other 883 2,039
------ ------
$5,011 $7,170
====== ======
</TABLE>
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 August 1, 1997. The line of credit is
collateralized by substantially all of the Company's assets. Advances bear
interest at the bank's reference rate (8.25% at September 30, 1996) plus
1.25%. At September 30, 1996, no balance was outstanding under this line.
- -10-
<PAGE> 30
The line of credit is subject to certain financial covenants including
maintenance of a minimum quick ratio of 1.25:1 and tangible net worth of
$32,000,000 and a maximum ratio of debt to total net worth of 1:1 and
maximum quarterly net loss of $2,050,000, $1,750,000, $1,550,000, and
$650,000 for the fourth quarter of fiscal 1996 and the first, second and
third quarters of fiscal 1997, respectively. At September 30, 1996, the
Company is in compliance with these covenants.
7. LEASES
Equipment with a cost and accumulated amortization of $714,000 and
$499,000 at September 30, 1996, respectively, ($880,000 and $395,000 at
September 30, 1995) has been leased under capital leases.
In July 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. The Company
commenced occupation of the new site in November 1995.
Future minimum annual capital and operating lease commitments at September
30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
-------- -------
<C> <C> <C>
1997 $ 868 $ 228
1998 869 16
1999 897 --
2000 931 --
2001 966 --
Thereafter through 2002 1,001 --
------ ------
Total minimum lease payments $5,532 244
======
Amount representing interest 11
------
Present value of minimum lease payments $ 233
======
</TABLE>
Rent expense for operating leases was approximately $1,134,000, $684,000
and $661,000 for the years ended September 30, 1996, 1995 and 1994,
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.
- -11-
<PAGE> 31
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, 1996.
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 nonstatutory 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.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting
for stock options and other equity instruments, such as stock purchase
plans. Under this method, compensation cost is measured based on the fair
value of the stock award when granted and is recognized as an expense over
the service period, which is usually the vesting period. This standard
will be effective for the Company beginning in fiscal 1997 and requires
measurement of awards made beginning in fiscal 1996.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma effect
of net income and earnings per share as if the company had applied the new
method of accounting. The Company intends to implement these disclosure
requirements for its stock option plans. As a result, for options issued
to employees, adoption of the new standard will not impact reported
earnings or earnings per share, and will have no effect on the Company's
cash flows.
- -12-
<PAGE> 32
Option activity under the Plans was as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ----------------------
<S> <C> <C>
Outstanding, October 1, 1993 198,881 $ 0.80 -- $ 9.24
Granted 509,350 $ 3.00 -- $ 4.00
Exercised (7,562) $ 0.80 -- $ 6.96
Canceled (237,889) $ 0.80 -- $ 9.24
---------
Outstanding, September 30, 1994 462,780 $ 2.32 -- $ 9.24
Granted 414,824 $ 7.60 -- $33.19
Exercised (95,280) $ 2.32 -- $ 9.24
Canceled (63,347) $ 2.40 -- $ 8.50
---------
Outstanding, September 30, 1995 718,977 $ 2.40 -- $33.19
Granted 868,363 $ 5.38 -- $31.21
Exercised (54,410) $ 2.40 -- $ 9.24
Canceled (725,014) $ 4.00 -- $33.19
---------
Outstanding, September 30, 1996 807,916 $ 2.40 -- $31.21
=========
</TABLE>
At September 30, 1996, the weighted average exercise price of outstanding
options was $6.44. In addition, 229,979 options were exercisable and
637,674 options were available for future grant.
As of September 30, 1996 and 1995, nonqualified options to purchase 74,934
and 4,375 shares, respectively, were outstanding to consultants and
directors at prices ranging from $3.60 to $16.71.
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 May 1994, the Company canceled options to purchase 86,875 shares of
common stock exercisable at $4.80 to $7.40 per share and issued
replacement options with an exercise price of $4.00 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 is 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 1996 and 1995 was $64,000 and $47,000,
respectively.
In November 1994, the Company reserved 50,000 shares for a directors stock
option plan. Options to exercise 6,000 shares at prices ranging from $9.14
to $17.50 have been issued under this plan at September 30, 1996.
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 1996, 52,694 shares were issued under this
Plan for net proceeds to the Company of $310,000. No shares had been
issued under this Plan in fiscal 1995.
- -13-
<PAGE> 33
9. INCOME TAXES
The income before provision (benefit) for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Domestic $ 5,639 $ 10,043 $ 3,895
Foreign (1,152) (822) (534)
-------- -------- --------
Total $ 4,487 $ 9,221 $ 3,361
======== ======== ========
</TABLE>
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal:
Current $ 1,253 $ 2,650 $ 57
Deferred 334 (3,200) --
------- ------- -------
1,587 (550) 57
State:
Current 91 722 80
Deferred 66 (704) --
------- ------- -------
Provision (benefit) for income taxes $ 1,744 $ (532) $ 137
======= ======= =======
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Tax at federal statutory rate $ 1,570 $ 3,227 $ 1,313
State taxes 87 436 53
Foreign sales corporation benefit (220) (238) --
Foreign losses not deductible 403 177 --
Other (28) 95 --
Tax impact of AG Israel transaction -- 2,136 --
Decrease in valuation allowance (68) (6,365) (1,229)
------- ------- -------
Provision (benefit) for income taxes $ 1,744 $ (532) $ 137
======= ======= =======
</TABLE>
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.
- -14-
<PAGE> 34
The components of the net deferred tax assets as of September 30 were as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards of Rapro $ 1,408 $ 1,476
Credit carryforwards 106 --
Reserves not currently deductible for tax purposes 2,753 3,665
Book depreciation over tax depreciation 645 239
------- -------
Gross deferred tax assets 4,912 5,380
Valuation allowance - Rapro net operating loss and credit
carryforwards (1,408) (1,476)
------- -------
Net deferred tax assets $ 3,504 $ 3,904
======= =======
</TABLE>
Realization of the tax benefit related to the Company's deferred tax
assets is dependent upon the generation of future taxable income.
Management has determined that recognition of its deferred tax assets is
considered more likely than not at September 30, 1996, and therefore, has
provided no valuation allowance. The valuation allowance at September 30,
1995 of $1,476,000, which related to amounts arising from Rapro's
preacquisition carryforwards, was reduced to $1,408,000 in 1996 due to
utilization of $68,000 of these 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, 1995 and 1994 from
a shareholder. Rent expense related to this lease for 1996, 1995 and 1994
was $72,000, $396,000 and $446,000, respectively.
Sales and accounts receivable related to significant customers were:
<TABLE>
<CAPTION>
SALES AS A PERCENTAGE
ACCOUNTS OF NET REVENUES
RECEIVABLE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Distributor/shareholder * 25% 25% 15% 13%
Distributor 37% 10 14 * 15
Intel * 37 20 29 *
NEC * * 17 * *
IBM * 13 * 12 *
</TABLE>
* Less than 10% of net revenues or accounts receivable
- -15-
<PAGE> 35
12. GEOGRAPHIC AND CUSTOMER INFORMATION
Information concerning the Company's operations by geographic area as of
and for the three years ended September 30, 1996 follows (in thousands).
Interregion transfers and eliminations represent transfers between AG
Israel for the periods in which it was consolidated through May 31, 1995
and domestic operations and are based on prices that approximate selling
prices to foreign distributors.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales:
From the United States to:
United States $ 32,460 $ 42,882 $ 21,018
Japan 19,263 9,132 5,321
Europe 10,108 3,078 6,629
Taiwan 7,044 7,134 4,830
Other Far East countries 2,214 274 1,968
Other -- 225 485
From Middle East (interregion transfers) -- -- 637
Eliminations -- -- (637)
-------- -------- --------
$ 71,089 $ 62,725 $ 40,251
======== ======== ========
Operating income (loss):
United States $ 10,319 $ 5,133
Middle East (746) (497)
Eliminations -- (171)
-------- --------
$ 9,573 $ 4,465
======== ========
Identifiable assets:
United States $13,586
Middle East 1,294
Eliminations (204)
--------
Total assets $14,676
========
</TABLE>
Export revenues as a percentage of net revenues were 54%, 32% and 48% in
1996, 1995 and 1994, 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.
- -16-
<PAGE> 36
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.
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 has 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 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 has accounted for its
49% investment in AG Israel using the equity method since June 1, 1995.
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 $1,124,000 and a net
loss of $822,000 and $972,000 for the eight months ended May 31, 1995 and
in fiscal 1994, respectively.
Condensed summary financial information (unaudited) of AG Israel as of and
for the year ended September 30, 1996 is as follows (in thousands):
Current assets $5,127
Total assets $7,098
Current liabilities $3,677
Noncurrent liabilities $ 533
Net sales $2,997
Total expenses 5,522
Net loss $2,525
- -17-
<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7, above.
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
1997 Annual Meeting of Shareholders (the "Proxy Statement") under the heading
"Election of Directors." The information concerning the Company's executive
officers required by this Item is incorporated by reference to the Proxy
Statement under the heading "Executive Officers."
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
20.
(2) Financial Statement Schedules: See Index to Financial
Statement Schedules, page 20.
(3) Exhibits: See Index to Exhibits, pages 21-22.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
19
<PAGE> 38
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 16th day of December, 1996.
AG ASSOCIATES, INC.
By: /s/ DENNIS V. FAVERO
----------------------------------------------
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ ARNON GAT Director, Chairman of the Board and December 16, 1996
------------------------------ Chief Executive Officer (Principal
Arnon Gat, Ph.D. Executive Officer)
/s/ ANITA GAT Director, Vice President Administration December 16, 1996
----------------------------- and Secretary
Anita Gat
/s/ NORIO KURODA Director December 16, 1996
-----------------------------
Norio Kuroda
/s/ JOHN MOORE Director December 16, 1996
------------------------------
John Moore
/s/ CECIL PARKER Director December 16, 1996
-----------------------------
Cecil Parker
</TABLE>
20
<PAGE> 39
AG ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s) in
Consolidated
Financial
Statements
------------
<S> <C>
Independent Auditors' Reports 1-2
Consolidated Balance Sheets - September 30, 1996 and 1995 3
Consolidated Income Statements - Years Ended September 30, 1996, 1995 and 1994 4
Consolidated Statements of Shareholders' Equity (Deficiency) - Years Ended September 30, 1996, 5
1995 and 1994
Consolidated Statements of Cash Flows - Years Ended September 30, 1996, 1995 and 1994 6-7
Notes to Consolidated Financial Statements 8-17
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Schedule II Valuation and Qualifying Accounts 24
Report of Independent Auditors on Financial Statement Schedule 25
</TABLE>
21
<PAGE> 40
AG ASSOCIATES, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS PAGE NO.
- ------ -------- --------
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
22
<PAGE> 41
EXHIBIT
NUMBER EXHIBITS PAGE NO.
- ------ -------- --------
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
between Registrant and Ronald G. Manley
10.38(4) Loan Agreement, dated August 2, 1996, by and between
Registrant and Silicon Valley Bank
11.01(4) Computation of Earnings Per Share
23.02(4) Consent of Deloitte & Touche LLP, Independent
Auditors
23.04(4) Consent of Kesselman & Kesselman, Independent
Auditors
27.00(4) 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) Filed herewith.
23
<PAGE> 42
AG ASSOCIATES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- End
Description of Period Expenses Describe Deductions of Period
- ----------------------------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
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
Year Ended September 30, 1994 310 355 0 131 (1) 534
- -----------------------------
INVENTORY RESERVES
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
Year Ended September 30, 1994 2,330 353 0 1,166 (4) 1,517
- -----------------------------
WARRANTY RESERVES
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
Year Ended September 30, 1994 1,796 1,661 0 1,144 (3) 2,313
</TABLE>
- -----------------------------
(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
24
<PAGE> 43
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
We have audited the consolidated financial statements of AG Associates, Inc. as
of September 30, 1996 and 1995 and for each of the three years in the period
ended September 30, 1996 and have issued our report thereon dated October 25,
1996; such financial statements and report are included in this 1996 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 takes as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
October 25, 1996
25
<PAGE> 1
Ex 10.33
MEMO
TO: Julio Guardado
FROM: Arnon Gat
SUBJECT: President's bonus plan for fiscal 1996
I am glad to present to you with your bonus plan for fiscal 1996. It is
intended to focus your efforts on the critical areas in the company's operation
and at the same time provide handsome rewards to you when the plan is
successfully executed. The plan allows for 100 bonus points, and more when an
upside is realized, divided between three major objectives for the company for
this year.
1. Total bookings for FY96 including systems, spare parts, and service revenue:
BONUS POINTS FOR FY96 BOOKINGS
<TABLE>
<CAPTION>
BOOKINGS
(IN $ MILLIONS) BONUS POINTS
<S> <C>
50 0
60 0
70 0
80 20
88 50
90 50
96 55
100 60
110 60
</TABLE>
Page 1
<PAGE> 2
2. RTP Operating profit (in %)
BONUS POINTS FOR FY96 OPERATING PROFIT
<TABLE>
<CAPTION>
% OF OPERATING PROFIT BONUS POINTS
<S> <C>
10 0
15 20
20 30
25 40
30 40
</TABLE>
3. Productivity: Average productivity is defined as Pr = PQ1/250 + PQ2/250 +
PQ3/250 + PQ4/250 PQx will be calculated as annualized revenue (in K$) for
the quarter divided by the total number of employees (Full Time
Equivalents) at the end of the quarter.
BONUS POINTS FOR FY96 PRODUCTIVITY
<TABLE>
<CAPTION>
AVERAGE PRODUCTIVITY BONUS POINTS
<S> <C>
0 0
1 0
2 0
3 10
4 20
5 30
6 30
</TABLE>
Page 2
<PAGE> 3
At the end of the year all your bonus points will be accumulated and will be
used to calculate your dollar bonus as follows:
Pres. Bonus = (Total Bonus Points/100) X 0.45 X 15/12 X $175,00
I trust that you are excited about the above plan and am requesting your
signature (in blood) below to indicate your understanding and agreement with
this plan. Good luck for this critical year.
/s/ Arnon Gat 12/19/95 /s/ Julio L. Guardado 11/6/95
- ---------------------------------- ----------------------------------
Arnon Gat, Chief Executive Officer Julio Guardado
President, Chief Operating Officer
PS The above bonus plan is subjected to the approval of the compensation
committee of AGA Board of directors
Page 3
<PAGE> 4
[AG ASSOCIATES LOGO]
M E M O R A N D U M
DATE: March 14, 1996
TO: Sue
FROM: Arnon
SUBJECT: 1996 EXECUTIVE BONUS PLAN
______________________________________________________________________________
Sue, I am pleased to offer the following bonus structure for this year. Prior
to constructing this plan, the Radford Compensation Report was researched and
its findings were relied upon. The purpose of this bonus plan is to reward
achievement of goals, reward team work between Finance and all other
departments within the company, and reward an effective service attitude of
the Finance group in its various responsibilities. This plan was discussed and
approved by the compensation committee of the AG Board of Directors.
<PAGE> 5
[AG ASSOCIATES LOGO]
1996 CFO COMPENSATION PLAN
The CFO compensation plan for fiscal 1996 consists of the following elements:
<TABLE>
<S> <C>
Base Salary: Per agreement
Annual Bonus: 30% based on Departmental Objectives, Customer
Satisfaction Survey, and Cash Management
5% discretionary based on special assignments by the CEO
Annual Stock Options: 6,000 based on accumulated percent earned bonus
Quarterly Bonus: $2,500 based on Bookings, Revenue, Operating Income
</TABLE>
Eligible to participate in this Plan, consisting of an annual bonus, a quarterly
bonus and a stock option grant, is Susan Salvesen.
1. The terms of the annual bonus are as follows.
- The purpose of the annual bonus is to provide incentive to achieve
goals, to reward teamwork and to reward an effective service attitude.
- Target compensation is the participant's base salary plus percentage
bonus for meeting the following goals:
- 10% of annual salary based on meeting agreed upon departmental goals
attached plus the additional goal of adding coverage by two analysts
during the course of fiscal 1996.
- 10% of annual salary based upon internal customer satisfaction
survey results of accounting, financial, and information technology
services (attachment).
- 10% based on cash management.
- 5% based on special assignments at the discretion of the CEO.
- The 10% bonus on departmental objectives will be based equally for each
objective.
- The 10% upside will be based on the new targets for bookings, revenue,
and operating income for the year. The average percentage that these
categories are exceeded multiplied by three will equal the upside
bonus (capped at 10% of base salary).
- The systems booking goal for 1996 is $73.8 million.
<PAGE> 6
- The participant will be eligible to receive an incentive stock option
grant under the terms of the company's existing stock option plan to
purchase up to 6,000 shares of the company's Common Stock, vesting
annually over a period of four years from the date of grant and
exercisable at the fair market value of the company's Common Stock on
the date of the grant.
The number of shares the participant actually receives under an option
will be based upon the participant achieving certain objectives to be
agreed to by the participant with the company's Chief Executive Officer
and in writing specifically referring to this plan prior to the end of
the second quarter of fiscal 1996. The number of shares will be
determined according to the formula below:
Stock Options = 6,000 x accumulated % earned bonus
----------------------------------
30%
The date of grant of each option will be the date that the
determination has been made by the company in writing no later than
December 15, 1996, that agreed departmental objectives have been met
and the extent to which they have been met. The participant must
continuously remain an officer of the company through the date of grant
in order to be entitled to receive an option described above.
2. The terms of the quarterly bonus are as follows.
- The purpose of the quarterly bonus is to focus the company's eligible
executives on meeting the quarterly financial objective as expected by
the company's shareholders.
- The quarterly bonus will be based on new quarterly targets and will not
be cumulative.
- The company must meet its quarterly operating profit, system bookings
and revenue goals for each participant to receive a total bonus
achievable or $2,500 each quarter. The goals are listed in the table
below. Failure of the company to meet or exceed either the revenue or
bookings goal will eliminate the bonus portions relating to these
goals.
GOALS TO ACHIEVE QUARTERLY BONUS
<TABLE>
<CAPTION>
YTD YTD YTD
BONUS $ Q1 Q2 Q3 Q4
- ------------------------------------ ---------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Operating Profit ($K) $500 n/a $4,132 $3,110 $3,547
Revenue ($K) $1,000 n/a $23,096 $21,647 $21,647
Systems Bookings ($K) $1,000 n/a $17,155 $19,985 $19,985
</TABLE>
<PAGE> 7
3. The following general terms apply to this bonus plan.
- Annual Bonus payments will be made no later than thirty days after the
audit of the company's fiscal year ending September 30, 1996 has been
completed, and quarterly bonuses will be made no later than thirty days
after the end of the quarter, so long in each case as the participant
has been continuously employed by the company as an executive officer
of the company through the date of payment. Computation of any amount
available for payment is, therefore, not to be considered as creating a
right to receive "wages" until amounts are allocated and payment is
due.
- Any amounts the participant received under this plan are in addition to
his other base salary and will be reduced by amounts the company is
required to withhold under applicable federal, state and local taxes,
unless the participant has satisfied these requirements in some other
way.
- This plan is in lieu of the company's quarterly profit sharing plan. It
is also an unfunded plan of deferred compensation. Any amounts payable
under this plan will be paid out of the company's general corporate
assets and will not be transferred into a trust or otherwise set aside.
No fiduciary relationship is created by this plan; if a participant is
entitled to receive payment under the plan, his or her status will be
the same as any other unsecured creditor/employee.
- The existence of this plan does not limit the company from continuing
to adopt other plans or programs, or continuing to make any salary,
bonus, incentive or other payment, relating to participant compensation
or the compensation of any other person that the company may, in its
sole judgment, consider proper.
- All questions of interpretation of this plan will be resolved by the
Compensation Committee of the company's Board of Directors. No waiver
by the company of any terms or conditions of this plan at any one time
should be considered a waiver of the same term or condition at a
different time. No waiver by the company of one term or condition
should be considered a waiver of any other term or condition.
Agreed:
- ----------------------------------- ----------
Name Date
<PAGE> 8
INTERNAL CUSTOMER SATISFACTION SURVEY
The following is a request to rate some of the services that the company
provides to your department. Please mark the ones that your department is using
and rate your overall satisfaction during the last quarter.
SERVICES USED TYPE OF SERVICES RATING FOR QX
_______________ ________________ ________________
_______________ Budgeting ________________
_______________ Financial Reporting ________________
_______________ Financial Forecasting ________________
_______________ Cost Accounting ________________
_______________ Payroll Services ________________
_______________ Phone System ________________
_______________ MRP/Data Works Effectiveness ________________
_______________ Network Effectiveness ________________
RATING: 5 - Exceptional, the service providers are proactive, professional
with quick turn around and excellent follow-up.
4 - Very good, service is timely, works as expected, instruction and
follow-up is provided.
3 - Good, the service is working satisfactory, service provider is
available to correct problems and offer help.
2 - Lacking
1 - Unacceptable
Department: ____________________________________________________________________
<PAGE> 9
[AG ASSOCIATES LOGO]
INTER-OFFICE COMMUNICATION
DATE: March 12, 1996
TO: Anita, Mac, Pat, Ron, Yuval
FROM: Julio
CC: Arnon, Sue
SUBJECT: Revised 1996 Executive Compensation Plan
- ------------------------------------------------------------------------------
Due to the overall slow down in the semiconductor industry and its effect on our
business, we have made some adjustments to the 1996 executive compensation plan
in the area of financial targets and will be making adjustments to departmental
goals and objectives if appropriate.
1
<PAGE> 10
Revised 1996 Executive Compensation Plan
March 11, 1996
The executive compensation plan for fiscal 1996 consists of the following
elements:
<TABLE>
<CAPTION>
<S> <C> <C>
Annual Bonus: 20% based on Company Goals and Objectives
Annual Bonus Upside: 20% based on Bookings, Revenue, Operating Income
Annual Stock Options: 6,000 based on Departmental Objectives
Quarterly Bonus: $2,500 based on Bookings, Revenue, Operating Income
</TABLE>
Those who are eligible to participate in this Plan, consisting of an annual
bonus, a quarterly bonus and a stock option grant, include: Anita Gat, Duane
McCallister, Pat Halahan, Ron Manley and Yuval Wasserman.
1. The terms of the annual bonus are as follows.
- The purpose of the annual bonus is to provide incentive to build a
strong and long term market and competitive position for the
company, with positive financial performance.
- Target compensation is the participant's base salary plus 20% bonus
for meeting all five company objectives with an additional 20%
upside if the company exceeds certain financial goals.
- The 20% bonus will be based equally for each objective (4% each).
The relationship is linear based on the percentage achievement of
the new target.
- The 20% upside will be based on the revised targets for bookings,
revenue, and operating income for the year. The average percentage
that these categories are exceeded will equal the upside bonus
(capped at 20% of base salary).
- The five revised company goals and objectives for fiscal 1996 that
apply to the above, which must be met in the sole judgment of the
company's President and COO, are:
1) Implement an on-going program of customer satisfaction in Q2.
2) Ship $88 million in '96.
3) Achieve operating profit > $15 million.
4) Successfully launch the Heatpulse 8800 in Q3.
5) Announce the next generation product in Q4.
In addition, the systems booking goal for 1996 is $72.2 million.
- Each participant will be eligible to receive an incentive stock
option grant under the terms of the company's existing stock option
plan to purchase up to 6,000 shares of the company's Common Stock,
vesting annually over a period of four years from the date of grant
and exercisable at the fair market value of the company's Common
Stock on the date of the grant. This will provide a competitive long
term incentive for retain our executives.
2
<PAGE> 11
The number of shares each participant actually receives under an
option will be based upon that participant's department achieving
certain objectives to be agreed to by each participant with the
company's President and COO and in writing specifically referring to
this plan prior to the end of the second quarter of fiscal 1996. The
number of shares will be determined as a percent achievement of all
the objectives combined.
The date of grant of each option will be the date that the
determination has been made by the company in writing no later than
December 15, 1996, that agreed departmental objectives have been met
and the extent to which they have been met. Each participant must
continuously remain an executive officer of the company through the
date of grant in order to be entitled to receive an option described
above.
2. The terms of the quarterly bonus are as follows.
- The purpose of the quarterly bonus is to focus the company's
eligible executives on meeting the quarterly financial objective as
expected by the company's shareholders.
- The quarterly bonus will be based on new quarterly targets and will
not be cumulative.
- The company must meet its quarterly operating profit, system
bookings and revenue goals for each participant to receive a total
bonus achievable or $2,500 each quarter. The goals are listed in the
table below. Failure of the company to meet or exceed either the
revenue or bookings goal will eliminate the bonus portions relating
to these goals. Failure of the company to meet quarterly profit
goals will eliminate the complete bonus even if other goals are
achieved.
GOALS TO ACHIEVE QUARTERLY BONUS
<TABLE>
<CAPTION>
YTD YTD YTD
BONUS $ Q1 Q2 Q3 Q4
- ------------------------------------ ---------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Operating Profit ($K) $500 n/a $4,132 $3,110 $3,547
Revenue ($K) $1,000 n/a $23,096 $21,647 $21,647
Systems Bookings ($K) $1,000 n/a $17,155 $19,985 $19,985
</TABLE>
3. The following general terms will apply to this bonus plan.
- Annual Bonus payments will be made no later than thirty days after
the end of the company's fiscal year, and quarterly bonuses will be
made no later than thirty days after the end of the quarter, so long
in each case as the participant has been continuously employed by
the company as an executive officer of the company through the end
of the company's fiscal year or quarter as applicable. Computation
of any amount available for payment is, therefore, not to be
considered as creating a right to receive "wages" until amounts are
allocated and payment is due.
3
<PAGE> 12
- Any amounts the participant received under this plan are in addition
to his other base salary and will be reduced by amounts the company
is required to withhold under applicable federal, state and local
taxes, unless the participant has satisfied these requirements in
some other way.
- This plan is in lieu of the company's quarterly profit sharing plan.
It is also an unfunded plan of deferred compensation. Any amounts
payable under this plan will be paid out of the company's general
corporate assets and will not be transferred into a trust or
otherwise set aside. No fiduciary relationship is created by this
plan; if a participant is entitled to receive payment under the
plan, his or her status will be the same as any other unsecured
creditor/employee.
- The existence of this plan does not limit the company from
continuing to adopt other plans or programs, or continuing to make
any salary, bonus, incentive or other payment, relating to
participant compensation or the compensation of any other person
that the company may, in its sole judgment, consider proper.
- This Revised 1996 Executive Compensation Plan supercedes the 1996
Executive Compensation Plan dated December 20, 1995.
- All questions of interpretation of this plan will be resolved by the
Compensation Committee of the company's Board of Directors. No
waiver by the company of any terms or conditions of this plan at any
one time should be considered a waiver of the same term or condition
at a different time. No waiver by the company of one term or
condition should be considered a waiver of any other term or
condition.
Agreed:
- ----------------------------------- ----------
Name Date
4
<PAGE> 13
[AG ASSOCIATES LOGO]
INTER-OFFICE COMMUNICATION
DATE: March 22, 1996
TO: Derek
FROM: Julio
CC: Arnon, Sue
SUBJECT: FY96 Sales Executive Compensation Plan
- ------------------------------------------------------------------------------
I am pleased to provide you with the following sales executive compensation plan
for fiscal 1996.
<PAGE> 14
REVISED 1996 SALES EXECUTIVE COMPENSATION PLAN
MARCH 11, 1996
The sales executive plan for fiscal 1996 consists of the following elements:
<TABLE>
<CAPTION>
<S> <C> <C>
Base Salary: $100,000
Target Sales Commission: $95,000 if Plan Systems Bookings and Shipments are
achieved (paid one half on booking and one half on
shipment).
Basic Commission Rate: Up to $81.2M in Systems Bookings, .13%
Upside Commission Rate: Over $81.2M in Systems Bookings, .250%
Annual Stock Options: 6,000 based on Departmental Objectives
Quarterly Bonus: $2,500 based on Bookings, Revenue, Operating Income
</TABLE>
Target compensation at plan: $205,000 plus 6,000 shares of stock
options.
Eligible to participate in this Plan is Derek Tomlinson.
1. The terms of the sales executive compensation plan are as follows:
- Target base plus commission for fiscal 1996 is $195,000 based on
systems bookings of $73.8M and revenue of plan of $75,402 If the
systems bookings plan is exceeded by ten percent ($81.2M), for
example, then base plus commissions would equal $205,560 (upon
shipment). If the systems bookings plan is exceeded by twenty
percent ($88.6M), for example, then base plus commissions would
equal $224,060 (upon shipment). There is no cap on commissions.
- No commissions will be paid for AGI/Integra sales during fiscal
1996.
2. The terms of the quarterly bonus are as follows.
- The purpose of the quarterly bonus is to focus the company's
eligible executives on meeting the quarterly financial objective as
expected by the company's shareholders.
- The quarterly bonus will be based on new quarterly targets and will
not be cumulative.
<PAGE> 15
- The company must meet its quarterly operating profit, system
bookings and revenue goals for each participant to receive a total
bonus achievable or $2,500 each quarter. The goals are listed in the
table below. Failure of the company to meet or exceed either the
revenue or bookings goal will eliminate the bonus portions relating
to these goals. Failure of the company to meet quarterly profit
goals will eliminate the complete bonus even if other goals are
achieved.
GOALS TO ACHIEVE QUARTERLY BONUS
<TABLE>
<CAPTION>
YTD YTD YTD
BONUS $ Q1 Q2 Q3 Q4
- ------------------------------------ ---------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Operating Profit ($K) $500 n/a $4,132 $3,110 $3,547
Revenue ($K) $1,000 n/a $23,096 $21,408 $21,647
Systems Bookings ($K) $1,000 n/a $17,155 $17,985 $19,985
</TABLE>
3. The following general terms will apply to this bonus plan.
- Annual Bonus payments will be made no later than thirty days after
the end of the company's fiscal year, and quarterly bonuses will be
made no later than thirty days after the end of the quarter, so long
in each case as the participant has been continuously employed by
the company as an executive officer of the company through the end
of the company's fiscal year or quarter as applicable. Computation
of any amount available for payment is, therefore, not to be
considered as creating a right to receive "wages" until amounts are
allocated and payment is due.
- Any amounts the participant received under this plan are in addition
to his other base salary and will be reduced by amounts the company
is required to withhold under applicable federal, state and local
taxes, unless the participant has satisfied these requirements in
some other way.
- This plan is in lieu of the company's quarterly profit sharing plan.
It is also an unfunded plan of deferred compensation. Any amounts
payable under this plan will be paid out of the company's general
corporate assets and will not be transferred into a trust or
otherwise set aside. No fiduciary relationship is created by this
plan; if a participant is entitled to receive payment under the
plan, his or her status will be the same as any other unsecured
creditor/employee.
- The existence of this plan does not limit the company from
continuing to adopt other plans or programs, or continuing to make
any salary, bonus, incentive or other payment, relating to
participant compensation or the compensation of any other person
that the company may, in its sole judgment, consider proper.
<PAGE> 16
- This Revised 1996 Executive Compensation Plan supersedes the 1996
Executive Compensation Plan dated December 20, 1995.
- All questions of interpretation of this plan will be resolved by the
Compensation Committee of the company's Board of Directors. No
waiver by the company of any terms or conditions of this plan at any
one time should be considered a waiver of the same term or condition
at a different time. No waiver by the company of one term or
condition should be considered a waiver of any other term or
condition.
I wish you the very best of luck for the balance of fiscal 1996 and urge you to
"break the bank."
Agreed:
- ---------------------------------- -------------
Derek Tomlinson, VP Sales Date
Attachments: FY1996 Individual Performance and Development Goals
<PAGE> 1
Exhibit 10.34
AGI, INC.
TRANSITION SERVICES AGREEMENT
- - This Transition Services Agreement (the "Agreement"), dated as of March 25,
1996 is entered into by and between AG Associates, Inc. ("AGA"), AG
Associates (Israel) Ltd. ("AG Israel") and AGI, Inc. ("AGI").
- - The parties hereto have agreed to enter this Agreement in connection with
the closing of the transactions contemplated by the Agreement (the
"Investment Agreement"), dated February 27, 1995, among the parties hereto
and Clal Electronics Industries Ltd. (the "Closing").
- - The parties agreed that AGA will provide to AGI, for the time period and
consideration described below, certain of the services that have been
provided for the "CVD Activities" (as defined in the Investment Agreement)
prior to the Closing, in order to ensure the continued and uninterrupted
operation of the CVD Activities under AGI, following the Closing.
- - Therefore, the parties hereto agree as follows.
1. SERVICES TO BE PROVIDED BY AGA. AGA will provide the following services to
AGI.
1.1 Human Resources Services. Those services generally described in
Schedule 1(a) hereto and incorporated herein by reference, and
related support, training, maintenance, information and reports.
With respect to the following matters, it is provided as follows.
New Hires; Terminations. AGI will make all decisions regarding
hiring, promotions and termination of its own employees. However,
AGA will provide employment services to AGI including administrative
aid in recruiting, interview scheduling and preparation of
employment offers. Any disputes between AGI and any of its
employees, former employee or other service providers with respect
to their employment by AGI will be administered by, and the
responsibility of, AGI.
Separation of Employment Records. AGI's employees shall be carried
on AGI payroll records and not those of AGA. However, upon receipt
by AGA from AGI of amounts needed to cover AGI's payroll from time
to time, AGA will, through its own bank account, make payroll
payments to AGI employees and on AGI's behalf. AGI will be listed on
AGA's payroll files as a separate organization. Each AGI employee or
other service provider will have a personnel file separate from
those of AGA employees.
Benefits. Although they may be administered by AGA, employment
benefits will be provided under separate plans for AGA and AGI
employees, wherever possible.
Notice to Employees. Each employee of AGI is to be informed in
writing by AGI at the time of hiring that, although employment
services are being provided by AGA as a service to AGI, such
employee is an employee of AGI, which will be solely responsible for
any compensation or other payments that may be due to such employee.
-1-
<PAGE> 2
1.2 Operational Services. Those services generally described in Schedule
1(b) hereto and incorporated herein by reference, and related
training, support, maintenance, information and reports, including,
without limitation, the following.
Telephone and Facsimile. Although AGA may, at the written request of
AGI, administer and manage payment for same, AGI will obtain and
maintain its own telephone and facsimile numbers.
Segregation of Assets; Grant of Security Interest and Guarantee. AGI
and AG Israel generally will purchase their own inventory, raw
materials and other assets under their own purchase orders. However,
if acceptable to AGA on a case by case basis, AGA may at the request
of AGI or AG Israel purchase inventory, raw materials or other
assets on the requesting party's behalf and sell such assets to the
requesting party at AGA's cost, including shipping, taxes and other
ordinary procurement expenses. Any inventory or other assets
purchased by AGA under this Agreement will be purchased at the
request of AGI or AG Israel and in the name of AGA, will upon
receipt and physical designation by AGA as the requesting party's
property and will become the property of requesting party, which
will then have an obligation to pay therefor. To secure payment of
the purchase price of any inventory or assets purchased by AGA for
the benefit of AGI under this paragraph, AGI hereby grants AGA a
security interest in any and all inventory and other assets so
purchased and to be so purchased. AGI will sign any UCC financing
statement reasonably requested by AGA to perfect its security
interest in such inventory and assets. Inventory may be sold to
customers of AGI free and clear of AGA's security interest if sold
in the ordinary course of business as permitted by California law.
AGI hereby unconditionally guaranties, and does hereby become surety
for, the punctual payment to AGA of any amounts owed to AGA by AG
Israel, and AG Israel hereby unconditionally guaranties, and does
hereby become surety for, the punctual payment to AGA of any amounts
owed to AGA by AGI, all under the immediately preceding paragraph in
this Section 1.2, when such payments are due, whether by reason of
acceleration or otherwise and whether the obligation for payment is
now existing or hereafter arising (the "Obligations"). The
Obligations of each guarantor are absolute, unconditional and
continuing whether or not this Agreement expires or is terminated.
Each guarantor hereby consents that, from time to time, without
notice to, or further consent of such guarantor, the performance or
observance of any provision of any Obligation may be waived by AGA,
or the time of performance thereof extended or accelerated or may be
renewed in whole or in part or otherwise amended, changed, released
or compromised, all without affecting the liability of such
guarantor hereunder. Each guarantor hereby waives notice of
acceptance of this guaranty, presentment, demand, protest, notice of
protest and notice of dishonor of any Obligation guaranteed hereby.
Whenever possible, AGA, AG Israel and AGI will segregate from AGA's
other assets any inventory or assets purchased for, or owned by, AGI
or AG Isreal and shall clearly mark such assets as dedicated to, or
owned by, AGI or AG Isreal, as the case may be.
-2-
<PAGE> 3
Facilities. The sublease of office facilities by AGI that are leased
or owned by AGA will be the subject of a separate real property
sublease between AGA and AGI (the "Sublease"). Whenever possible,
the workplace of AGI employees will be separated from the workplace
of AGA employees and signage will be employed to identify those
areas used by AGI sufficient to put to those visiting with each
party on notice that AGA and AGI are separate businesses.
Patents. Title to, and payment for, patents and patent applications
shall be governed by the terms of the Agreement, when applicable.
Although AGA may aid AGI in the preparation and filing of certain
patents or patent applications not covered by the Agreement, such
assets will be applied for in the name of AGI and paid for by AGI as
incurred or as specified in Section 2 below.
1.3 Financial and Control Systems. Those services generally described in
Schedule 1(c) hereto and incorporated herein by reference and
related support, maintenance, training, information and reports,
except as set forth below.
Separate Records. The books and records of AGI will be separate from
those of AGA.
Collection Services and Accounts Payable. AGI will pay all AGI
accounts payable and other expenses incurred in connection with the
activities described in Schedule 1(c) from its own bank accounts and
shall collect its own accounts receivable. However, AGA shall
provide accounts payable services for AGI, consisting of such
services as preparing purchase orders and administering the payment
by AGI of invoices. AGA may also, at the request of AGI and in AGA's
discretion, collect any AGI accounts receivable and may pay any AGI
accounts payable and other expenses incurred in connection with the
activities described in Schedule 1(c). Such payments and
collections, if any, shall be netted and subject to offset as
described in Section 2 below.
Other Financial and Control Systems. Any other matters listed on
Schedule 1(c) will consist of AGA's administrative services only and
will not require AGA to make any payments on AGI's behalf for
reimbursement of expenses, benefits, petty cash, credit cards or the
like, unless expressly described in this Agreement. Such payments
will be made directly from AGI's own bank accounts.
1.4 Additional Services. Any additional services that may be agreed to
in writing by AGI and AGA and which are not explicitly and
unambiguously referred to in this Agreement will be provided by AGA
for a fee to be mutually agreed upon between AGA and AGI.
2. CONSIDERATION.
2.1 Payments. In exchange for the services provided under Schedules
1(a), 1(b) and 1(c), AGI shall pay to AGA the incremental direct
costs and out-of-pocket expenses, derived directly from the
provision of those services. No AGA overhead allocations will be
charged to AGI. Payment will be made after presentation of AGA's
invoice therefor, net 30. Interest per annum on any amount overdue
will accrue at a floating rate equal to prime applicable to, and
reported by, AGA's bank from time to time.
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<PAGE> 4
2.2 Offset. Any amounts due from AGA to AGI, or visa versa, may be
offset from time to time at the discretion of either party exercised
in writing delivered to the other party.
2.3 Indemnification. For purposes of this Section 2.3, the entity(ies)
to be indemnified in a particular instance described in this Section
shall be referred to collectively as the "Indemnified Person or
Persons" with respect to such instance and entity(ies) that are
obligated to provide such indemnification shall be referred to in
such instance as the "Indemnifing Person or Persons"). AGI and AG
Israel hereby agree to indemnify AGA of and from any claim, demand
or action of any third person (i.e. other than the parties hereto)
and any cost, expense, loss, damage, settlement or other charge of
any kind or nature that AGA may incur, or with which AGA may be
charged, as a result of such third party claim, demand or action,
which was a consequence of providing services and other assets to
AGI in accordance with this Agreement; provided that AGA shall not
be entitled to indemnification under this Section 2.3 as a result of
AGA's gross negligence or willful misconduct. Likewise AGA hereby
agrees to indemnify each of AGI and AG Israel of and from any claim,
demand or action of any third person (i.e. other than the parties
hereto) and the resulting cost, expense, loss, damage, settlement or
other charge of any kind or nature that such Indemnified Person may
incur, or with which any such Indemnified Person may be charged, as
a result of such third party claim, demand or action, which was a
consequence of the gross negligence or willful misconduct of AGA in
providing services and assets to AGI in accordance with this
Agreement. With respect to any claim for indemnity hereunder
resulting from a third party claim, demand or action, the
Indemnified Persons who are the subject of such claim, demand or
action shall, after receipt of notice of the commencement of any
action or the presentation or other assertion of any claim or demand
which could result in any indemnification claim or demand pursuant
to this Section 2.3, give prompt written notice thereof to the
Indemnifying Persons (although failure to give prompt notice shall
not mitigate the indemnification obligations hereunder unless and to
the extent the Indemnifying Parties are prejudiced by such failure
or delay).
(i) The Indemnifying Party or Parties shall be entitled to
participate in the defense of any such claim, demand or
action. The Indemnifying Party or Parties may also, to the
extent that it or they may desire, assume the defense thereof
with its or their own counsel, unless the Indemnified Party
reasonably objects to such assumption on the grounds that
representation of all entities by the same counsel would be
prohibited under any rule of professional conduct applicable
to such counsel, then the Indemnified Party or Parties may
participate in their own defense with counsel of its or their
own choosing at the cost of the Indemnifying Party or Parties.
Except as specified in the preceding sentence, an Indemnifying
Party or Parties that assumes the defense of a claim, demand
or action shall not be liable to the Indemnified Party or
Parties for any fees of other counsel or any other expenses,
in each case, incurred by such Indemnified Party or Parties in
connection with the defense thereof.
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<PAGE> 5
(ii) The Indemnifying Party or Parties shall be authorized, without
the consent of the Indemnified Party being required, to settle
or compromise any such claim, demand or action, provided that
such settlement or compromise includes an unconditional
release of the Indemnified Parties from all liability arising
out of such claim, demand or action. An Indemnifying Party or
Parties shall not be liable for any compromise or settlement
of any such claim, demand or action effected by the
Indemnified Party or Parties without the Indemnifying Party's
or Parties' written consent.
(iii) The parties agree to cooperate to the fullest extent possible
in connection with any claim, demand or action for which
indemnification is or may be sought under this Agreement.
3. TERM AND TERMINATION.
3.1 Term. The term of this Agreement shall begin on June 1, 1995, and
shall continue until terminated by AGI or AGA as described in
Section 3.2 below.
3.2 Termination. Either AGI or AGA may cancel any or all service or
services provided pursuant to this Agreement on 90 days prior notice
to the other party. However, this Agreement, and/or any service
provided for in this Agreement, may be terminated immediately upon
notice duly given by either AGI or AGA to the other in the event of a
default by AGA, or either AGI or AG Israel, respectively, under this
Agreement. Failure of the other party to perform as required by this
Agreement, including, without limitation, the failure to pay any
amount when due, will deemed to constitute such a default. Failure of
any party to declare a default under this Agreement, or to take any
other action to be taken in event of default of the other, will not
be deemed a waiver of such default. The terms of this Agreement may
only be waived in writing signed by the party to be charged.
3.3 Effect of Termination. Cancellation of any particular service
pursuant to this Section 3 shall not affect the remaining services,
if any. Expiration or termination of this Agreement shall not affect
the indemnification obligations set forth in Section 2 hereof, which
shall survive such expiration or termination and shall apply to cover
advancement of expenses or other monetary obligations incurred by AGA
on behalf of AGI that are described in this Agreement whether arising
before or after such expiration or termination.
4. MANAGING THE AGREEMENT.
4.1 Status Report. AGI will distribute to AGA a monthly status report
regarding the services actually received, any changes required and
implementation problems, if any.
4.2 Conflicts. Significant conflicts between the parties regarding the
implementation of this Agreement, or any portion of it, will be
submitted to AGA's and AG Israel's Chief
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<PAGE> 6
Financial Officers (each, a "CFO") for resolution. If such persons
do not resolve such conflict within 60 days after submission, either
of such CFOs may refer the matter to AG Israel's General Manager and
to AGA's Chairman of the Board for resolution. If such persons do
not resolve such conflict within 30 days after such submission, the
matter shall be submitted, at the election of any party by notice
given to the other parties, to binding arbitration before one
arbitrator in Santa Clara, California, under the rules of the
American Arbitration Association. The decision of the arbitrator, of
the Chief Financial Officers or of the General Manager and Chairman
of the Board, as the case may be, will be final and binding.
5. GENERAL PROVISIONS.
5.1 Confidentiality. None of the parties will disclose to any third party
or use any part of the information exchanged among the parties or to
which a party is exposed to during the course of the fulfillment of
this Agreement that is disclosed in written, graphic, machine
readable or other tangible form by the disclosing party or that is
disclosed orally or visually by one party to another pursuant to this
Agreement (collectively, "Confidential Information"), without the
prior written consent of the disclosing party, except for the purpose
of fulfilling its obligations and exercising its rights under this
Agreement. Each receiving party will take all reasonable measures to
maintain the confidentiality of all Confidential Information of the
other parties in its possession or control, which will in no event be
less than the measures it uses to maintain the confidentiality of its
own information of similar importance. This Section 5(a) will not
apply to Confidential Information which:
(i) is now in the public domain, or subsequently enters the public
domain, without the fault of the receiving party,
(ii) is known by the receiving party at the time of receiving such
information,
(iii) is furnished by the disclosing party to third parties without
restriction on disclosure,
(iv) is subsequently rightfully furnished to the receiving party by
a third party without breach of an obligation with respect to
disclosure taken by such third party toward the disclosing
party, or
(v) is independently developed by the receiving party without use
of the Confidential Information of the disclosing party.
5.2 Independent Contractors. The parties to this Agreement are
independent contractors. There is no relationship of partnership,
joint venture, employment, franchise or agency among the parties.
None of the parties has the power to bind any of the others or to
incur obligations on the other's behalf without the other's prior
written consent.
5.3 Limitations. Regardless of AGA's obligation to provide licenses for
AutoCAD 13, ORCAD or provide any other asset, AGA will be released
from its obligation to do so with respect to any particular license
or asset to the extent the provision of the same
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<PAGE> 7
would violate any contract with the owner of such asset (such as a
prohibition on assignment) or violate any laws, rules or regulations
of any governmental authority. This provision shall not derogate
from AGA's obligations under the Investment Agreement.
5.4 Notices. All notices provided for herein will be given in writing
and delivered personally, sent by confirmed facsimile transmission
or sent by registered mail, postage prepaid, in each case addressed
to the party to receive notice at its address set forth below or to
such other address as such party previously may have noticed to the
other pursuant to this Section 5.4.
5.5 Governing Law. This Agreement will be governed by, and interpreted
in accordance with, the laws of the State of California without
regard to the principles of conflicts of laws.
5.6 Entire Agreement. The terms and conditions contained in this
Agreement and in the Sublease, together, constitute the entire
agreement among the parties hereto concerning its subject matter and
supersede all previous or contemporaneous communications, whether
oral or written, among the parties with respect to such subject
matter.
5.7 Assignment. This Agreement may not be assigned without the prior
written consent of the other parties, which consent will not be
unreasonably withheld or delayed. This Agreement shall be binding
upon, and inure to the benefit of, the permitted successors and
assigns of the parties.
------------------------------ ------------------------------------
AG ASSOCIATES, INC. AGI, INC.
By: By:
--------------------------- ---------------------------------
Address: 4425 Fortran Drive, Address: 4425 Fortran Drive,
Santa Clara Santa Clara
California, 95134-2300 California, 95134-2300
Attention: Chief Financial Attention:
Officer --------------
Facsimile No: (408) 935-2701 Facsimile No:
----------------------
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<PAGE> 8
-----------------------------------------------------
AG ASSOCIATES (ISRAEL) LTD.
By:
--------------------------------------------------
Address: Industrial Park at Ramat Gabriel
P.O.B. 171, Migdal HeEmeq 10551
Israel
Attention: President
Facsimile No: 06-440551
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<PAGE> 9
SERVICES SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE 1(a) - HUMAN RESOURCES SERVICES
a. Recruiting
b. Benefits administration / payroll
c. Employee relations
d. Employee training
e. Travel
SCHEDULE 1(b) - OPERATIONAL SERVICES
Materials / Stock Room
a. Inventory tracking
b. Spare parts inventory maintenance
c. Shipping / receiving / QA
d. FED-EX services
e. Provide packaging materials
f. Order entry
g. Materials planning
h. Purchase of Heatpulse 610 parts
i. Office supplies
MIS
a. PC repair / maintenance
b. PC applications software
c. Phones, long distance charges
d. Voicemail
e. E-mail
f. MRP, shortage, custom MIS reports
g. Software license for AutoCAD 13, ORCAD
h. Training
Facilities (Borregas building)
a. Apps, lab / support areas
b. Facilities services (i.e., water, CDA, process gases, sensors / alarm, scrubber)
c. Janitorial services (including clean room smock changes)
d. Safety (includes performing government regulations concerning safety and hazardous materials)
Marketing / Sales
a. MARCOM costs (presentations, literature)
b. Trade Show support / representation
c. Patent applications
</TABLE>
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<PAGE> 10
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE 1(b) - OPERATIONAL SERVICES (Continued)
Other
a. Receptionist
b. Machine shop services
c. Coffee, microwave
d. Mail services
SCHEDULE 1(c) - FINANCIAL AND CONTROL SYSTEMS
a. A / P
b. A / R
c. Payroll
d. Benefits
e. Expense report processing
f. Petty cash, travel
g. Credit cards, travel insurance
h. Departmental expenses
i. Monthly / quarterly financial statements
j. Inventory Valuation
k. Property accounting
l. Legal entity requirements
</TABLE>
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<PAGE> 1
10.35
SUBLEASE
This Sublease, dated, for reference purposes only, August 20, 1996, is made by
and between AG Associates, Inc., a California corporation ("Sublessor"), AGI,
Inc., a Delaware corporation ("Sublessee"), and AG Associates (Israel) Ltd., as
the guarantor of Sublessee's obligations to Sublessor (the "Guarantor").
1. SUBLEASED PREMISES. Sublessor hereby subleases to Sublessee and
Sublessee hereby subleases from Sublessor for the Term, for the Rent
(as hereinafter defined), and upon all of the terms and conditions set
forth herein, that certain real property situated in the County of
Santa Clara, State of California, commonly known as 4423 Fortran Drive,
San Jose, California and described as 9,188 sq. feet of the southeast
corner of Building C (hereinafter, the "Building") from commencement of
this Sublease until October 1, 1996, and 3,148 square feet located in
the same area of the Building from October 1, 1996 until this Sublease
expires or is otherwise terminated. Such 9,188 or 3,148 square foot
area, as the case may be, will be referred to in this Sublease as the
"Subleased Premises."
2. TERM. The term of this Sublease shall be for three (3) years commencing
on November 30, 1995 and ending on November 30, 1998, unless sooner
terminated pursuant to any provision of this Sublease. Sublessor grants
to Sublessee the right and option, exercisable so long as Sublessee is
not in default of any of its obligations to Sublessor under this
Sublease, to extend and renew this Sublease upon the same terms and
conditions and the same rental for consecutive one (1) year additional
terms (but no longer than the term of the Master Lease, as such term
may be extended from time to time by Master Lessor and Sublessor). Each
such extension shall be automatic, unless the Sublessee notifies the
Sublessor of its intention not to extend the term of the Sublease at
least ninety (90) days prior to the end of the then current term.
3. RENT.
3.1 Initial Rent. Sublessee shall pay to Sublessor as rent for the
Subleased Premises (the "Rent") monthly payments, until July
1, 1996, equal to $22,500 in the aggregate as full and
complete consideration for possession and use of the Subleased
Premises, including all expenses such as insurance costs,
taxes, utilities and other operating expenses charged with
respect to the Subleased Premises and/or the use by Sublessee
of all telecommunications equipment, such as fax, telephone
(including Sublessee's telephone numbers), switchboard, and so
on, in the premises (the "Premises") leased by Sublessor under
the Master Lease, and $10,000 in the aggregate each month from
July 1, 1996 until October 1, 1997. Such payments shall
initially serve as Rent for the Subleased Premises and as full
consideration thereof, which includes also all the aforesaid
expenses.
<PAGE> 2
3.2 Subsequent Rent. Beginning on October 1, 1997, the Rent for
the Subleased Premises will be adjusted (upward or downward)
on October 1 of each year of the term hereof and any extension
of such term according to the following formula:
New Monthly Rent = A(B) + C(D)
-----------
12
Where: A = The Sublessor's annual facility department
budget for the Premises, less depreciation,
office supplies and miscellaneous expense
categories;
B = The square footage of the Subleased Premises
divided by the square footage of the Premises
(i.e. the percent of total square feet
occupied by Sublessee);
C = The Sublessor's annual information technology
department budget, less depreciation and
expense associated with the "Dataworks"
system; and
D = The number of Sublessee's employees and full
time consultants divided by the combined
number of such employees and consultants of
Sublessee and Sublessor (i.e. the percent of
total employees and consultants in the
Premises that are Sublessee's).
3.3 Payment. Rent will be paid by Sublessee, in advance, on the
first day of each month of the term hereof and any extension
of such term. Rent for any period during the term hereof which
is for less than one month shall be a pro rata portion of the
monthly installment. Rent shall be payable in lawful money of
the United States to Sublessor at the address stated herein or
to such other persons or at such other places as Sublessor may
designate in writing.
4. NO LIABILITY FOR SUBLESSOR'S ACTIONS. It is hereby clarified that
Sublessee shall not be obligated to pay any taxes, assessments, license
fees or other charges to governmental entities with respect to any
alterations or additions made to the Premises (other than changes made
to the Subleased Premises at the request of Sublessee) at Sublessor's
election, nor to pay any portion of any penalty or other payment under
the Master Lease that resulted from Sublessor's default, omission or
failure to comply with the terms of the Master Lease (other than the
obligations assumed by Sublessee hereunder), including, but not limited
to Late Charges and interest and penalties accruing thereon.
5. USE.
5.1 Use. The Subleased Premises shall be used and occupied only
for the uses permitted in the Master Lease and for no other
purpose. During the term of this Sublease and any extensions
hereof and so long as no default by Sublessee has occurred and
is continuing under this Sublease, Sublessee will be entitled
to use the conference rooms located on the Premises on a first
come first served basis
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<PAGE> 3
and, although Sublessee will maintain its own telephone
number(s), Sublessor and Sublessee will share the use of
Sublessor's switchboard.
5.2 Compliance with Law. Sublessee shall at Sublessee's expense
comply promptly with all applicable statutes, ordinances,
rules, regulation, orders, restrictions of record and
requirements in effect during the term or any part of the term
of this Sublease regulating the use by Sublessee of the
Premises.
5.3 Waste. Neither Sublessee nor Sublessor shall use, or permit
the use of, the Subleased Premises or the Premises,
respectively, in any manner that will tend to create waste or
a nuisance or which shall tend to disturb such other tenants.
5.3 Condition of Subleased Premises. Sublessee hereby accepts the
Subleased Premises in its condition existing as of the date of
commencement of this Sublease, subject to all applicable
zoning, municipal, county and state laws, ordinances and
regulations governing and regulation the use of the Subleased
Premises, and accepts this Sublease subject to such laws,
ordinances and regulations. Sublessee acknowledges that
neither Sublessor nor Sublessor's agents have made any
representation or warranty as to the suitability of the
Subleased Premises for the conduct of Sublessee's business.
6. MASTER LEASE.
6.1 Master Lease and Master Lessor. Sublessor is the lessee of the
Premises by virtue of a Lease Agreement referred to in this
Sublease as the "Master Lease," a copy of which is attached
hereto, marked Exhibit 1 and dated July 21, 1995, wherein
South Bay Construction & Development Company, Inc., a
California corporation is the lessor referred to in this
Sublease as the "Master Lessor."
6.2 Subordination. This Sublease is and shall be at all times
subject and subordinate to the Master Lease.
6.3 Terms Applicable. With respect to the Subleased Premises only,
the terms conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be,
mutatis mutandis, the terms and conditions of the Master
Lease, except for those provisions of the Master Lease which
are directly contradicted by this Sublease in which event the
terms of this Sublease shall control over the Master Lease, or
are excluded or modified as provided in Section 6.4 below.
Therefore, for that purpose, wherever in the Master Lease the
word "Landlord" is used it shall be deemed to mean the
Sublessor herein and wherever in the Master Lease the word
"Tenant" is used it shall be deemed to mean the Sublessee
herein.
6.4 Obligation to Perform. During the term of this Sublease and
for all periods subsequent for obligations which have arisen
prior to the termination of this Sublease
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<PAGE> 4
it is specifically agreed that, as between Sublessee and
Sublessor, the following sections of the Master Lease are
modified or excluded herefrom:
(a) Sections 1, 2, 3, 4A, 4B, 4D, 4E, 4F, 5, 7B through
7E, 8B, 8C, 9, the 4th and 5th sentences of Section
10B, 12, the last sentence of Section 14, Sections
23, 25, 27, 31B, 37, 38, 40 and 41 and Exhibit C are
excluded;
(b) For purposes of this Sublease, Tenant's Pro Rata
Share, when referred to in the Master Lease and where
applicable, will refer to the ratio that the square
footage constituting the Subleased Premises bears to
the square footage of the Premises;
(c) The maintenance and repair obligations of Landlord in
Sections 10A, 11, 13 and 16 will remain the
obligations of Master Lessor; the word "Landlord" as
used in Section 19 will apply both to Sublessor and
Master Lessor; the provisions of Section 39D will be
the direct obligation of Sublessee to Master Lessor;
and the last sentence of Section 39G, will apply only
to Master Lessor.
6.5 Definitions and Clarification. The obligations of the Tenant
under the Master Lease that Sublessee has assumed under
Sections 6.3 and 6.4 above are referred to in this Sublease as
the "Sublessee's Assumed Obligations." The obligations of the
Tenant under the Master Lease that Sublessee has not so
assumed are referred to in this Sublease as the "Sublessor's
Remaining Obligations." It is clarified that the obligations
of the Tenant that the Sublessee has assumed under Section 6.3
and 6.4 are not applicable to any portion of the Premises that
are not the Subleased Premises and that Sublessor remains
responsible for performance of these and the other obligations
that comprise the Sublessor's Remaining Obligations.
6.6 Indemnity of Sublessee. Sublessee will hold Sublessor free and
harmless of and from all liability, judgments, costs, damages,
claims or demands, including reasonable attorneys fees,
arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
6.7 Sublessor to Maintain Master Lease. Sublessor agrees to
maintain the Master Lease during the entire Lease Term under
the Master Lease, or until this Sublease expires or otherwise
is terminated, whichever occurs first, subject, however, to
any earlier termination of the Master Lease without the fault
of the Sublessor and to comply with or perform Sublessor's
Remaining Obligations and to hold Sublessee free and harmless
of and from all liability, judgments, costs, damages, claims
or demands arising out of Sublessor's failure to comply with
or perform Sublessor's Remaining Obligations. Sublessor will
use reasonable commercial efforts to endure and enforce
compliance and performance by the Master Lessor of its
obligations under the Master Lease that remain on Master
Lessor's part to perform.
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<PAGE> 5
6.8 Indemnification Procedure. With respect to any claim for
indemnity arising under Section 6.6 or 6.7 above resulting
from a third party claim or demand, the indemnified party
shall, after receipt of notice of the commencement of any
action or the presentation or other assertion of any claim
which could result in any indemnification claim pursuant to
Section 6.6 or 6.7, give prompt written notice thereof to
indemnifying party (although failure to give prompt notice
shall not mitigate the indemnification obligations hereunder
unless and to the extent the indemnifying party is prejudiced
by such failure or delay).
(a) The indemnifying party shall be entitled to
participate in the defense of any such claim or
action. The indemnifying party may also, to the
extent that it may desire, assume the defense thereof
with its own counsel, unless the indemnified party
reasonably objects to such assumption on the grounds
that representation of all entities by the same
counsel would be prohibited under any rule of
professional conduct applicable to such counsel, then
the indemnified party may participate in its own
defense with counsel of its own choosing at the cost
of the indemnifying party. Except as specified in the
preceding sentence, the indemnifying party shall not
be liable to indemnified party for any fees of other
counsel or any other expenses, in each case, incurred
by the indemnified party in connection with the
defense thereof.
(b) The indemnifying party shall be authorized, without
the consent of indemnified party being required, to
settle or compromise any such action or claim,
provided that such settlement or compromise includes
an unconditional release of the indemnified party
from all liability arising out of such action or
claim. The indemnifying party shall not be liable for
any compromise or settlement of any such action
effected by indemnified party without the
indemnifying party's written consent.
(c) The parties agree to cooperate to the fullest extent
possible in connection with any claim for which
indemnification is or may be sought under this
Agreement.
7. INSURANCE. During the term of this Sublease and any extension thereof,
Sublessor shall include Sublessee as an additional named insured, or at
Sublessor's election, a co-insured party, under the insurance policies
it carries pursuant to Section 8B of the Master Lease.
8. DEFAULT UNDER MASTER LEASE. Sublessor hereby represents and warrants to
Sublessee that, to Sublessor's knowledge, no default presently exists
under the Master Lease of obligations to be performed by Sublessor and
that the Master Lease is in full force and effect. In the event that
Sublessor defaults in its obligations to be performed by it under the
Master Lease, Sublessee shall have the right to cure any default of
Sublessor, if such cure is accepted by the Master Lessor. If such
default is cured by Sublessee, then Sublessee shall have a right of
reimbursement and offset from and against Sublessor.
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<PAGE> 6
9. GUARANTY. Guarantor hereby unconditionally and irrevocably guarantees
to Sublessor, and does hereby become surety for, the punctual payment,
when due whether by reason of acceleration or otherwise, of all rent,
interest, fees and any other amounts payable to Sublessor, to Master
Lessor or to any other person or entity as a result of this Sublease,
whether the obligation for payment is now existing or hereafter arising
(the "Obligations"). The Obligations of Guarantor are absolute,
unconditional and continuing whether or not this Sublease expires or is
terminated. Guarantor hereby consents that, from time to time, without
notice to, or further consent of the Guarantor, the performance or
observance of any provision of the Master Lease or of any Obligation
may be waived by Sublessor and/or Master Lessor, or the time of
performance thereof extended or accelerated or may be renewed in whole
or in part or otherwise amended, changed, released or compromised, all
without affecting the liability of Guarantor hereunder. Guarantor
hereby waives notice of acceptance of this guaranty, all set-offs and
counterclaims of Guarantor and presentment, demand, protest, notice of
protest and notice of dishonor of any Obligation guaranteed hereby.
10. GENERAL PROVISIONS.
10.1 Attorney's fees. If any party named herein brings an action to
enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal,
shall be entitled to his reasonable attorney's fees to be paid
by the losing party as fixed by the court.
10.2 Entire Agreement. This Sublease and the Master Lease contain
the entire agreement among the parties hereto concerning
sublease by Sublessee of the Subleased Premises and replace
any other prior or contemporaneous discussions concerning such
subject matter.
10.3 Notices. All notices or other communications under this
Sublease shall be in writing and shall be effective when
personally delivered or when deposited in the postal service,
certified mail (return receipt requested), postage prepaid, to
the address of the receiving party specified on the signature
page(s) to this Sublease or to such other address as the
receiving party may hereafter have given 10 days advance
notice to the sending party in the manner specified above.
10.4 Governing Law. This Sublease will be governed by, and
interpreted in accordance with, the laws of the State of
California without regard to the principles of conflict of
laws.
10.5 Counterparts. This Sublease may be executed in any number of
counterparts, each of which will be deemed an original but all
of which together shall constitute one and the same agreement.
THIS SUBLEASE WILL NOT BE EFFECTIVE AGAINST ANY PARTY UNLESS SIGNED BY GUARANTOR
WITHIN TEN (10) DAYS AFTER EXECUTION BY SUBLESSOR AND SUBLESSEE.
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<PAGE> 7
Executed at________________________ AG ASSOCIATES, INC.
on_________________________________ By_______________________________________
address____________________________ By_______________________________________
___________________________________ "Sublessor"
Executed at________________________ AGI, INC.
on_________________________________ By_______________________________________
address____________________________ By_______________________________________
___________________________________ "Sublessee"
Executed at________________________ AG ASSOCIATES (ISRAEL) LTD.
on_________________________________ By_______________________________________
address____________________________ By_______________________________________
___________________________________ "Guarantor"
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<PAGE> 1
Exhibit 10.36
CONFIDENTIAL SEPARATION AGREEMENT
1. This Agreement is made between Patrick Halahan and AG Associates
("THE Company"), on behalf of the Company and its owners, agents, officers,
employees and persons related to the Company.
2. a. Due to the slowdown in semiconductor fab startups and associated
business conditions at AG Associates, the Company must consolidate certain
functions as part of a company-wide reorganization. Even though we have tried
spending adjustments as a remedy, there are factors in the environment that are
just too negative for us to control for a continuing period. Unfortunately, your
position is one of those affected by the reorganization. As a result of this
change, you will be laid off effective Wednesday, July 31, 1996 ("Separation
Date"). You will receive a lump sum payment equal to four months severance in
the gross amount of $41,666.66 less applicable federal, state and local
deductions in lieu of notice. In addition, the Company will make available to
you individual outplacement services for up to six months from the Separation
Date through Torchiana, Mastrov & Associates, Inc., who will provide you with
unlimited personal consulting sessions for the entire period of the program,
offices, computer equipment and full administrative support.
b. You agree that you will be responsible for providing such consulting
services to the Company as the President of the Company may from time to time
require under a separate agreement, dated July 31, 1996. Your employment or
consulting elsewhere shall not be inconsistent with the terms of the Consulting
Services Agreement so long as such employment or consulting does not in any way
breach or conflict with your obligations under the Employee Invention and
Confidentiality Agreement signed by you on June 30, 1995.
c. You have been granted a stock option for the purchase of shares of
the Company's common stock equal to a total of 31,250 shares. Such options will
continue to vest until December 31, 1996, so long as you continue to serve under
the Consulting Services Agreement. Such options will terminate ninety days after
termination of your consultant status under the Consulting Services Agreement.
Such options may be exercised, to the extent they are vested, prior to the time
they terminate in accordance with their terms.
3. The Company will provide continued health insurance coverage through
COBRA for a period of four months from the date of Separation. You agree to
complete the necessary COBRA forms for electing medical insurance continuation
coverage. You then have the option, at your own expense, to extend the health
insurance coverage provided by the Company, for an additional period of 12
months pursuant to the terms and conditions of COBRA. You have 60 days from the
Separation Date to notify the Company in writing of your election to continue
your coverage past the original four month period.
4. You acknowledge that if you are a participant in the Employee Stock
Purchase Plan your payroll deductions will immediately be discontinued upon the
Separation Date. Any funds remaining in your account for the current Offering
Period will be refunded to you in your final paycheck without interest and no
shares will be purchased for you on the Purchase Date. Any stock acquired
through your participation in prior Offering Periods is not affected by your
withdrawal from the Plan.
<PAGE> 2
5. You agree, that at a time the Company may request, you will return
to the Company all Company property, including, but not limited to, office and
desk keys, card entry keys, company credit cards, telephone calling cards,
cellular telephones, software, all computer hardware and ancillary hardware,
product-related documentation, including, but not limited to, hard copy
information or information contained on magnetic or other storage media,
customer lists and other information related to the Company's customers. You
also agree that you have not retained any copies of any such property.
6. You acknowledge that you are bound by the agreement dated June 30,
1995, that as a result of your employment with the Company you have had access
to the Confidential Information of the Company, that you will hold all such
Confidential Information in strictest confidence and that you may not make any
use of such Confidential Information on behalf of any third party.
7. The payments you have received on the Separation Date are in full
satisfaction of any and all accrued salary, vacation pay, bonus pay,
profit-sharing, termination benefits, or other compensation to which you may be
entitled by virtue of this employment with the Company or your termination of
employment. You agree that by signing this Agreement and accepting the payment
described above, you hereby give up any and all rights you may have to file a
claim or complaint of any kind against the Company or any related persons,
including without limitation claims for any additional compensation or benefits
arising out of the termination of your employment and any claims for any
additional stock or stock options. You hereby expressly waive any benefits of
Section 1542 of the Civil Code of the State of California, which states: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor."
8. You agree that you will not disparage the Company or its products,
services, agents, representatives, directors, officers, shareholders, attorneys,
employees, vendors, affiliates, successors or assigns, or any person acting by,
through, under or in concert with any of them, with any written or oral
statement.
9. You have carefully considered this Agreement before signing it. You
have consulted with an attorney before signing this Agreement, or have
voluntarily elected not to do so. You understand this Agreement and its final
and binding effect. The only representations made regarding this Agreement, or
to induce you to sign it, are contained in this Agreement. You sign this
Agreement knowingly and voluntarily.
AG ASSOCIATES AGREED AND ACCEPTED:
/s/ Julio Guardado 7/29/96 /s/ Patrick B. Halahan 29 July 96
- ---------------------------------- ----------------------------------------
Julio Guardado Date Patrick B. Halahan Date
President & Chief Operating Officer 3932 Casanova Drive
San Mateo, CA 94403
<PAGE> 1
EXHIBIT 10.37
CONFIDENTIAL SEPARATION AGREEMENT
1. This Agreement is made between Ronald Manley and AG Associates ("the
Company"), on behalf of the Company and its owners, agents, officers, employees
and persons related to the Company.
2. a. Due to the slowdown in semiconductor fab startups and associated
business conditions at AG Associates, the Company must consolidate certain
functions as part of a company-wide reorganization. Even though we have tried
spending adjustments as a remedy, there are factors in the environment that are
just too negative for us to control for a continuing period. Unfortunately, your
position is one of those affected by the reorganization. As a result of this
change, you will be laid off effective Wednesday, July 31, 1996 ("Separation
Date"). You will receive a lump sum payment equal to four months severance in
the gross amount of $36,666.67 less applicable federal, state and local
deductions in lieu of notice. In addition, the Company will make available to
you individual outplacement services for up to six months from the Separation
Date through Torchiana, Mastrov & Associates, Inc., who will provide you with
unlimited personal consulting sessions for the entire period of the program,
offices, computer equipment and full administrative support.
b. You agree that you will be responsible for providing such consulting
services to the Company as the President of the Company may from time to time
require under a separate agreement, dated July 31, 1996. Your employment or
consulting elsewhere shall not be inconsistent with the terms of the Consulting
Services Agreement so long as such employment or consulting does not in any way
breach or conflict with your obligations under the Employee Invention and
Confidentiality Agreement signed by you on July 1, 1994.
c. You have been granted a stock option for the purchase of shares of
the Company's common stock equal to a total of 15,500 shares. Such options will
continue to vest until December 31, 1996, so long as you continue to serve under
the Consulting Services Agreement. Such options will terminate ninety days after
termination of your consultant status under the Consulting Services Agreement.
Such options may be exercised, to the extent they are vested, prior to the time
they terminate in accordance with their terms.
3. The Company will provide continued health insurance coverage through
COBRA for a period of four months from the date of Separation. You agree to
complete the necessary COBRA forms for electing medical insurance continuation
coverage. You then have the option, at your own expense, to extend the health
insurance coverage provided by the Company, for an additional period of 12
months pursuant to the terms and conditions of COBRA. You have 60 days from the
Separation Date to notify the Company in writing of your election to continue
your coverage past the original four month period.
4. You acknowledge that if you are a participant in the Employee Stock
Purchase Plan your payroll deductions will immediately be discontinued upon the
Separation Date. Any funds remaining in your account for the current Offering
Period will be refunded to you in your final paycheck without interest and no
shares will be purchased for you on the Purchase Date. Any stock acquired
through your participation in prior Offering Periods is not affected by your
withdrawal from the Plan.
<PAGE> 2
5. You agree, that at a time the Company may request, you will return
to the Company all Company property, including, but not limited to, office and
desk keys, card entry keys, company credit cards, telephone calling cards,
cellular telephones, software, all computer hardware and ancillary hardware,
product-related documentation, including, but not limited to, hard copy
information or information contained on magnetic or other storage media,
customer lists and other information related to the Company's customers. You
also agree that you have not retained any copies of any such property.
6. You acknowledge that you are bound by the agreement dated July 1,
1994, that as a result of your employment with the Company you have had access
to the Confidential Information of the Company, that you will hold all such
Confidential Information in strictest confidence and that you may not make any
use of such Confidential Information on behalf of any third party.
7. The payments you have received on the Separation Date are in full
satisfaction of any and all accrued salary, vacation pay, bonus pay,
profit-sharing, termination benefits, or other compensation to which you may be
entitled by virtue of this employment with the Company or your termination of
employment. You agree that by signing this Agreement and accepting the payment
described above, you hereby give up any and all rights you may have to file a
claim or complaint of any kind against the Company or any related persons,
including without limitation claims for any additional compensation or benefits
arising out of the termination of your employment and any claims for any
additional stock or stock options. You hereby expressly waive any benefits of
Section 1542 of the Civil Code of the State of California, which states: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor."
8. You agree that you will not disparage the Company or its products,
services, agents, representatives, directors, officers, shareholders, attorneys,
employees, vendors, affiliates, successors or assigns, or any person acting by,
through, under or in concert with any of them, with any written or oral
statement.
9. You have carefully considered this Agreement before signing it. You
have consulted with an attorney before signing this Agreement, or have
voluntarily elected not to do so. You understand this Agreement and its final
and binding effect. The only representations made regarding this Agreement, or
to induce you to sign it, are contained in this Agreement. You sign this
Agreement knowingly and voluntarily.
AG ASSOCIATES AGREED AND ACCEPTED:
/S/ Julio Guardado 7/29/96 /s/ Ronald G. Manley 8/16/96
- ---------------------------------- ----------------------------------------
Julio Guardado Date Ronald G. Manley Date
President & Chief Operating Officer 5361 Emerald Court
Byron, CA 94514
<PAGE> 1
EXHIBIT 10.38
- --------------------------------------------------------------------------------
AG ASSOCIATES, INC.
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION........................................... 1
1.1 Definitions................................................... 1
1.2 Accounting Terms.............................................. 6
2. LOAN AND TERMS OF PAYMENT.............................................. 6
2.1 Advances...................................................... 6
2.2 Overadvances.................................................. 8
2.3 Interest Rates, Payments, and Calculations.................... 8
2.4 Crediting Payments............................................ 9
2.5 Fees.......................................................... 9
2.6 Additional Costs.............................................. 9
2.7 Term.......................................................... 10
3. CONDITIONS OF LOANS.................................................... 10
3.1 Conditions Precedent to Initial Advance....................... 10
3.2 Conditions Precedent to all Advances.......................... 10
4. CREATION OF SECURITY INTEREST.......................................... 10
4.1 Grant of Security Interest.................................... 10
4.2 Delivery of Additional Documentation Required................. 11
4.3 Right to Inspect.............................................. 11
5. REPRESENTATIONS AND WARRANTIES......................................... 11
5.1 Due Organization and Qualification............................ 11
5.2 Due Authorization; No Conflict................................ 11
5.3 No Prior Encumbrances......................................... 11
5.4 Bona Fide Eligible Accounts................................... 11
5.5 Merchantable Inventory........................................ 11
5.6 Name; Location of Chief Executive Office...................... 11
5.7 Litigation.................................................... 11
5.8 No Material Adverse Change in Financial Statements............ 12
5.9 Solvency...................................................... 12
5.10 Regulatory Compliance......................................... 12
5.11 Environmental Condition....................................... 12
5.12 Taxes......................................................... 12
5.13 Subsidiaries.................................................. 12
5.14 Government Consents........................................... 12
5.15 Full Disclosure............................................... 12
6. AFFIRMATIVE COVENANTS.................................................. 13
6.1 Good Standing................................................. 13
6.2 Government Compliance......................................... 13
6.3 Financial Statements, Reports, Certificates................... 13
6.4 Inventory; Returns............................................ 14
6.5 Taxes......................................................... 14
6.6 Insurance..................................................... 14
6.7 Principal Depository.......................................... 14
6.8 Quick Ratio................................................... 14
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C> <C>
6.9 Debt-Net Worth Ratio.......................................... 14
6.10 Tangible Net Worth............................................ 14
6.11 Profitability................................................. 14
6.12 Further Assurances............................................ 15
7. NEGATIVE COVENANTS..................................................... 15
7.1 Dispositions.................................................. 15
7.2 Change in Business............................................ 15
7.3 Mergers or Acquisitions....................................... 15
7.4 Indebtedness.................................................. 15
7.5 Encumbrances.................................................. 15
7.6 Distributions................................................. 15
7.7 Investments................................................... 15
7.8 Transactions with Affiliates.................................. 15
7.9 Subordinated Debt............................................. 16
7.10 Inventory..................................................... 16
7.11 Compliance.................................................... 16
8. EVENTS OF DEFAULT...................................................... 16
8.1 Payment Default............................................... 16
8.2 Covenant Default.............................................. 16
8.3 Material Adverse Change....................................... 16
8.4 Attachment.................................................... 16
8.5 Insolvency.................................................... 17
8.6 Other Agreements.............................................. 17
8.7 Subordinated Debt............................................. 17
8.8 Judgments..................................................... 17
8.9 Misrepresentations............................................ 17
9. BANK'S RIGHTS AND REMEDIES............................................. 17
9.1 Rights and Remedies........................................... 17
9.2 Power of Attorney............................................. 18
9.3 Accounts Collection........................................... 18
9.4 Bank Expenses................................................. 19
9.5 Bank's Liability for Collateral............................... 19
9.6 Remedies Cumulative........................................... 19
9.7 Demand; Protest............................................... 19
10. NOTICES................................................................ 19
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER............................. 20
12. GENERAL PROVISIONS..................................................... 20
12.1 Successors and Assigns........................................ 20
12.2 Indemnification............................................... 20
12.3 Time of Essence............................................... 20
12.4 Severability of Provisions.................................... 20
12.5 Amendments in Writing, Integration............................ 20
12.6 Counterparts.................................................. 20
12.7 Survival...................................................... 21
12.8 Confidentiality............................................... 21
</TABLE>
2
<PAGE> 4
This LOAN AND SECURITY AGREEMENT is entered into as of August 2, 1996,
by and between SILICON VALLEY BANK ("Bank") and AG ASSOCIATES, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
DEFINITIONS AND CONSTRUCTION
Definitions. As used in this Agreement, the following
terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means an Advance under the
Revolving Facility.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents (including fees and
expenses of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section
2.1 hereof.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit
A attached hereto.
1
<PAGE> 5
"Committed Line" means Five Million Dollars
($5,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination thereof
unless such Indebtedness is renewable or extendable at the option of Borrower or
any Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(c) Accounts with respect to which the account
debtor is an officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account debtor
may be conditional;
(e) Accounts with respect to which the account
debtor is an Affiliate of Borrower;
2
<PAGE> 6
(f) Accounts with respect to which the account
debtor does not have its principal place of business in the United States,
except for Eligible Foreign Accounts;
(g) Accounts with respect to which the account
debtor is the United States or any department, agency, or instrumentality of the
United States;
(h) Accounts with respect to which Borrower is
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to Borrower;
(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage (except that the concentration limit for
each of IBM and Intel shall be 35%), except as approved in writing by Bank;
(j) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Bank believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Eligible Foreign Accounts" means Accounts that are
not excluded by clauses (a) through (k) above, other than clause (f), with
respect to which the account debtor does not have its principal place of
business in the United States and that are: (1) covered by credit insurance in
form and amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit in favor of Bank as beneficiary, in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank; or (3) that
Bank approves on a case-by-case basis (Bank having previously approved Accounts
owing by Canon, Metron and TSMC, to the extent otherwise permitted hereunder);
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles
as in effect from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d) all
Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
3
<PAGE> 7
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means the day immediately prior to
the first anniversary of the date of this Agreement.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the Schedule;
4
<PAGE> 8
(c) Indebtedness incurred to lease or purchase
equipment provided such Indebtedness does not exceed the lesser of the cost or
fair market value of such Equipment and provided in any case that the principal
amount of such Indebtedness does not exceed $3,000,000;
(d) Subordinated Debt; and
(e) Indebtedness to trade creditors incurred in
the ordinary course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank;
(c) Investments in Borrower's wholly-owned
Subsidiaries in an amount not to exceed Five Hundred Thousand Dollars ($500,000)
made in Borrower's fiscal year 1997.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the consolidated cash, cash-equivalents,
accounts receivable and investments, with maturities not to exceed 90 days, of
Borrower determined in accordance with GAAP.
5
<PAGE> 9
"Responsible Officer" means each of the President,
Chief Executive Officer, the Chief Financial Officer and the Controller of
Borrower.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in
which (i) any general partnership interest or (ii) more than 50% of the stock of
which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(c) all reserves not already deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made in accordance with GAAP. When used
herein, the terms "financial statements" shall include the notes and schedules
thereto.
LOAN AND TERMS OF PAYMENT
Advances. Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to Borrower in an
aggregate amount not to exceed the lesser of (i) the Committed Line minus the
face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) minus the Foreign Exchange Reserve or (ii) the
Borrowing Base minus the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit minus the Foreign Exchange
Reserve. For purposes of this Agreement, "Borrowing Base" shall mean an amount
equal to eighty percent (80%) of Eligible Accounts. Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may
be repaid and reborrowed at any time during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of Advances made under this Section 2.1 to Borrower's deposit
account.
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The Revolving Facility shall terminate on the Maturity Date, at which
time all Advances under this Section 2.1 and other amounts due under this
Agreement shall be immediately due and payable.
2.1.1 Letters of Credit.
(a) Subject to the terms and conditions
of this Agreement, Bank agrees to issue or cause to be issued letters of credit
for the account of Borrower in an aggregate face amount not to exceed (i) the
lesser of the Committed Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face amount of
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) shall not in any case exceed Four Million Dollars ($4,000,000). Each
such letter of credit shall have an expiry date no later than the Maturity Date;
provided that Borrower may request Bank to issue a letter of credit that expires
up to six months after the Maturity Date for so long as Borrower's letter of
credit reimbursement obligation shall be secured by cash on terms acceptable to
Bank at any time after the Maturity Date if the term of this Agreement is not
extended by Bank. All such letters of credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of application and letter of credit agreement. All
amounts actually paid by Bank in respect of a letter of credit shall, when paid,
constitute an Advance under this Agreement.
(b) The obligation of Borrower to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrower shall indemnify, defend and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
letters of credit.
2.1.2 Letter of Credit Reimbursement; Reserve.
(a) Borrower may request that Bank
issue a letter of credit payable in a currency other than United States Dollars.
If a demand for payment is made under any such letter of credit, Bank shall
treat such demand as an advance to Borrower of the equivalent of the amount
thereof (plus cable charges) in United States currency at the then prevailing
rate of exchange in San Francisco, California, for sales of that other currency
for cable transfer to the country of which it is the currency.
(b) Upon the issuance of any letter of
credit payable in a currency other than United States Dollars, Bank shall create
a reserve under the Committed Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of the face
amount of such letter of credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
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2.1.3 Foreign Exchange Contract; Foreign Exchange
Settlements.
(a) Subject to the terms of this
Agreement, Borrower may utilize up to $4,000,000 for foreign exchange contracts
(the "Exchange Contracts"), pursuant to which Bank shall sell to or purchase
from Borrower foreign currency on a spot or future basis. All Exchange Contracts
must provide for delivery of settlement on or before the Maturity Date. The
limit available at any time shall be reduced by the following amounts (the
"Foreign Exchange Reserve") on each day (the "Determination Date"): (on all
outstanding Exchange Contracts on which delivery is to be effected or settlement
allowed more than two business days from the Determination Date, 10% of the
gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange
Contracts on which delivery is to be effected or settlement allowed within two
business days after the Determination Date, 100% of the gross amount of the
Exchange Contracts. In lieu of the Foreign Exchange Reserve for 100% of the
gross amount of any Exchange Contract, Borrower may request that Bank treat such
amount as an Advance under the Committed Line.
(b) Bank may, in its discretion,
terminate the Exchange Contracts at any time (a) that an Event of Default occurs
or (b) that there is no sufficient availability under the Committed Line and
Borrower does not have available funds in its bank account to satisfy the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without
limitation of any applicable indemnities, Borrower agrees to reimburse Bank for
any and all fees, costs and expenses relating thereto or arising in connection
therewith.
(c) Borrower shall not permit the total
gross amount of all Exchange Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be more than $4,000,000 nor
shall Borrower permit the total gross amount of all Exchange Contracts to which
Borrower is a party, outstanding at any one time, to exceed $4,000,000.
(d) Borrower shall execute all standard
form applications and agreements of Bank in connection with the Exchange
Contracts and, without limiting any of the terms of such applications and
agreements, Borrower will pay all standard fees and charges of Bank in
connection with the Exchange Contracts.
Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Bank pursuant to Sections 2.1, 2.1.1
and 2.1.2 of this Agreement is greater than the lesser of (i) the Committed Line
or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the
amount of such excess.
Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth
in Section 2.3(b), any Advances shall bear interest, on the average Daily
Balance, at a rate equal to one and one quarter percent (1.25%) above the Prime
Rate.
(b) Default Rate. All Obligations shall
bear interest, from and after the occurrence of an Event of Default, at a rate
equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall
be due and payable on the first calendar day of each month during the term
hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and
all Periodic Payments against any of Borrower's deposit accounts or against the
Committed Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
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(d) Computation. In the event the Prime
Rate is changed from time to time hereafter, the applicable rate of interest
hereunder shall be increased or decreased effective as of 12:01 a.m. on the day
the Prime Rate is changed, by an amount equal to such change in the Prime Rate.
All interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days elapsed.
Crediting Payments. Prior to the occurrence of an
Event of Default, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account or Obligation as Borrower specifies.
After the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment shall be immediately applied
to conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
Fees. Borrower shall pay to Bank the following:
Facility Fee. An annual Facility Fee equal
to Thirty Thousand Dollars ($30,000), which fee shall be payable and fully
earned and nonrefundable on the Closing Date;
(b) Financial Examination and Appraisal
Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of
Borrower's Accounts, and for each appraisal of Collateral and financial analysis
and examination of Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date
hereof, all Bank Expenses incurred through the Closing Date, including
reasonable attorneys' fees and expenses, and, after the date hereof, all Bank
Expenses, including reasonable attorneys' fees and expenses, as and when they
become due.
Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law), in each case after the date of this Agreement:
(a) subjects Bank to any tax with
respect to payments of principal or interest or any other amounts payable
hereunder by Borrower or otherwise with respect to the transactions contemplated
hereby (except for taxes on the overall net income of Bank imposed by the United
States of America or any political subdivision thereof);
(b) imposes, modifies or deems
applicable any deposit insurance, reserve, special deposit or similar
requirement against assets held by, or deposits in or for the account of, or
loans by, Bank; or
(c) imposes upon Bank any other
condition with respect to its performance under this Agreement, and the result
of any of the foregoing is to increase the cost to Bank, reduce the income
receivable by Bank or impose any expense upon Bank with respect to any loans,
Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of
such increase in cost, reduction in income or additional expense as and when
such cost, reduction or expense is incurred or determined, upon presentation by
Bank of a statement of the amount and
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setting forth Bank's calculation thereof, all in reasonable detail, which
statement shall be deemed true and correct absent manifest error.
Term. This Agreement shall become effective on the
Closing Date and, subject to Section 12.7, shall continue in full force and
effect for a term ending on the Maturity Date. Notwithstanding the foregoing,
Bank shall have the right to terminate its obligation to make Advances under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
CONDITIONS OF LOANS
Conditions Precedent to Initial Advance. The
obligation of Bank to make the initial Advance is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of
Borrower with respect to incumbency and resolutions authorizing the execution
and delivery of this Agreement;
(c) an audit of Borrower's Accounts;
(d) financing statement (Forms UCC-1);
(e) insurance certificate;
(f) payment of the fees and Bank
Expenses then due specified in Section 2.5 hereof; and
(g) such other documents, and
completion of such other matters, as Bank may reasonably deem necessary or
appropriate.
Conditions Precedent to all Advances. The obligation
of Bank to make each Advance, including the initial Advance, is further subject
to the following conditions:
(a) timely receipt by Bank of the
Payment/Advance Form as provided in Section 2.1; and
(b) the representations and warranties
contained in Section 5 shall be true and correct in all material respects on and
as of the date of such Payment/Advance Form and on the effective date of each
Advance as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Advance. The
making of each Advance shall be deemed to be a representation and warranty by
Borrower on the date of such Advance as to the accuracy of the facts referred to
in this Section 3.2(b).
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CREATION OF SECURITY INTEREST
Grant of Security Interest. Borrower grants and
pledges to Bank a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Except as set forth
in the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof.
Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver to Bank, at the request of
Bank, all Negotiable Collateral, all financing statements and other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.
Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's Articles of Incorporation or Bylaws,
nor will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
Bona Fide Eligible Accounts. The Eligible Accounts
are bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
Merchantable Inventory. All Inventory is in all
material respects of good and marketable quality, free from all material
defects.
Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
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Litigation. Except as set forth in the Schedule,
there are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral. Borrower does
not have knowledge of any such pending or threatened actions or proceedings.
No Material Adverse Change in Financial Statements.
All consolidated financial statements related to Borrower and any Subsidiary
that have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
Solvency. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
Regulatory Compliance. Borrower and each Subsidiary
has met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
Taxes. Borrower and each Subsidiary has filed or
caused to be filed all tax returns required to be filed, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
Subsidiaries. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
Government Consents. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to
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state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading.
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
Good Standing. Borrower shall maintain its and each
of its Subsidiaries' corporate existence and good standing in its jurisdiction
of incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
Government Compliance. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
Financial Statements, Reports, Certificates. Borrower
shall deliver to Bank: (a) as soon as available, but in any event within twenty
(20) days after the end of each month, a company prepared consolidated balance
sheet and income statement covering Borrower's consolidated operations during
such period, together with a backlog and a book-to-bill report, each certified
by a Responsible Officer; (b) as soon as available, but in any event within
ninety (90) days after the end of Borrower's fiscal year, audited consolidated
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
within five (5) days upon becoming available, copies of all statements, reports
and notices sent or made available generally by Borrower to its security holders
or to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q
filed with the Securities and Exchange Commission; (d) promptly upon receipt of
notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (e) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Within twenty (20) days after the last day of each month in which there
are outstanding Advances, including Letter of Credit and Exchange Contracts (and
within twenty (20) days of the last day of each fiscal quarter in which no
Advances are outstanding), Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit
C hereto, together with aged listings of accounts receivable and accounts
payable.
Within forty-five (45) days after the last day of each fiscal quarter,
Borrower shall deliver to Bank a Compliance Certificate signed by a Responsible
Officer in substantially the form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every twelve (12) months unless an Event of Default has occurred
and is continuing.
Inventory; Returns. Borrower shall keep all Inventory
in good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns
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and recoveries and of all disputes and claims, where the return, recovery,
dispute or claim involves more than Fifty Thousand Dollars ($50,000).
Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates attesting
to the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
Insurance.
(a) Borrower, at its expense, shall
keep the Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as ordinarily
insured against by other owners in similar businesses conducted in the locations
where Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance
shall be in such form, with such companies, and in such amounts as reasonably
satisfactory to Bank. All such policies of property insurance shall contain a
lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank
as an additional loss payee thereof and all liability insurance policies shall
show the Bank as an additional insured, and shall specify that the insurer must
give at least twenty (20) days notice to Bank before canceling its policy for
any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
Principal Depository. Borrower shall maintain its
principal depository and operating accounts with Bank.
Quick Ratio. Borrower shall maintain, as of the last
day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities of at
least 1.25 to 1.0.
Debt-Net Worth Ratio. Borrower shall maintain, as of
the last day of each fiscal quarter, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
1.0 to 1.0.
Tangible Net Worth. Borrower shall maintain, as of
the last day of each fiscal quarter, a Tangible Net Worth of not less than
Thirty Two Million Dollars ($32,000,000).
Profitability. Borrower shall not suffer a loss of
more than $2,050,000 for the fiscal quarter ending September 30, 1996; a loss of
more than $1,750,000 for the fiscal quarter ending December 31, 1996; a loss for
the fiscal quarter ending $1,550,000 for the fiscal quarter ending March 31,
1997; or a loss of more than $650,000 for the fiscal quarter ending June 30,
1997. Borrower shall not suffer a cumulative loss for the four quarters ending
September 30, 1997 of more than $5,000,000. If Borrower suffers a loss in two
consecutive fiscal quarters, then Borrower shall maintain a Book to Bill ration
of not less than 0.9 to 1.0 "Book to Bill Ratio" means a ratio of the (i) dollar
value of purchase orders received in a given quarter to (ii) dollar value of
Accounts created in such quarter.
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Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
Dispositions. Convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of Inventory in the ordinary course of business; (ii)
Transfers of non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or
obsolete Equipment.
Change in Business. Engage in any business, or permit
any of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership. Borrower will not, without thirty (30) days prior written
notification to Bank, relocate its chief executive office.
Mergers or Acquisitions. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization, or acquire, or permit any of its Subsidiaries to acquire,
all or substantially all of the capital stock or property of another Person,
except mergers, consolidations and acquisitions are permitted provided (i)
Borrower is the surviving entity, (ii) the aggregate cash payment in such
transactions does not exceed $2,000,000 in any fiscal year and (iii) an Event of
Default does not exist before such transaction and would not exist after giving
effect to such transaction.
Indebtedness. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
Encumbrances. Create, incur, assume or suffer to
exist any Lien with respect to any of its property, or assign or otherwise
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries so to do, except for Permitted Liens.
Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
Investments. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments.
Transactions with Affiliates. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a nonaffiliated
Person.
Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
15
<PAGE> 19
Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10 hereof and such other locations of which Borrower gives Bank
prior written notice and as to which Borrower signs and files a financing
statement where needed to perfect Bank's security interest.
Compliance. Become an "investment company" controlled
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
Payment Default. If Borrower fails to pay the
principal of, or any interest on, any Advances when due and payable; or fails to
pay any portion of any other Obligations not constituting such principal or
interest, including without limitation Bank Expenses, within thirty (30) days of
receipt by Borrower of an invoice for such other Obligations;
Covenant Default. If Borrower fails to perform any
obligation under Sections 6.7, 6.8, 6.9, 6.10, or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after Borrower receives notice thereof or any officer of Borrower becomes
aware thereof; provided, however, that if the default cannot by its nature be
cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default (provided
that no Advances will be required to be made during such cure period);
Material Adverse Change. If there occurs a material
adverse change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's security
interests in the Collateral;
Attachment. If any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or governmental agency, and the same is not
paid within ten (10) days after Borrower receives notice thereof, provided that
none of the foregoing shall
16
<PAGE> 20
constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
Other Agreements. If there is a default in any
agreement to which Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or that could have a Material Adverse
Effect;
Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed under
any subordination agreement entered into with Bank;
Judgments. If a judgment or judgments for the payment
of money in an amount, individually or in the aggregate, of at least Fifty
Thousand Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
Misrepresentations. If any material misrepresentation
or material misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate delivered to Bank by any
Responsible Officer pursuant to this Agreement or to induce Bank to enter into
this Agreement or any other Loan Document.
BANK'S RIGHTS AND REMEDIES
Rights and Remedies. Upon the occurrence and during
the continuance of an Event of Default, Bank may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether
evidenced by this Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable (provided that upon the occurrence of an Event of
Default described in Section 8.5 all Obligations shall become immediately due
and payable without any action by Bank);
Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and
claims directly with account debtors for amounts, upon terms and in whatever
order that Bank reasonably considers advisable;
(d) Without notice to or demand upon
Borrower, make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank's determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower's owned premises, Borrower
hereby grants Bank a license to enter into possession of such premises and to
occupy the same, without charge, in order to exercise any of Bank's rights or
remedies provided herein, at law, in equity, or otherwise;
17
<PAGE> 21
(e) Without notice to Borrower set off
and apply to the Obligations any and all (i) balances and deposits of Borrower
held by Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Bank;
(f) Ship, reclaim, recover, store,
finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the
manner provided for herein) the Collateral. Bank is hereby granted a license or
other right, solely pursuant to the provisions of this Section 9.1, to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(g) Sell the Collateral at either a
public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower's premises) as Bank determines is commercially reasonable, and apply
any proceeds to the Obligations in whatever manner or order Bank deems
appropriate;
(h) Bank may credit bid and purchase at
any public sale; and
(i) Any deficiency that exists after
disposition of the Collateral as provided above will be paid immediately by
Borrower.
Power of Attorney. Effective only upon the occurrence
and during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
Accounts Collection. At any time from the date of
this Agreement, Bank may notify any Person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account. Borrower
shall collect all amounts owing to Borrower for Bank, receive in trust all
payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
Bank Expenses. If Borrower fails to pay any amounts
or furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an
18
<PAGE> 22
agreement by Bank to make similar payments in the future or a waiver by Bank of
any Event of Default under this Agreement.
Bank's Liability for Collateral. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
Borrower.
Remedies Cumulative. Bank's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and for
the specific purpose for which it was given.
Demand; Protest. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Bank on which Borrower may in any way
be liable.
NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: AG Associates, Inc.
4425 Fortran Drive
San Jose, CA 95134
Attn: Arnon Gat
FAX: (408) 935-2732
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Diane Thompson
FAX: (408) 748-9478
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
19
<PAGE> 23
CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
GENERAL PROVISIONS
Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
Indemnification. Borrower shall defend, indemnify and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
Amendments in Writing, Integration. This Agreement
cannot be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
Survival. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations remain outstanding. The obligations of Borrower to
indemnify Bank with respect to the expenses, damages, losses, costs and
liabilities described in Section 12.2 shall
20
<PAGE> 24
survive until all applicable statute of limitations periods with respect to
actions that may be brought against Bank have run.
Confidentiality. In handling any confidential
information Bank shall exercise the same degree of care that it exercises with
respect to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain or in the knowledge or possession of Bank
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is prohibited
from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
AG ASSOCIATES, INC.
By:
----------------------------------
Title:
----------------------------------
SILICON VALLEY BANK
By:
----------------------------------
Title:
----------------------------------
21
<PAGE> 25
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
13. All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
14. All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
15. All now existing and hereafter arising accounts, and all other
forms of obligations owing to Borrower arising out of the sale or lease of
goods, the licensing of technology or the rendering of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Borrower and Borrower's Books relating to any of the foregoing;
16. All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
17. Any and all claims, rights and interests in any of the above
and all substitutions for, additions and accessions to and proceeds thereof.
22
<PAGE> 26
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: (408) 496-2426 TIME:
FROM:
----------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
--------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
------------------------------------------------------
PHONE NUMBER:
--------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
-------------- ---------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE)
PRINCIPAL PAYMENT (ONLY)
INTEREST PAYMENT (ONLY)
PRINCIPAL AND INTEREST (PAYMENT) $
-----------------------------
OTHER INSTRUCTIONS:
--------------------------------------------------------
---------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
<PAGE> 27
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- -----------------------------------
Authorized Requester Phone #
- -----------------------------------
Received By (Bank) Phone #
-----------------------------------
Authorized Signature (Bank)
<PAGE> 28
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: AG Associates, Inc. Lender: Silicon Valley Bank
Commitment Amount: $5,000,000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
----- -----
2. Additions (please explain on reverse) $
-----
3. TOTAL ACCOUNTS RECEIVABLE $
-----
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
-----
5. Balance of 50% over 90 day accounts $
-----
6. Concentration Limits $
-----
7. Foreign Accounts $
-----
8. Governmental Accounts $
-----
9. Contra Accounts $
-----
10. Promotion or Demo Accounts $
-----
11. Intercompany/Employee Accounts $
-----
12. Other (please explain on reverse) $
-----
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
-----
14. Eligible Accounts (#3 minus #13) $
-----
15. LOAN VALUE OF ACCOUNTS (80% of #14) $
-----
BALANCES
16. Maximum Loan Amount $
-----
17. Total Funds Available [Lesser of #15 or #16] $
-----
18. Present balance owing on Line of Credit $
-----
19. Outstanding under Sublimits ( ) $
-----
20. RESERVE POSITION (#17 minus #18 and #19) $
-----
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
Rec'd By:
------------
Auth. Signer
AG Associates, Inc. Date:
----------------
Verified:
------------
By: Auth. Signer
Authorized Signer Date:
----------------
----------------------
25
<PAGE> 29
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: AG ASSOCIATES, INC.
The undersigned authorized officer of AG Associates, Inc. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C>
Monthly financials, reports Monthly within 20 days Yes No
10-Q Quarterly within 5 days Yes No
10-K and annual statement FYE within 5 days Yes No
A/R & A/P Agings Monthly within 20 days* Yes No
A/R Audit Initial and Annual Yes No
</TABLE>
<TABLE>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.25:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $32,000,000 $________ Yes No
Maximum Debt/Tangible Net Worth 1.0:1.0 _____:1.0 Yes No
Profitability: Quarterly See Agreement $________ Yes No
</TABLE>
* When outstandings exceed $0, quarterly otherwise
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Received by:
Sincerely, ---------------------
AUTHORIZED SIGNER
- -----------------------------------
Date:
SIGNATURE ----------------------------
- ----------------------------------- Verified:
------------------------
TITLE AUTHORIZED SIGNER
- ----------------------------------- Date:
----------------------------
DATE
Compliance Status: Yes No
26
<PAGE> 30
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: AG Associates, Inc. Bank: Silicon Valley Bank
- --------------------------------------------------------------------------------
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $5,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Line
--------------
<S> <C>
Amount paid to Borrower directly: $
---------
Undisbursed Funds $
---------
Principal $5,000,000
</TABLE>
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
<TABLE>
<S> <C>
Charges Paid in Cash:
$30,000 Loan Fee
$ Accounts Receivables Audit
------
$ 100 UCC Search Fees
$ 100 UCC Filing Fees
$ Outside Counsel Fees and Expenses (Estimate)
------
Total Charges Paid in Cash $
------
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT
AND THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF , 19 .
BORROWER:
AG Associates, Inc.
- -----------------------------------------------------
Authorized Officer
- --------------------------------------------------------------------------------
<PAGE> 31
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: AG Associates, Inc. BANK: Silicon Valley Bank
- --------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. AG Associates, Inc. ("Grantor") understands
that insurance coverage is required in connection with the extending of a
loan or the providing of other financial accommodations to Grantor by Bank.
These requirements are set forth in the Loan Documents. The following
minimum insurance coverages must be provided on the following described
collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be cancelled or diminished
without a minimum of twenty (20) days' prior
written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with
an effective date of August 2, 1996, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at
the option of Bank, shall be payable on demand or shall be added to the
indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES
THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE
LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE
BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE
INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR
PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY
FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance
agent or company) all information Bank deems appropriate, whether regarding
the Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
AUGUST 2, 1996.
GRANTOR:
AG Associates, Inc.
x
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
<PAGE> 32
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
Borrower: AG Associates, Inc.
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of AG Associates,
Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized
and existing under and by virtue of the laws of the State of .
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting
(or by other duly authorized corporate action in lieu of a meeting), the
following resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
- ----------------------- ------------------------- -------------------------------
- ----------------------- ------------------------- -------------------------------
- ----------------------- ------------------------- -------------------------------
- ----------------------- ------------------------- -------------------------------
- ----------------------- ------------------------- -------------------------------
</TABLE>
acting for an on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers,
employees, or agents and Bank, such sum or sums of money as in their
judgment should be borrowed, without limitation, including such sums as are
specified in that certain Loan and Security Agreement dated as of August 2,
1996 (the "Loan Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and
on such terms as may be agreed upon, evidencing the sums of money so
borrowed or any indebtedness of the Corporation to Bank, and also to
execute and deliver to Lender one or more renewals, extensions,
modifications, refinancings, consolidations, or substitutions for one or
more of the notes, or any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all
of the Corporation's Obligations, as described in the Loan Agreement.
<PAGE> 33
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation or in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Bank, or to
cause such other disposition of the proceeds derived therefrom as they may
deem advisable.
LETTERS OF CREDIT; FOREIGN EXCHANGE. To execute letters of credit
applications, foreign exchange agreements and other related documents
pertaining to Bank's issuance of letters of credit and foreign exchange
contracts.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and things,
to pay any and all fees and costs, and to execute and deliver such other
documents and agreements as they may in their discretion deem reasonably
necessary or proper in order to carry into effect the provisions of these
Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions
are hereby ratified and approved, that these Resolutions shall remain in
full force and effect and Bank may rely on these Resolutions until written
notice of their revocation shall have been delivered to and received by
Bank. Any such notice shall not affect any of the Corporation's agreements
or commitments in effect at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the
case may be, and occupy the positions set forth opposite their respective
names; that the foregoing Resolutions now stand of record on the books of
the Corporation; and that the Resolutions are in full force and effect and
have not been modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on _______________,
19___ and attest that the signatures set opposite the names listed above
are their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X
- --------------------------------------------------------------------------------
2
<PAGE> 1
AG ASSOCIATES, INC.
EXHIBIT 11.01
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Weighted average common shares
outstanding during the period 5,883 4,385 2,925
Common share equivalents 257 385 847
------ ------ ------
Total 6,140 4,770 3,772
====== ====== ======
Net Income $2,743 $9,753 $3,224
Interest on convertible debentures -- 35 60
------ ------ ------
Adjusted net income $2,743 $9,788 $3,284
====== ====== ======
Earnings per share $ 0.45 $ 2.05 $ 0.87
====== ====== ======
</TABLE>
14
<PAGE> 1
EXHIBIT 23.02
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statements No.
33-94716 and 333-02360 of AG Associates, Inc. on Form S-8 of our reports dated
October 25, 1996, included in the Annual Report on Form 10-K of AG Associates,
Inc. for the year ended September 30, 1996.
DELOITTE & TOUCHE LLP
San Jose, California
December 18, 1996
<PAGE> 1
EXHIBIT 23.04
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Annual Report on Form 10-K of AG
Associates, Inc. and to the incorporation by reference in the Registration
Statements of AG Associates, Inc. on Form S-8 (File Nos 33-94716 and 333-02360)
of our report to the Board of Directors and Shareholders of AG Associates
(Israel) Ltd. dated November 8, 1994.
Kesselman & Kesselman
Certified Public Accountants (Isr.)
Haifa, Israel
December 19, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,996
<SECURITIES> 9,989
<RECEIVABLES> 9,463
<ALLOWANCES> 903
<INVENTORY> 11,668
<CURRENT-ASSETS> 36,997
<PP&E> 12,685
<DEPRECIATION> 4,475
<TOTAL-ASSETS> 45,852
<CURRENT-LIABILITIES> 10,147
<BONDS> 0
0
0
<COMMON> 35,640
<OTHER-SE> 54
<TOTAL-LIABILITY-AND-EQUITY> 45,852
<SALES> 71,089
<TOTAL-REVENUES> 71,089
<CGS> 39,365
<TOTAL-COSTS> 39,365
<OTHER-EXPENSES> 26,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 4,487
<INCOME-TAX> 1,744
<INCOME-CONTINUING> 2,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,743
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
