AG Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AGAI)") else Response.Write("(NASDAQ:AGAI)") end if %>
Q3 Conference Call
408-935-2000

BUFFALO, N.Y., August 1, 1996/FOOLWIRE/---AG Associates

<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AGAI)") else Response.Write("(NASDAQ:AGAI)") end if %>, the world's leading supplier of advanced, single-wafer rapid thermal processing (RTP) equipment used in the manufacture of integrated circuits (ICs), yesterday reported results for the three and nine month periods ended June 30, 1996.

Consistent with Street expectations, net sales for the third quarter of fiscal 1996 reached $17.2 million, up from the $16.8 million posted in the third quarter of fiscal 1995. Net income was $39,000 ($0.01 per share), down from the $3.7 million reported last year ($0.32 per share excluding a one-time tax benefit of $0.43 per share).

For the nine months ended June 30, 1996, revenues rose 45 percent over the same period last year-reaching $62.3 million. Net income, however, decreased to $4.65 million ($0.76 per share), compared to the $6.9 million ($0.90 per share excluding the one-time tax benefit of $0.74 per share) posted last year.

Commenting on the results, AG Associates' Chairman and Chief Executive Officer Dr. Arnon Gat noted that the industry's current market conditions have clearly impacted the company's second half of fiscal 1996. "As we reported last quarter, the pushouts of both new fabs and fab expansions have led to reduced order rates for our RTP product line," said Gat. Another major factor affecting results was the heavy R&D investment associated with the company's new RTP system, Heatpulser 8800-introduced earlier this month at the SEMICON/West '96 exposition in San Francisco.

According to company officials, Heatpulse 8800 addresses a majority of 0.25-micron process requirements, while enhancing existing 0.35-micron RTP applications. This new, advanced 200mm RTP tool, which is based on AG Associates' production-proven Heatpulse platform, incorporates a number of proprietary design features that dramatically improve temperature uniformity and repeatability, while significantly boosting throughput.

Gat added that Heatpulse 8800 incorporates a new feature that permits emissivity-independent temperature control throughout the processing cycle-a significant requirement in allowing chipmakers to achieve superior process repeatability and increase yield.

"When coupled with other new design features, Heatpulse 8800 enables chipmakers to achieve significantly better results in both process performance and cost of ownership for today's most advanced IC production requirements. Specifically, Heatpulse 8800 offers results comparable to the most advanced tool on the market today, yet is available at one-third the price," said Gat.

Customer reception of the system was very favorable--AG has already shipped three beta systems, two domestically and one abroad. The Heatpulse 8800 has a $50,000 higher selling price though the margin should not change substantially for this product. Previous ASP (average selling price) for AG systems was $600,000.

Despite the strong reception the tool received at the show and its future potential in the market, AG Associates remains very cautious given the lengthening industry slowdown. Due to current market conditions, AG Associates anticipates that the slowdown in demand for the company's products will continue for the foreseeable future.

To bring expenses in line with expected revenue during the challenging period ahead, AG Associates reports that it has initiated aggressive expense control measures, including a reduction in work force that affected 69 out of 295 employees -- primarily in the manufacturing, administrative and selected development areas. The company also noted that it is reorganizing and closely managing operating expenses to further control costs. These personnel were "non-critical" and come mostly from manufacturing and administration and also from selected areas of product development. Areas not effected were process technology, long-range R&D, and customer support. This should amount to $4-5 million in direct costs in 1997, but will create a one-time charge in the coming quarter.

At the same time, the company announced that it will maintain all of its customer support programs to meet the needs of its customers worldwide, as well as continue to invest heavily in the core competencies critical to success in this market. These include temperature uniformity, repeatability, throughput and other emerging next-generation RTP process requirements.

As part of this effort, AG Associates is continuing to develop its 0.18-micron-capable RTP system, which is slated for market announcement in the first quarter of calendar year 1997, with production shipments beginning in the second half of 1997.

During the past quarter, AG has seen a number of order cancellations. "This recent phenomenon is really foreign to us since the establishment of AG 15 years ago. This general slowdown in the industry is compounded by the pressure Applied Materials puts on the RTP market through the introduction of their Centura RTP system, which took place a year and a half ago." AG is moving on a number of front "to continue to dominate the market segment [they] have created. AG needed to, and has, closed the technology gap." They are also developing tools which they hope are more cost-effective and which address the middle of the market.

Overall service revenue is around $3.1 million per quarter. On the sales side, key customers shipments during the quarter include NEC, Winbond, Toshiba, and IDT. Each of these have received more than one automatic system. Revenues were 37% North America and 63% international, with much of the sales coming from distributors. Canon, AG's Japan distributor, received, 26% of shipments. Metron, AG's Korean and European distributor, received 17% of shipments. End users making up more than 10% of sales are NEC, at 25% and Winbond with 11%.

Gross margins decreased because of the increase in sales to distributors, where the company marks down product 15-22% based on geography. European systems also require customization, called CE, which comes out of gross margin. Operating expenses decreased 7% from last quarter. because there are no commissions on distributor sales and also because of tighter spending in SG&A overhead. The company is still very much committed to R&D, though.

Tax rate was 41% and should hold at that level for the year. Total committed system backlog is down at $9.2 million, compared to $17.6 million from the prior quarter and $35.8 million on year ago. $1.3 million in orders were cancelled last quarter--the above backlog figures are net. AG's backlog consists of 8108 systems, but the company sees customers requesting conversions to the 8800 system. In addition, they do see the possibility of customer retrofit requests.

Cash should maintain its level for the rest of the year although A/R collection did not go as well as Gat had hoped. Inventory was $11.4 million, down $1.1 million from last quarter. Manufacturing inventory comprised the bulk of the decrease while spare parts decreased only slightly.

Q&A

Most of the backlog will be shipped within the next 4-5 months.

Cash usage for the quarter--mostly in operating items. $6.9 million inventory purchases were made in the quarter. A $500,000 investment was made in its AGI subsidiary during the quarter but that loss is shown on the income statement. Depreciation during the quarter was $561,000.

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