<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-25862
AG ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
California 94-2776181
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4425 Fortran Drive, San Jose, California 95134-2300
(Address of principal executive offices and zip code)
Registrant's telephone number: (408) 935-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, no par value,
was 6,065,774 at January 31, 1998.
<PAGE> 2
AG ASSOCIATES, INC.
INDEX
<TABLE>
<CAPTION>
Description Page Number
----------- -----------
<S> <C>
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the
Three Month Periods Ended December 31, 1997 and 1996 3
Condensed Consolidated Balance Sheets as of December 31,
1997 and September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Three Month Periods Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosure About Market Risk 13
Part II: Other Information
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 3: Defaults Upon Senior Securities 14
Item 4: Submission of Matters to a Vote of Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 16,433 $ 9,133
Cost of sales 10,185 5,734
-------- --------
Gross profit 6,248 3,399
Operating expenses:
Research and development 3,948 3,175
Selling, general and administrative 2,361 2,090
-------- --------
Total operating expenses 6,309 5,265
-------- --------
Loss from operations (61) (1,866)
Interest income, net 44 102
Other income, net 32 37
-------- --------
Income (loss) before income taxes 15 (1,727)
Provision (benefit) for income taxes 6 (432)
-------- --------
Net income (loss) $ 9 $ (1,295)
======== ========
Basic net income (loss) per share (see note 2) $ 0.00 $ (0.22)
Diluted net income (loss) per share (see note 2) $ 0.00 $ (0.22)
Shares used in basic per share calculation (see note 2) 6,066 5,948
Shares used in diluted per share calculation (see note 2) 6,132 5,948
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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<PAGE> 4
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
(unaudited) (*)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 4,947 $ 2,485
Short-term investments 1,459 1,672
Accounts receivable, net 8,791 13,415
Inventories 13,648 11,676
Income taxes refundable 1,613 1,652
Deferred tax assets 2,215 2,221
Prepaid expenses and other current assets 909 896
-------- --------
Total current assets 33,582 34,017
Property and equipment, net 9,006 8,493
Deferred tax assets 437 437
-------- --------
Total assets $ 43,025 $ 42,947
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,105 $ 6,272
Accrued liabilities 3,181 2,997
Warranty reserves 1,723 1,687
Current portion of capital lease obligations 235 194
-------- --------
Total current liabilities 11,244 11,150
Capital lease obligations 234 275
Contingencies (Note 4)
Shareholders' equity
Common stock 36,148 36,139
Net unrealized loss on short-term investments (3) (10)
Accumulated deficit (4,598) (4,607)
-------- --------
Total shareholders' equity 31,547 31,522
-------- --------
Total liabilities and shareholders' equity $ 43,025 $ 42,947
======== ========
</TABLE>
(*) Derived from audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9 $ (1,295)
Reconciliation to net cash provided by (used in)
operating activities:
Depreciation and amortization 660 665
Deferred tax assets 6 (432)
Deferred stock compensation -- 17
Changes in assets and liabilities:
Accounts receivable 4,624 773
Inventories (1,972) 658
Prepaid expenses and other current assets (13) (76)
Accounts payable (167) (629)
Accrued liabilities and warranty reserves 220 (259)
Customer advances -- (181)
Income taxes payable 39 --
-------- --------
Net cash provided by (used in) operating activities 3,406 (756)
Cash flows from investing activities:
Purchases of short-term investments (309) (1,264)
Maturities of short-term investments 529 2,350
Capital expenditures (1,173) (956)
-------- --------
Net cash provided by (used in) investing activities (953) 130
Cash flows from financing activities:
Repayment of capital lease obligations -- (32)
Proceeds from issuance of common stock 9 29
-------- --------
Net cash provided by (used in) financing activities 9 (3)
-------- --------
Net increase (decrease) in cash and equivalents 2,462 (629)
Cash and equivalents at beginning of period 2,485 1,996
-------- --------
Cash and equivalents at end of period $ 4,947 $ 1,367
======== ========
Supplemental disclosure of cash flow information
Cash paid/(refunded) during the period for:
Interest $ 13 $ 34
======== ========
Income taxes -- --
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)
NOTE 1 - Basis of Presentation
The financial statements have been prepared by AG Associates, Inc. (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). While the quarterly financial information contained in this
filing is unaudited, the financial statements presented reflect all normal
recurring adjustments which the Company considers necessary for a fair
presentation of the financial position, results of operations and cash flows for
all interim periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the entire year. The
information included in this report should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in the Company's
1997 Annual Report on Form 10-K.
NOTE 2 - Net Income Per Share Information
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). SFAS 128 requires a dual presentation of basic
and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue stock were exercised
or converted into common stock. Prior periods have been restated to conform with
SFAS 128.
<TABLE>
<CAPTION>
Three months ended December 31,
1997 1996
---------- ----------
<S> <C> <C>
Net income (loss) $ 9 $ (1,295)
========== ==========
Shares used in calculation:
Weighted average common shares outstanding used in
calculation of basic net income (loss) per share 6,066 5,948
Dilutive effect of stock options 66 0
---------- ----------
Shares used in calculation of diluted net
income (loss) per share 6,132 5,948
========== ==========
Basic net income (loss) per share $ 0.00 $ (0.22)
========== ==========
Diluted net income (loss) per share $ 0.00 $ (0.22)
========== ==========
</TABLE>
Options to purchase 747,716 shares of common stock at prices ranging from $5.75
to $16.82 were outstanding as of December 31, 1997 but not included in the
calculation of diluted net income per share because the option's exercise price
was greater than the average market price of the common shares for the period
and would therefore, be anti-dilutive for purposes of the calculation. For the
period ending December 31, 1996 the diluted net loss per share excludes common
equivalents of 82,419 as such amounts are anti-dilutive.
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<PAGE> 7
NOTE 3 - Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market,
consist of:
<TABLE>
<CAPTION>
(in thousands)
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Raw materials $ 7,323 $ 7,500
Work-in-progress 6,325 4,176
-------- --------
Total $ 13,648 $ 11,676
======== ========
</TABLE>
Inventories are shown net of reserves for obsolete, slow-moving and non-salable
inventory of $3,512,000 and $3,666,000 at December 31, 1997 and September 30,
1997, respectively.
NOTE 4 - Litigation
The Company is currently involved in an intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. in the United States District Court
for the Northern District of California, San Jose Division. Applied Materials
alleges that the Company's products infringe on two Applied Materials patents
relating to RTP processes and heater head design and seeks a permanent
injunction against infringement, and award of damages for infringement, treble
damages for intentional and willful infringement, attorneys' fees and costs of
suit. On July 23, 1997, the Company answered Applied Materials' complaint and
counterclaimed for declaratory relief that the Company's products do not
infringe the patents and that the patents are invalid. On October 3, 1997, the
Company filed a counterclaim in the United States District Court for Northern
California, San Jose Division against Applied Materials for infringement of one
of the Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim by alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and counterclaims
is set for March 1, 1999. Management believes Applied Materials' claims are
without merit and intends to defend the Company vigorously. However, there can
be no assurance that this litigation will be resolved in favor of the Company,
and, in any event, litigation could result in significant expense to the Company
and could divert the efforts of the Company's technical and management personnel
from other tasks, whether or not such litigation is determined in favor of the
Company. In particular, the Company expects to incur significant legal expenses
in fiscal 1999 in the event Applied Materials' claims are not resolved by then.
In the event of an adverse ruling in any such litigation, the Company might be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, discontinue the use of certain processes or expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing technology.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and section
27A of the Securities Act of 1933, as amended. These forward-looking statements
are subject to significant risks and uncertainties, including those identified
in the section labeled "Factors That May Affect Future Results" and in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997, that may cause actual results to differ materially from those discussed in
such forward-looking statements. The Company has identified with a preceding
asterisk ("*") various sentences within this form 10-Q which contain such
forward-looking statements, and words such as "believes," "anticipates,"
"expects," "future," "intends" and similar expressions are also intended to
identify such forward-looking statements. In addition, the section labeled
"Factors That May Affect Future Results," which has no asterisks for improved
readability, consists primarily of forward-looking statements. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof. Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the Securities and Exchange
Commission, including its form 10-K, that attempt to advise interested parties
of the risks and factors that may affect the Company's business.
Factors That May Affect Future Results
The Company's business, financial condition and results of operations are
subject to the following risks.
RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company derives
substantially all of its revenue from a single line of rapid thermal processing
products. The rapid thermal processing ("RTP") industry is subject to rapid
technological change, and the Company and its competitors continuously seek to
introduce new products that provide improved process results and manufacturing
performance at prices acceptable to RTP customers. There can be no assurance
that the Company can develop new products more quickly than its competitors or
that the Company's products will have better price/performance characteristics
than competitors' products. During fiscal 1997, the Company introduced its new
Starfire 200mm RTP system, and announced its new Starfire 300mm RTP system,
which are intended to provide previously unavailable RTP capabilities for the
0.18 and 0.25 micron line widths. The Company anticipates that shipments of the
Starfire RTP systems will commence in the second quarter of fiscal 1998,
although initial margins on the Starfire RTP systems are expected to be lower
than current Heatpulse production systems. However, there can be no assurance
that shipments of the Starfire RTP systems will commence on schedule or that any
of the Company's new products will achieve market acceptance.
SEMICONDUCTOR INDUSTRY VOLATILITY. The semiconductor industry has
historically been cyclical and subject to unexpected periodic downturns
associated with sudden changes in supply and demand. In recent quarters, the
Company has sequentially grown net sales from the semiconductor industry's
downturn in 1996, however the current economic instability in Asia, which has
had an effect on the Company's backlog, will result in lower net sales for
second and third quarter of fiscal 1998 compared to net sales in the first
quarter of fiscal 1998. In addition, the Company's continuation of a high level
of research and development spending on its new products and competitive
pressures will continue to affect the Company's overall profitability. The
Company cannot predict industry cycles and their effect on the RTP market, rate
of orders for the Company's products or the degree to which the Company's new
products will achieve market acceptance. In particular, the semiconductor
industry may experience a prolonged downturn as a result of economic instability
in Asia. For these reasons, the Company's analysts' and investors' expectations
with respect to the Company's new orders, net sales and operating results with
respect to future quarters may not be met.
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<PAGE> 9
STOCK PRICE VOLATILITY. The Company's common stock price may be subject to
significant volatility. For any given quarter, a shortfall in the Company's
announced revenue or earnings from the levels expected by securities analysts or
investors could have an immediate and adverse effect on the trading price of the
Company's common stock. The Company may not learn of, nor be able to confirm,
revenue or earnings shortfalls until late in the quarter or following the end of
the quarter. In general, the Company participates in a very dynamic high
technology industry, which can result in significant fluctuations in the
Company's common stock price at any time.
COMPETITION. The Company's ability to compete depends upon the Company's
ability to develop new RTP product features that enhance uniformity and
repeatability, improve process capability and flexibility and reduce cost of
ownership. The Company's competitors, many of whom have substantially greater
resources than the Company, also seek to compete in these areas, and certain
competitors have introduced products that have additional functionality compared
to the Company's products or offer similar products to those of the Company at
lower prices. In addition, the Company expects to see increased competition from
batch furnace vendors as those companies increased functionality available in
such machines. Applied Materials, Inc. ("Applied Materials") has made
significant gains in the Company's market and has offered certain functionality
the Company was not able to provide with its products, allowing Applied
Materials to capture significant customers. Applied Materials and AST are
significantly larger companies with greater resources than the Company. There
are also larger Japanese and domestic companies that possess the technical
resources to enter the RTP market.
CLAIMS OF PATENT INFRINGEMENT. The Company is currently involved in an
intellectual property litigation. On April 24, 1997, Applied Materials filed a
complaint against the Company, AST Elektronik GmbH and AST Elektronik U.S.A. in
the United States District Court for the Northern District of California, San
Jose Division. Applied Materials alleges that the Company's products infringe on
two Applied Materials patents relating to RTP processes and heater head design
and seeks a permanent injunction against infringement, and award of damages for
infringement, treble damages for intentional and willful infringement,
attorneys' fees and costs of suit. On July 23, 1997, the Company answered
Applied Materials' complaint and counterclaimed for declaratory relief that the
Company's products do not infringe the patents and that the patents are invalid.
On October 3, 1997, the Company filed a counterclaim in the United States
District Court for Northern California, San Jose Division against Applied
Materials for infringement of one of the Company's RTP process patents. On
October 27, 1997, Applied Materials answered the counterclaim by alleging that
it does not infringe the Company's patent and that the patent is invalid. The
trial on all claims and counterclaims is set for March 1, 1999. Management
believes Applied Materials' claims are without merit and intends to defend the
Company vigorously. However, there can be no assurance that this litigation will
be resolved in favor of the Company, and, in any event, litigation could result
in significant expense to the Company and could divert the efforts of the
Company's technical and management personnel from other tasks, whether or not
such litigation is determined in favor of the Company. In particular, the
Company expects to incur significant legal expenses in fiscal 1999 in the event
Applied Materials' claims are not resolved by then. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, discontinue
the use of certain processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
INVENTORY OBSOLESCENCE. Because the Company's industry is subject to rapid
technological change, the Company has experienced, and expects to experience,
obsolescence of certain of its products as the Company and its competitors
introduce new products with improved price/performance characteristics. In
particular, the Company discontinued its Heatpulse 4100 product line in the
quarter ended March 31, 1997 and consequently wrote down $1.4 million of
inventory in that quarter. During the quarter ended June 30, 1997, the Company,
for the first time in its history, booked more orders for its Heatpulse 8800
product line than its Heatpulse 8100 product line and this trend has continued
into the first quarter of fiscal 1998. To the extent sales of new products do
not offset, or generate lower margins than sales of older products, the
Company's business, results of operation and financial condition would be
materially adversely affected. In addition, the Company believes that the
Heatpulse 8100 product line will become obsolete as acceptance of the Heatpulse
8800 and Starfire products increases.
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<PAGE> 10
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
are subject to quarterly and other fluctuations due to a variety of factors,
including the volume and timing of orders received, potential cancellation or
rescheduling of orders, competitive pricing pressures, the Company's ability to
manage costs during periods of low or negative earnings growth, the availability
and cost of component parts and materials from the Company's suppliers, the
adequate forecasting of the mix of product demand due to production lead times
and capacity constraints, the timing of new product announcements and
introductions by the Company or its competitors, changes in the mix of products
sold, research and development expenses associated with new product
introductions, the timing and level of development costs, market acceptance of
new or enhanced versions of the Company's products, seasonal customer demand,
the cyclical nature of the semiconductor industry, the impact of the Company's
efforts to implement its evolving long-term strategy, the uncertainties of
ongoing negotiations and economic conditions generally or in various geographic
areas. In addition, because of the relatively high selling prices of the
Company's products, a significant portion of the Company's net sales in any
given period is derived from the sale of a relatively small number of units, and
a change, even though minor, in the number of units sold during a quarter can
result in a large fluctuation in net sales for the quarter.
EMPLOYEE RISK. Competition in recruiting personnel in the semiconductor
industry is intense. The Company believes that its future success will depend in
part on its ability to recruit and retain highly skilled management, marketing
and technical personnel. The Company believes it must provide personnel with a
competitive compensation package, which necessitates the continued availability
of stock options and requires ongoing shareholder approval of the Company's
stock compensation programs.
YEAR 2000 INFRASTRUCTURE RISK. The Company is currently in the process of
evaluating its information technology infrastructure for Year 2000 compliance.
The Company does not expect that the cost to modify its information technology
infrastructure to be Year 2000 compliance will be material to its financial
condition or results of operations. The Company does not anticipate any material
disruption in its operations as a result of any failure by the Company to be in
compliance. The Company does not currently have any information concerning the
Year 2000 compliance status of its suppliers and customers. In the event that
any of the Company's significant suppliers or customers does not successfully
and timely achieve Year 2000 compliance, the Company's business or operations
could be adversely affected.
Results of Operations
The following table sets forth items in the Company's Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales 100% 100%
Cost of Sales 62 63
-------- --------
Gross profit 38 37
Operating expenses:
Research and development 24 35
Selling, general and administrative 14 23
-------- --------
Total operating expenses 38 58
-------- --------
Income (loss) from operations * (20)
Interest income (expense), net * 1
Other income, net * *
-------- --------
Income (loss) before income taxes * (19)
Provision (benefit) for income taxes * 5
-------- --------
Net income (loss) *% (14)%
======== ========
</TABLE>
- ----------
*less than 1%
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Net Sales
Net sales for the three months ended December 31, 1997 (first quarter fiscal
1998) was $16.4 million compared to $9.1 million for the same period in fiscal
1997, representing an increase of 80%. The increase in sales was due primarily
to the increase in unit sales of the Company's Heatpulse(R) 8000 systems which
the Company believes was attributable to the semiconductor industry's recovery
from the end of calendar 1996.
The Company utilizes distributors in certain geographic regions. All of the
Company's sales in Japan are through Canon Sales Co., Inc. ("Canon"), and those
in Europe and Korea are through Metron Technology ("Metron"). Sales to
distributors generally result in a lower gross profit, caused by lower selling
prices, which are largely offset by reduced selling and marketing expenses. For
the three month period ended December 31, 1997, Canon represented 28% of net
sales and Metron represented 14% of net sales. For the same period in the prior
fiscal year, Canon represented 17% of net sales and Metron represented 9% of net
sales. International sales as a percentage of net sales increased for the three
month period ended December 31, 1997 to 46% from 32% for the same period in the
prior fiscal year. The increase in the percentage of the Company's net sales
represented by Canon, Metron, and international customers is due to stronger
business in Japan and Europe. *Based upon the geographic locations of
semiconductor manufacturers, the Company anticipates that international sales in
general will continue to account for a significant portion of net sales in
fiscal 1998. *However, international sales as a percentage of net sales will
vary on a quarterly basis depending on the timing of orders and the relative
strength of the Asian economies. See "Factors That May Affect Future Results -
Potential Fluctuations in Operating Results."
Two end-user customers represented 16% and 15% of net sales in the three months
ended December 31, 1997. *The Company expects a significant portion of its
future sales to remain concentrated within a limited number of strategic
customers. *The Company expects increasing competition from Applied Materials, a
competitor who has substantially greater resources than the Company,
particularly in the sale of rapid thermal processing ("RTP") systems designed
for 0.25 micron line width applications and the emerging 0.18 micron line width
applications. In addition, the Company has experienced, and continues to
experience, competition from other RTP equipment suppliers. *These competitors'
impact on future sales cannot be estimated. *As a result of competitive
pressures, there can be no assurance that the Company will be able to retain its
strategic customers or that such customers will not cancel, reschedule or
significantly reduce the volume of orders or, in the event orders are canceled,
that such orders will be replaced by other sales. See "Factors That May Affect
Future Results - Competition."
Gross Profit
Gross profit for the three month period ended December 31, 1997 was $6.2 million
compared to a gross profit of $3.4 million for the same period in fiscal 1997.
Gross profit as a percentage of net sales for the three month period ended
December 31, 1997 increased to 38% from 37% for the same period in fiscal 1997.
The increase in gross margin was attributable to the increase in revenue over
the same period that resulted in the Company's fixed manufacturing costs being
spread over increased units, and the cost reduction program the Company has put
into place in fiscal 1997. *The Company expects increased competition and market
conditions to lower gross margins in the second and third quarters of fiscal
1998, which would have an immediate adverse effect on the Company's business and
results of operations.
Research and Development Expenses
Research and development ("R&D") expenses were $3.9 million for the three month
period ended December 31, 1997, representing an increase of $0.8 million (24%)
when compared with the same period in fiscal 1997. As a percentage of net sales,
R&D expenses decreased to 24% for the three
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<PAGE> 12
months ended December 31, 1997 from 35% for the same period in the prior fiscal
year, as a result of substantially higher sales that were not met with
corresponding increases in R&D spending. R&D expenses are primarily attributable
to the continuing development of the Company's new StarfireTM 0.18 micron 200mm
and 300mm RTP systems. *The Company continues to believe that significant
investment in R&D is required to keep up with the demands of the RTP market and
to remain competitive. See "Factors That May Affect Future Results - Rapid
Technological Change and Development Risks."
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses was $2.4 million for the
three month period ended December 31, 1997, representing an increase of $0.3
million (13%) compared with the same period in fiscal 1997. As a percentage of
net sales, SG&A spending decreased to 14% for the three month period ending
December 31, 1997, compared to 23% for the same period in fiscal 1997, as a
result of higher sales that were not met with corresponding increases in SG&A
spending. *Through the remainder of the fiscal year, SG&A spending in absolute
dollars is expected to remain in line with current levels; however, actual
spending may fluctuate depending on, among other things, the level of net sales
and the sales channel for the Company's products, that could result in higher
representation commissions. *As a percentage of net sales, SG&A spending may
vary from quarter to quarter.
Interest Income, Net
Interest income, net decreased to $44,000 for the three month period ended
December 31, 1997, from $102,000 in the same period in fiscal 1997, primarily
due to lower interest income earned on the Company's cash and investments as a
result of lower cash and investment balances.
Provision (Benefit) for Income Taxes
The Company has recorded a tax liability as a result of its net taxable income
during the three months ended December 31, 1997. The fiscal 1998 tax rate of 40%
represents the Company's current estimate of its annual effective tax rate,
which is higher than the 25% tax benefit rate used in fiscal 1997 primarily due
to an increase in the valuation allowance. *A significant change in income or
loss from anticipated levels would have a significant impact on this tax rate.
Backlog
The Company's system backlog (consisting of systems scheduled for delivery
within the next twelve months) as of December 31, 1997 was approximately $12.1
million as compared to approximately $14.6 million at September 30, 1997 and
$11.1 million at December 31, 1996. The decrease in backlog is attributable to
the effects on the semiconductor industry by the economic crisis in Asia. The
Company includes in its backlog customer purchase orders that have been accepted
and to which shipment dates have been assigned within the next twelve months.
All orders are subject to cancellation or delay with limited or no penalty.
*Because of possible changes in delivery schedules and additions and
cancellations of orders, the Company's backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period. *Given the
decrease in backlog, the Company expects revenues for the second and third
quarters of fiscal 1998 to be somewhat lower than revenues for the three months
ended December 31, 1997; in addition, the Company expects its results of
operations to yield a net loss. *In addition, there can be no assurance that the
Company's net sales will not decline further or that the Company will not incur
increasing net losses. See "Factors That May Affect Future Results Semiconductor
Industry Volatility."
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<PAGE> 13
Liquidity And Capital Resources
As of December 31, 1997, the Company had cash, cash equivalents and short-term
investments of $6.4 million, compared to $4.2 million as of September 30, 1997.
The increase of $2.2 million was primarily attributable to collections from two
large customers. Working capital decreased to $22.3 million at December 31, 1997
from $22.9 million at September 30, 1997.
The Company's operating activities provided cash of $3.4 million during the
three months ended December 31, 1997. Depreciation and amortization charges and
a significant decrease in accounts receivable were partially offset by an
increase in inventory. The increase in inventory was primarily due to the
manufacture of the Starfire 0.18 micron RTP systems for Beta testing.
The Company's investing activities used cash of $1.0 million during the three
month period ended December 31, 1997, due to capital expenditures of $1.2
million primarily for Starfire internal RTP systems. *The Company currently
anticipates that its capital expenditures will be approximately $3.0 million for
the remainder of fiscal 1998, principally to support new product development and
manufacturing cost reductions. *However, the actual level of capital spending
will be dependent on a variety of factors, including the Company's business
requirements and general economic conditions.
Cash provided by financing activities was $9,000 during the three months ended
December 31, 1997, consisting of proceeds from the issuance of common stock.
*The Company believes that current cash and short-term investment balances,
together with existing sources of liquidity, will satisfy the Company's
anticipated liquidity and working capital requirements through the next twelve
months. *However, due to the Asian economic crisis, the uncertain nature of the
semiconductor industry, competitive market conditions, the strong commitment to
developing the Company's next-generation products, and the possible outcome of
current litigation with Applied Materials, liquidity and working capital
requirements are difficult to anticipate beyond the next twelve months. *There
can be no assurance that additional financing, when required, will be available,
or if available, can be obtained on terms satisfactory to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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<PAGE> 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved in an intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. in the United States District Court
for the Northern District of California, San Jose Division. Applied Materials
alleges that the Company's products infringe on two Applied Materials patents
relating to RTP processes and heater head design and seeks a permanent
injunction against infringement, and award of damages for infringement, treble
damages for intentional and willful infringement, attorneys' fees and costs of
suit. On July 23, 1997, the Company answered Applied Materials' complaint and
counterclaimed for declaratory relief that the Company's products do not
infringe the patents and that the patents are invalid. On October 3, 1997, the
Company filed a counterclaim in the United States District Court for Northern
California, San Jose Division against Applied Materials for infringement of one
of the Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim by alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and counterclaims
is set for March 1, 1999. Management believes Applied Materials' claims are
without merit and intends to defend the Company vigorously. However, there can
be no assurance that this litigation will be resolved in favor of the Company,
and, in any event, litigation could result in significant expense to the company
and could divert the efforts of the Company's technical and management personnel
from other tasks, whether or not such litigation is determined in favor of the
Company. In particular, the Company expects to incur significant legal expenses
in fiscal 1999 in the event Applied Materials' claims are not resolved by then.
In the event of an adverse ruling in any such litigation, the Company might be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, discontinue the use of certain processes or expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing technology.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit 27 Financial Data Schedule
B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
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<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AG Associates, Inc.
(Registrant)
Dated: February 12, 1997 By: /s/ KIRK JOHNSON
-------------------------------------
Kirk Johnson
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
- 15 -
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 4,947
<SECURITIES> 1,459
<RECEIVABLES> 9,694
<ALLOWANCES> 903
<INVENTORY> 13,648
<CURRENT-ASSETS> 33,582
<PP&E> 16,547
<DEPRECIATION> 7,541
<TOTAL-ASSETS> 43,025
<CURRENT-LIABILITIES> 11,244
<BONDS> 0
0
0
<COMMON> 36,148
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,025
<SALES> 16,433
<TOTAL-REVENUES> 16,433
<CGS> 10,185
<TOTAL-COSTS> 10,185
<OTHER-EXPENSES> 6,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 15
<INCOME-TAX> 6
<INCOME-CONTINUING> 9
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
