<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 June 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: 0-23372
GASONICS INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-2159729
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2450 Junction Avenue, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 325-1200
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
----- -----
At June 30, 1996, there were 13,377,345 shares of the Registrant's Common
Stock, $0.001 par value per share, outstanding.
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GASONICS INTERNATIONAL CORPORATION
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1996
and September 30, 1995 3
Condensed Consolidated Statements of Operations for the three
and nine month periods ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Securityholders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Exhibit Index 21
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PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS JUNE 30, Sept. 30,
1996 1995
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(UNAUDITED)
Current assets:
Cash and cash equivalents $ 8,087 $ 7,595
Marketable securities 15,016 29,004
Trade accounts receivable, net 27,215 16,974
Inventories 31,780 19,123
Prepaid expenses & other current assets 5,760 3,992
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Total current assets 87,858 76,688
Property & equipment, net 10,308 7,935
Other assets 1,212 744
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Total assets $ 99,378 $ 85,367
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 2,791 $ 2,894
Accounts payable 11,937 7,343
Accrued expenses 10,643 11,321
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Total current liabilities 25,371 21,558
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Long-term liabilities 569 621
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Stockholders' equity:
Common stock &
additional paid-in capital 31,541 29,468
Unrealized gain on investment 1,080 2,376
Note receivable from stockholder (90) (165)
Retained earnings 40,907 31,509
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Total stockholders' equity 73,438 63,188
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Total liabilities & stockholders' equity $ 99,378 $ 85,367
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See accompanying notes.
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 29,058 $ 27,884 $ 99,837 $ 71,905
Cost of sales 15,876 12,124 48,177 30,799
--------- --------- --------- --------
Gross margin 13,182 15,760 51,660 41,106
--------- --------- --------- --------
Operating expenses:
Research & development 4,669 3,452 13,456 9,075
Selling, general & administrative 7,620 6,714 24,509 17,588
--------- --------- --------- --------
Total operating expenses 12,289 10,166 37,965 26,663
--------- --------- --------- --------
Operating income 893 5,594 13,695 14,443
Other income (expense)
Interest expense (11) - (36) -
Interest and other income, net 165 365 656 630
Gain on sale of stock 143 2,843 143 2,843
--------- --------- --------- --------
Income before provision for income taxes 1,190 8,802 14,458 17,916
--------- --------- --------- --------
Provision for income taxes 416 3,232 5,060 6,539
--------- --------- --------- --------
Net income $ 774 $ 5,570 $ 9,398 $ 11,377
--------- --------- --------- --------
--------- --------- --------- --------
Net income per share $ 0.06 $ 0.41 $ 0.69 $ 0.87
--------- --------- --------- --------
--------- --------- --------- --------
Weighted average common &
common equivalent shares 13,603 13,700 13,625 13,037
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
See accompanying notes.
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED JUNE 30,
--------------------------
1996 1995
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Cash flows from operating activities:
Net cash (used for) provided by $ (9,126) $ 2,045
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Cash flows from investing activities:
Purchases of property & equipment (5,147) (3,215)
Decrease (increase) in marketable securities 12,692 (14,837)
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Net cash provided by (used for)
investing activities 7,545 (18,052)
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Cash flows from financing activities:
Principal payments under capital - (22)
Proceeds from issuance of common stock 2,073 13,479
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Net cash provided by financing 2,073 13,457
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Net decrease in cash and cash equivalents 492 (2,550)
Cash & cash equivalents at beginning of period 7,595 13,131
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Cash & cash equivalents at end of period $ 8,087 $ 10,581
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See accompanying notes.
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GASONICS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit and reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position and the results of operations of the Company for the interim periods.
The statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles.
The results of operations for the nine months ended June 30, 1996 are not
necessarily indicative of the operating results to be expected for the full
fiscal year. Such financial statements should be read in conjunction with the
information contained herein, including Risk Factors, and in the Company's
Annual Report on Form 10-K for the year ended September 30, 1995 and the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
Any party interested in receiving a copy of these Annual and Quarterly Reports
should request a copy from the Chief Financial Officer of the Company.
2. INVENTORIES
Inventories consist of the following (in thousands):
June 30, 1996 September 30, 1995
------------- ------------------
(unaudited)
Raw Materials $13,938 $ 7,492
Work in Process 12,816 7,656
Finished Goods 5,026 3,975
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$31,780 $19,123
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------- -------
3. NET INCOME PER SHARE
Net income per share data has been computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from stock options
(using the treasury stock method).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain forward-looking statements which involve
numerous risks and uncertainties. The Company's actual results could differ
materially from those anticipated in any such forward-looking statements as a
result of certain factors, including those set forth under "Additional Risk
Factors".
RESULTS OF OPERATIONS
NET SALES for the third quarter and nine month period ended June 30, 1996
increased 4% to $29.1 million and 39% to $99.8 million, respectively, compared
to net sales for the comparable two periods in fiscal 1995. The growth in
revenue for the third quarter was principally due to shipments of flat panel
display equipment from the Company's liquid crystal display (LCD) division in
Japan (formerly called Tekisco) which was acquired in August 1995 and the first
shipment for revenue of the Company's new Vertical High Pressure (VHP) furnace.
In addition to the above, revenue increased for the nine month period due to the
increased shipments of the Company's 8-inch downstream plasma photoresist
removal products including its new performance enhancing platform product (the
"PEP"). Sales of spare parts, service and support also increased as a result of
retrofits to older systems and from maintenance revenues resulting from a larger
number of systems in the Company's installed base. International sales, which
are predominantly to customers in Europe and Asia Pacific, accounted for
approximately 50% of net sales for the nine month period ended June 30, 1996
compared to approximately 41% for the same period ended June 30, 1995. Third
quarter fiscal 1996 sales were materially adversely impacted principally by a
slowdown in new orders and rescheduling of existing orders resulting from delays
in customer fabs and, as a result, third quarter sales were down from that of
the preceeding quarter. The Company expects that future sales will continue to
be materially adversely impacted by the current business climate.
GROSS MARGIN as a percentage of net sales for the third quarter and nine month
period of fiscal 1996 was 45% and 52%, respectively, compared to 57% for the
same quarter and nine month period, respectively, of fiscal 1995. The decrease
in gross margin for both periods of the current fiscal year is attributable to
several factors, including a less favorable product sales mix which is, in part,
due to a product shift from higher margin, more mature products to newly
introduced products which typically have lower margins due to inefficiencies
during initial stages of production and the sale of flat panel
display equipment from the Company's LCD division in Japan. The Company's flat
panel display equipment has significantly lower gross margins than its
photoresist removal systems. Additionally, gross margins have been negatively
impacted by an increase in field service costs related to the building of
worldwide direct service capability and new product support capability and due
to underabsorption of manufacturing costs due to reduced manufacturing activity.
The Company's gross margin as a percentage of net sales has been, and will
continue to be, affected by a variety of factors, including the mix and average
selling prices of products sold and the costs to manufacture, service and
support new product introductions and enhancements. The Company expects that
its gross margins will remain at or lower than that recorded in the third
quarter of fiscal 1996 due, in part, to inefficiencies associated with new
product introductions, continued increase in sales of lower margin flat panel
display equipment products from the Company's LCD division in Japan, competitive
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pricing pressures, changes in product mix and other factors including those
referred to above.
RESEARCH AND DEVELOPMENT expenditures for the third quarter of fiscal 1996 were
$4.7 million or 16.1% of net sales compared to $3.5 million or 12.4% of net
sales for the third quarter of fiscal 1995. For the nine month period of fiscal
1996 and fiscal 1995, research and development expenses were $13.5 million or
13.5% of net sales and $9.1 million or 12.6% of net sales, respectively. The
increase in overall spending in both periods from that of the comparable periods
last fiscal year primarily reflects expenses associated with an increased number
of research and development employees, an increase in services performed by
consultants, including customer specification and customization of current
products and new product development, including the PEP product development
program. Additionally, both the three and nine month periods of fiscal 1996
include research and development expenses of $.3 million and $.8 million,
respectively, associated with the Company's LCD division in Japan which was
acquired in August 1995. The Company anticipates that the current level of
research and development spending will continue and may increase in absolute
dollars in the fourth quarter of fiscal 1996 due, in part, to the anticipated
significant continued investment in new product development.
SELLING, GENERAL AND ADMINISTRATIVE expenses of $7.6 million in the third
quarter of fiscal 1996 and $24.5 million for the nine month period of fiscal
1996 increased from $6.7 million and $17.6 million for the third quarter and
nine month period, respectively, of fiscal 1995. As a percentage of net sales,
selling, general and administrative expenses increased in the third quarter of
fiscal 1996 to 26.2% from 24.1% for the same quarter of fiscal 1995 and were 24%
for the nine month periods of both fiscal 1996 and 1995. The increase in
absolute dollars in both periods when compared to the comparable periods last
fiscal year is principally due to an increase in the number of employees,
primarily in sales and marketing, increased third party commissions in
connection with higher international sales volume, and expenses of $.4 million
and $.9 million for the third quarter and nine month periods of fiscal 1996,
respectively, associated with the operations of the LCD division in Japan. A
significant component of selling, general and administrative expenses is third
party commissions which are payable on a significant portion of the overseas
business. This expense can fluctuate significantly depending on the mix of
domestic versus foreign sales in any period. Although the Company has taken
steps to manage its spending due to the uncertainties of the current business
climate, it anticipates that the current level of selling, general and
administrative spending will continue and may increase in absolute dollars in
the fourth quarter of fiscal 1996 due to an anticipated higher concentration of
sales in foreign locations that are subject to third party commissions.
OTHER INCOME (EXPENSE) consists primarily of interest expense, interest income
and a gain on sale of stock of a third party. Interest expense of $11,000 for
the quarter and $36,000 for the nine month period of fiscal 1996 is for a loan
from the Bank of Tokyo to the Company's wholly owned subsidiary in Japan,
GaSonics International Japan KK, in the amount of approximately $2.8 million
(see Liquidity and Capital Resources). Interest and other income consisting
primarily of interest income was $165,000 for the third quarter and $656,000 for
the nine month period of fiscal 1996 compared to $365,000 and $630,000 for third
quarter and nine month period of fiscal 1995, respectively. The decrease in the
three month period of fiscal 1996 from the same period of fiscal 1995 is
primarily the result of a $144,000 reserve that was reversed in
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the third quarter of fiscal 1995 that had been established earlier in fiscal
1995 against an impairment in value of one of the Company's investments. This
reserve was reversed when this investment was recovered in full. The gain on
sale of stock for the three and nine month ended June 30, 1996 of $143,000 and
$2.8 million for the same periods ended June 30, 1995 was realized from the sale
of 5,000 and 96,500 shares, respectively, of Integrated Process Equipment
Corporation (IPEC) common stock. The Company received a total of 294,600 shares
of IPEC Class A common stock during fiscal 1990 in exchange for certain services
provided by the Company. As of June 30, 1996, the Company holds 54,673 shares
of IPEC common stock and recorded as a $1.1 million unrealized gain on
investments in stockholders' equity.
INCOME TAXES for the first nine months of fiscal 1996 were accrued at 35% of
income before income taxes compared to 36.5% for the same period last year. The
reduction in the effective tax rate was primarily attributable to a projected
increase in international sales as a percentage of total sales that may result
in a greater tax benefit derived from the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $9.1 million cash for operating activities for the nine month
period ended June 30, 1996 and provided cash of $2.0 million for the same period
of fiscal 1995. This increased use of cash from operating activities was
principally due to an $2.1 million increase in accounts receivable resulting
from higher sales, disproportionately higher percentage of sales occurring in
the last month of the June 1996 quarter, longer payment terms related to
business in Japan, and a $5.7 million increase in inventory, primarily
attributable to the production of the new PEP products and the flat panel
display products from the Company's LCD division in Japan. In addition, the
Company incurred a $2.0 million decrease in net income due to the factors
discussed above.
The Company's investing activities for the nine months ended June 30, 1995
provided cash of $12.7 million from marketable securities to fund operating
activities and used cash of $5.1 million for the purchase of equipment and
leasehold improvements. For the same period last fiscal year, the Company
invested cash of $14.8 million in marketable securities and used $3.2 million to
purchase equipment and leasehold improvements.
Financing activities provided $2.1 million and $13.5 million for the periods
ended June 30, 1996 and 1995, respectively, primarily from the issuance of stock
in connection with the Company's employee stock purchase and stock option plans
and, for the period ended June 30, 1995, the issuance of stock in connection
with the Company's public offering which closed on March 9, 1995.
At June 30, 1996, the Company had working capital of $62.5 million compared to
$55.1 at September 30, 1995. Accounts receivable and inventories at June 30,
1996 were $27.2 million and $31.8 million, respectively. Accounts receivable at
June 30, 1996 increased $10.2 million from September 30, 1995 primarily due to a
disproportionately higher percentage of sales late in the quarter and longer
credit terms relative to receivables in Japan. Inventory increased by $12.7
million from September 30, 1995 to June 30, 1996 principally from the purchase
of materials needed to support the anticipated demand of the new PEP system, a
build-up in the LCD division
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inventory for orders scheduled to ship later this fiscal year, a rescheduling of
existing orders and, to a lesser extent, an increase in spare parts inventory to
support the Company's newly established parts depots located in Singapore and
Holland and to support increased sales levels. The Company expects future
inventory levels to fluctuate from period to period, and believes that because
of the relatively long manufacturing cycle of its products, its investment in
inventories will continue to represent a significant portion of working capital.
As a result of such investment in inventories, the Company may be subject to an
increasing risk of inventory obsolescence, which could materially adversely
affect the Company's operating results.
The Company's principal sources of liquidity at June 30, 1996 consisted of
approximately $8.1 million in cash and cash equivalents, $15.0 million in
marketable securities and a $15 million unsecured line of credit with Union Bank
which was entered into on March 4, 1996. A commercial letter of credit
provision of $.5 million and a foreign exchange contract provision of $1.0
million is also provided under the credit line. Available borrowing under the
credit line is reduced by the amount of outstanding letters of credit. This
line of credit contains certain covenants, including covenants relating to
financial ratios and tangible net worth which must be maintained by the Company.
As of June 30, 1996, except for $69,193 outstanding under the letter of credit
provision, there were no borrowings outstanding under this line, and the Company
was in compliance with its bank covenants. This line of credit agreement
expires February 28, 1997. The Company's wholly-owned Japanese subsidiary,
GaSonics International Japan KK, has an outstanding loan of approximately $2.8
million from the Bank of Tokyo against a promissory note which is secured by a
Letter of Guarantee issued by the Company. The loan carries an interest rate of
1.625% per annum and is due and payable on January 31, 1997. The primary
purpose of the loan was to fund the purchase of the Company's LCD division
(formerly called Tekisco) in Japan which was acquired in August 1995.
The Company believes anticipated cash flows from operations, funds available
under its existing revolving line of credit facility and existing cash, cash
equivalents and marketable securities will be sufficient to meet the Company's
cash requirements during the next twelve months. Beyond the next twelve months,
the Company may require additional equity or debt financing to achieve its
working capital or capital equipment needs.
ADDITIONAL RISK FACTORS
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated significantly in the past and
will fluctuate significantly in the future. The Company anticipates that
factors affecting its future operating results will include the cyclicality of
the semiconductor industry and the markets served by the Company's customers,
the timing of significant orders, patterns of capital spending by customers, the
proportion of direct sales and sales through distributors, the proportion of
international sales to net sales, changes in pricing by the Company, its
competitors, customers or suppliers, market acceptance of new and enhanced
versions of the Company's products, the mix of products sold, financial systems,
procedures and controls, discounts, the timing of new product announcements and
releases by the Company or its competitors, delays, cancellations or
rescheduling of orders due to customer financial difficulties or otherwise, the
Company's ability to produce systems in volume and meet customer requirements,
changes in overhead absorption levels due to changes in the
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number of systems manufactured, political and economic instability and lengthy
sales cycles. Gross margins have varied and may vary materially based on a
variety of factors including the mix and average selling prices of systems
sales, the mix of revenues, including service and support revenues, and the
costs associated with new product introductions and enhancements and the
customization of systems. Furthermore, announcements by the Company or its
competitors of new products and technologies could cause customers to defer
purchases of the Company's existing systems, which would also materially
adversely affect the Company's business, financial condition and results of
operations. The Company has expended significant resources with respect to the
development and ramp up of production and anticipated commercial shipments of
three new products, the Strata, a high selectivity etch system, the VHP, a
vertical high pressure furnace system, and the PEP, a performance enhancement
platform. Gross margins in fiscal 1996 have decreased from the level attained
during fiscal 1995 and may further decrease due, in part, to start-up
inefficiencies associated with these introductions, competitive pricing
pressures, changes in product mix, including the products sold by the Company's
LCD division in Japan, and other factors. Additionally, sales and earnings for
the third quarter of fiscal 1996 were materially adversely impacted by the
current semiconductor business slowdown and, while the Company is managing its
expenses to partially offset the loss of income from the decline in revenue, it
is anticipated that this slowdown in the industry will continue and will
continue to have a material adverse affect on the Company's future revenues and
operating results.
LIMITED SYSTEM SALES; BACKLOG
The Company derives a substantial portion of its sales from the sale of a
relatively small number of systems which typically range in purchase price from
approximately $150,000 to $600,000 for its photoresist removal systems and up to
approximately $1.5 million for its other products. As a result, the timing of
recognition of revenue for a single transaction could have a material adverse
effect on the Company's sales and operating results. The Company's backlog at
the beginning of a quarter typically does not include all sales required to
achieve the Company's sales objectives for that quarter. Moreover, all customer
purchase orders are subject to cancellation or rescheduling by the customer with
limited or no penalties and, therefore, backlog at any particular date is not
necessarily representative of actual sales for any succeeding period. The
Company's net sales and operating results for a quarter may depend upon the
Company obtaining orders for systems to be shipped in the same quarter that the
order is received. The Company's business and financial results for a
particular period could be materially adversely affected if an anticipated order
for even one system is not received in time to permit shipment during such
period. Furthermore, a significant portion of the Company's net sales have
recently been realized near the end of the quarter. A delay in a shipment near
the end of a particular quarter, due, for example, to an unanticipated shipment
rescheduling, to cancellations or deferrals by customers, to unexpected
manufacturing difficulties experienced by the Company or to supply shortages,
may cause net sales in a particular quarter to fall significantly below the
Company's expectations and may materially adversely affect the Company's
operating results for such quarter. In addition, significant investments in
research and development, capital equipment and customer service and support
capability worldwide have result in significant fixed costs which the Company
will not be able to reduce rapidly if sales goals for a particular period are
not met. Because the Company builds its systems according to forecast, a
reduction in customer orders or backlog could present further difficulties
regarding the Company's ability to plan production and inventory levels, which
could
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adversely impact operating results. The impact of these and other factors on
the Company's operating results in any future period cannot be forecasted
accurately.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
The Company's business depends in significant part upon capital expenditures by
manufacturers of semiconductor devices, including manufacturers that are opening
new or expanding existing fabrication facilities, which, in turn, depend upon
the current and anticipated market demand for such devices and products
utilizing such devices. The semiconductor industry is highly cyclical and
historically has experienced periods of oversupply, resulting in significantly
reduced demand for capital equipment, including systems manufactured and
marketed by the Company. The semiconductor industry has experienced significant
growth in recent years which has resulted in significant growth in the capital
equipment industry. However, in recent months there has be a down turn in
demand which has resulted in delays of new orders and rescheduling of existing
orders that materially adversely affected the Company's fiscal 1996 third
quarter financial results and is expected to materially adversely affect future
financial results. The Company anticipates that a significant portion of new
orders depend upon demand from Integrated Circuit ("IC") manufacturers building
or expanding large fabrication facilities, and there can be no assurance that
such demand will exist.
HIGHLY COMPETITIVE INDUSTRY
The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate capital
equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular vendor's capital equipment,
the Company believes that the manufacturer generally relies upon that equipment
for the specific production line application and frequently will attempt to
consolidate its other capital equipment requirements with the same vendor.
Accordingly, the Company expects to experience difficulty in selling to a
particular customer for a significant period of time if that customer selects a
competitor's capital equipment. The Company currently has only one principal
product line and experiences intense competition worldwide from a number of
foreign and domestic manufacturers, including Alcantech, Applied Materials,
Inc., Fusion Systems Corporation, Lam Research Corporation, Matrix Semiconductor
Systems, Inc., Mattson Technology, Inc., Plasma Systems and Ramco, many of which
have substantially greater installed bases and greater financial, marketing,
technical and other resources than the Company. Certain of the Company's
competitors have recently announced the introduction of, or have introduced,
competitive products that offer other technologies and improvements. Applied
Materials and Lam Research have introduced modules to their products which
remove photoresist using dry chemical processing and, therefore, compete with
the Company's products. The Company expects its competitors to continue to
develop enhancements to and future generations of competitive products that may
offer improved price or performance features. New product introductions and
enhancements by the Company's competitors could cause a significant decline in
sales or loss of market acceptance of the Company's systems in addition to
intense price competition or otherwise make the Company's systems or technology
obsolete or noncompetitive. In addition, by virtue of its reliance on sales of
advanced dry chemistry processing equipment, the Company could be at a
disadvantage compared to certain competitors that offer more diversified product
lines. The Company believes that it will continue to face competition from
current and new vendors employing other technologies, such as wet chemistry,
traditional dry chemistry and other ashing techniques, as such competitors
attempt to extend the capabilities of their existing products. Increased
competitive pressure could lead to reduced demand and lower prices for the
Company's products, thereby materially adversely
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affecting the Company's operating results. There can be no assurance that the
Company will be able to compete successfully in the future.
Competitors of the Company's LCD division in Japan include Japan-based companies
and Japan-based joint ventures such as Applied Komatsu and Koyo Lindbergh.
These competitors manufacture alternative technology systems and they could, at
any time, enter the Company's markets with improved technology or with systems
that are directly competitive with those of the Company's LCD division.
DEPENDENCE ON KEY CUSTOMERS
Historically, the Company has sold a significant proportion of its systems in
any particular period to a limited number of customers. Sales to the Company's
ten largest customers in fiscal 1993, 1994, 1995 and the nine month period of
fiscal 1996 ended June 30, 1996 accounted for approximately 74%, 71%, 68% and
55% of net sales, respectively. The Company expects that sales of its products
to relatively few customers, particularly Advanced Micro Devices, IBM, Intel,
Motorola, Samsung, SGS Thomson, Siemens and AT&T will continue to account for a
high percentage of net sales in the foreseeable future. None of the Company's
customers has entered into a long-term agreement requiring it to purchase the
Company's products. Moreover, sales to certain of its customers have decreased
as those customers have completed or delayed purchasing requirements for new or
expanded fabrication facilities. Although the composition of the group
comprising the Company's largest customers has varied from year to year, the
loss of a significant customer or any reduction in orders from any significant
customer, including departures from recent buying patterns, market, economic or
competitive conditions in the semiconductor industry or in the industries that
manufacture products utilizing integrated circuits, could materially adversely
affect the Company's business, financial condition and results of operations.
The Company's ability to increase or maintain current sales levels in the future
will depend in part upon its ability to obtain orders from new customers as well
as the financial condition and success of its customers and the general economy,
of which there can be no assurance.
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
The Company has undergone a period of rapid growth. Since 1993, the Company has
significantly increased the scale of its operations to support increased sales
levels and has expanded its operations to address critical infrastructure
requirements, including the hiring of additional personnel, commencement of
independent operations in the United Kingdom, Korea, Japan, Singapore and Taiwan
and significant investments in research and development to support product
development. The Company's expansion has resulted in significantly higher
operating expenses and due to the recent slowdown in new orders, it is
anticipated that the Company's future operating results will be materially
adversely affected.
The recent growth in the Company's sales and expansion in the scope of its
operations has placed a considerable strain on its management, financial and
other resources and has required the Company to initiate an extensive
reevaluation of its operating and financial systems, procedures and controls.
In this regard, in connection with their examination of the fiscal 1995
financial statements, the Company's auditors noted that the Company's current
systems had a number of limitations and identified a significant deficiency in
the Company's internal control structure due to the absence of
Page 13
<PAGE>
a comprehensive set of written policies and procedures. Although the Company is
engaged in defining and implementing new management information, manufacturing
and cost accounting systems, these systems are not currently expected to be
fully operational until early fiscal 1997 at the earliest. There can be no
assurance that any existing or new systems, procedures or controls will be
adequate to support the Company's operations or that its new systems will be
designed and implemented in a cost-effective and timely manner.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
The semiconductor manufacturing industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
be competitive will depend in part upon its ability to develop new and enhanced
systems and to introduce these systems at competitive prices and in a timely and
cost effective manner to enable customers to integrate the systems into their
operations either prior to or upon commencement of volume product manufacturing.
In addition, new product introductions or enhancements by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products. Increased competitive pressure could also lead to
intensified price-based competition resulting in lower prices and margins, which
would materially adversely affect the Company's business, financial condition
and results of operations. Any success of the Company in developing,
introducing and selling new and enhanced systems depends upon a variety of
factors including product selection, timely and efficient completion of product
design and development, timely and efficient implementation of manufacturing and
assembly processes, effective sales and marketing and product performance in the
field. In particular, the Company's future performance will depend in part upon
the successful commercialization of the Strata, the VHP and the PEP. There can
be no assurance that any such product will achieve any significant revenues or
contribute to the profitability of the Company. Because new product development
commitments must be made well in advance of sales, new product decisions must
anticipate both the future demand for the type of ICs under development by
leading IC manufacturers and the equipment required to produce such Ics. There
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or in enhancing existing
products.
Because of the large number of components in, and the complexity of, the
Company's systems, significant delays can occur between a system's initial
introduction and the commencement of volume production. As is typical in the
semiconductor capital equipment market, the Company has experienced delays from
time to time in the introduction of, and certain technical and manufacturing
difficulties with, certain of its systems and enhancements and may experience
delays and technical and manufacturing difficulties in future introductions or
volume production of new systems or enhancements. The Company's inability to
complete the development or meet the technical specifications of any of its new
systems, including the Strata, the VHP and the PEP or enhancements or to
manufacture and ship these systems or enhancements in volume and in a timely
manner would materially adversely affect the Company's business, financial
condition and results of operations as well as its customer relationships. In
addition, the Company may incur substantial unanticipated costs to ensure the
functionality and reliability of its future product introductions early in the
product's life cycle. If new products have reliability or quality problems,
reduced orders or higher manufacturing costs, delays in collecting accounts
receivable and additional service and warranty expenses may result, which events
could materially adversely affect the Company's business, financial condition
and results of operations.
Page 14
<PAGE>
LENGTHY SALES CYCLE
Sales of the Company's systems depend, in significant part, upon the decision of
a prospective customer to increase manufacturing capacity through the expansion
of existing fabrication facilities or the opening of new facilities, which
typically involves a significant capital commitment. The Company often
experiences delays in finalizing system sales following initial system
qualification while the customer evaluates and receives approvals for the
purchase of the Company's systems and completes a new or expanded facility. Due
to these and other factors, the Company's systems typically have a lengthy sales
cycle during which the Company may expend substantial funds and management
effort. The Company believes that the length of the sales cycle will continue
to increase as certain of its customers centralize purchasing decisions into one
decision making entity, which is expected to intensify the evaluation process
and require additional sales and marketing expenditures by the Company.
RISKS ASSOCIATED WITH THE JAPANESE MARKET
The Company believes that increased penetration of the Asia Pacific market,
particularly Japan, will be essential to its future financial performance. The
Company has sold a relatively small number of systems to Japanese semiconductor
manufacturers. To date, the Company has not fully developed a customer service
and support capability in Japan and remains at a disadvantage in selling,
servicing and supporting products in Japan. The Japanese semiconductor market
(including fabrication plants operated outside of Japan by Japanese
semiconductor manufacturers) represents a substantial percentage of the
worldwide semiconductor manufacturing capacity, and has been difficult for
non-Japanese companies to penetrate. Furthermore, the licensing of products and
process technologies by Japanese semiconductor manufacturers to non-Japanese
semiconductor manufacturers could result in a recommendation to use certain
semiconductor capital equipment manufactured by Japanese companies. Late in
fiscal 1995, the Company acquired a local company in Japan, but there can be no
assurance that this company will enable the Company to penetrate Japan. In
addressing this market, the Company is at a distinct competitive disadvantage
compared to leading Japanese suppliers, many of which have long-standing
collaborative relationships with Japanese semiconductor manufacturers. In
addition, since 1992, Japanese semiconductor manufacturers have substantially
reduced their levels of capital spending on new fabrication facilities and
equipment, thereby increasing competitive pressures in the Japanese market.
Although the Company is investing significant resources in Japan which has
significantly increased operating expenses, there can be no assurance that the
Company will be able to achieve significant sales to the Japanese semiconductor
market.
INTERNATIONAL SALES
International sales accounted for 42%, 41%, 40% and 50% of net sales in fiscal
years 1993, 1994, 1995 and for the nine month period ended June 30, 1996,
respectively. The Company has established independent operations in the United
Kingdom, Korea, Japan, Singapore and Taiwan and acquired a company in Japan.
The Company anticipates that international sales will continue to account for a
significant portion of net sales. International sales are subject to certain
risks, including unexpected changes in regulatory requirements, exchange rates,
foreign currency fluctuations, tariffs and other barriers, political and
economic instability, potentially adverse tax
Page 15
<PAGE>
consequences, natural disasters, outbreaks of hostilities, difficulties in
accounts receivable collection, extended payment terms, difficulties in managing
distributors or representatives and difficulties in staffing and managing
foreign subsidiary and branch operations. The Company is also subject to the
risks associated with the imposition of legislation and import and export
regulations. The Company cannot predict whether tariffs, quotas, duties, taxes
or other charges or restrictions will be implemented by the United States, Japan
or any other country upon the importation or exportation of the Company's
products in the future. There can be no assurance that these factors will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
INTELLECTUAL PROPERTY RIGHTS
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
its financial performance will depend more upon the innovation, technological
expertise and marketing abilities of its employees than upon such protection.
There can be no assurance that any of the Company's pending patent applications
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent issued to the Company will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company.
As is typical in the semiconductor industry, the Company has received notices
from time to time from third parties alleging infringement claims. Although
there are currently no pending claims or lawsuits against the Company regarding
any possible infringement claims, there can be no assurance that infringement
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to have merit, will not materially adversely affect the Company's
business, financial condition and results of operations. If any such claims are
asserted against the Company, the Company may seek to obtain a license under the
third party's intellectual property rights. There can be no assurance that a
license will be available on reasonable terms or at all. The Company could
decide, in the alternative, to resort to litigation to challenge such claims.
Such challenges could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations.
SOLE OR LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS; COMPLEXITY IN
MANUFACTURING PROCESS
Certain components, subassemblies and services necessary for the manufacture of
the Company's systems are obtained from a sole supplier or a limited group of
suppliers. Specifically, the Company relies on three companies for supply of
the robotics used in its products and two other companies for microwave power
supplies used in all of its ashing systems. The Company does not maintain any
long-term supply agreements with any of its suppliers. The Company is relying
increasingly on outside vendors to manufacture certain components and
subassemblies. The Company's reliance on sole or a limited group of suppliers
and the Company's increasing reliance on subcontractors involve several risks,
including a potential inability to obtain an adequate supply
Page 16
<PAGE>
of required components and reduced control over pricing and timely delivery of
components and subassemblies. Because the manufacture of certain of these
components and subassemblies is an extremely complex process and requires long
lead times, there can be no assurance that delays or shortages caused by
suppliers will not occur in the future. Certain of the Company's suppliers have
relatively limited financial and other resources. Any inability to obtain
adequate deliveries or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture such components internally
could delay the Company's ability to ship its products, which could damage
relationships with current and prospective customers and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's LCD division in Japan, is heavily dependent on one key supplier
for quartz and ceramic fabrication and is seeking alternative sources.
FUTURE ACQUISITIONS
In August 1995, the Company acquired its flat panel display equipment (LCD)
division in Japan (formerly called Tekisco). In the future, the Company may
pursue acquisitions of additional product lines, technologies or businesses.
Future acquisitions by the Company may result in potentially dilutive issuances
of equity securities, incurrence of debt and amortization expenses related to
goodwill and other intangible assets, which could materially adversely affect
the Company's financial condition and results of operations. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies and products of the acquired companies, the
diversion of management's attention from other business concerns, risks of
entering markets in which the Company has no or limited direct prior experience,
and the potential loss of key employees of the acquired company. From time to
time, the Company has engaged in preliminary discussions with third parties
concerning potential acquisitions of product lines, technologies and businesses;
however, there are currently no negotiations, commitments or agreements with
respect to any acquisition. In the event that such an acquisition does occur,
there can be no assurance as to the effect thereof on the Company's business,
financial condition or operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's financial performance will depend in significant part upon the
continued contributions of its officers and key personnel, many of whom would be
difficult to replace. No employee has an employment or noncompetition agreement
with the Company. The loss of any key person could have a material adverse
effect on the business, financial condition and results of operations of the
Company. In addition, the Company's future operating results depend in part
upon its ability to attract and retain other qualified management, engineering,
financial and accounting, technical, marketing and sales and support personnel
for its operations. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting or retaining such
personnel. The failure to attract or retain such persons could materially
adversely affect the Company's business, financial condition and results of
operations.
Page 17
<PAGE>
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances used to manufacture the
Company's products. The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in substantial
fines being imposed on the Company, suspension of production, alteration of its
manufacturing process or cessation of operations. Such regulations could
require the Company to acquire expensive remediation equipment or to incur
substantial expenses to comply with environmental regulations. Any failure by
the Company to control the use, disposal or storage of, or adequately restrict
the discharge of, hazardous or toxic substances could subject the Company to
significant liabilities.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As of June 30, 1996, the Company's officers, directors and members of their
families that may be deemed affiliates of such persons owned approximately 28.1%
of the Company's outstanding shares of Common Stock. Accordingly, these
stockholders will be able to significantly influence the election of the
Company's directors and the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions, regardless of how other stockholders
of the Company may vote. Such a high level of ownership by such persons or
entities may have a significant effect in delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of other holders of Common Stock. Certain provisions of the Company's
Certificate of Incorporation, 1994 Stock Option/Stock Issuance Plan, Bylaws and
Delaware law may also discourage certain transactions involving a change in
control of the Company. In addition to the foregoing, the ability of the
Company's Board of Directors to issue preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a change in control of the Company.
VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments related
to the Company's business, fluctuations in the Company's operating results,
sales of the Company's Common Stock into the market place, failure to meet or
changes in analysts' expectations, natural disasters, outbreaks of hostilities,
general conditions in the semiconductor industry or the worldwide economy,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in patents or other intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's common stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. Many companies in
the semiconductor equipment industry have recently approached or experienced
historical highs in the market prices of their common stock. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
Page 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1996
Page 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GASONICS INTERNATIONAL CORPORATION
(Registrant)
-----------------------------------------
Date: August 13, 1996 By: Terry R. Gibson
Vice President, Finance
Chief Financial Officer
(Signing on behalf of the registrant and as
principal financial officer)
Page 20
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Number Description Numbered Page
27 Financial Data Schedule
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 8087
<SECURITIES> 15016
<RECEIVABLES> 27796
<ALLOWANCES> 581
<INVENTORY> 31780
<CURRENT-ASSETS> 87858
<PP&E> 13478
<DEPRECIATION> 3170
<TOTAL-ASSETS> 99378
<CURRENT-LIABILITIES> 25371
<BONDS> 0
0
0
<COMMON> 604
<OTHER-SE> 72834
<TOTAL-LIABILITY-AND-EQUITY> 99378
<SALES> 99837
<TOTAL-REVENUES> 99837
<CGS> 48177
<TOTAL-COSTS> 48177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 210
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 14458
<INCOME-TAX> 5060
<INCOME-CONTINUING> 9398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9398
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
