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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 DECEMBER 31, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-23372
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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)
2540 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) 570-7000
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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
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At December 31, 1996, there were 13,558,125 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.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December
31, 1996 and September 30, 1996 3
Condensed Consolidated Statements of Operations for
the three month periods ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Securityholders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Exhibit Index 22
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PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS Dec. 31, Sept. 30,
1996 1996
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(unaudited)
Current assets:
Cash and cash equivalents $ 13,696 $ 11,774
Marketable securities 13,148 14,135
Trade accounts receivable, net 28,356 23,032
Inventories 23,906 26,817
Prepaid and deferred income taxes 3,451 3,451
Prepaid expenses & other current assets 2,660 3,204
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Total current assets 85,217 82,413
Property & equipment, net 11,963 11,575
Deposits and other assets 2,402 2,442
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Total assets $ 99,582 $ 96,430
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 2,455 $ 2,455
Accounts payable 7,747 7,318
Income taxes payable 1,512 1,100
Accrued expenses 12,973 12,316
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Total current liabilities 24,687 23,189
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Long-term liabilities 534 552
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Stockholders' equity:
Common stock &
additional paid-in capital 32,145 31,413
Unrealized gain on investment 888 902
Note receivable from stockholder (40) (65)
Retained earnings 41,368 40,439
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Total stockholders' equity 74,361 72,689
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Total liabilities & stockholders' equity $ 99,582 $ 96,430
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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)
Three Months Ended
December 31,
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1996 1995
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Net sales $ 29,686 $ 33,782
Cost of sales 17,024 15,277
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Gross margin 12,662 18,505
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Operating expenses:
Research & development 4,089 4,169
Selling, general & administrative 7,199 7,918
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Total operating expenses 11,288 12,087
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Operating income 1,374 6,418
Other income (expense)
Interest expense (14) (13)
Interest income 217 310
Other expense (148) (16)
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Income before provision for income taxes 1,429 6,699
Provision for income taxes 500 2,345
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Net income $ 929 $ 4,354
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Net income per share $ 0.07 $ 0.32
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Weighted average common &
common equivalent shares 13,906 13,676
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See accompanying notes.
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
December 31,
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1996 1995
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Cash flows from operating activities:
Net cash provided by (used for) operating
activities $ 1,235 $ (6,598)
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Cash flows from investing activities:
Purchases of property & equipment (1,018) (1,268)
Decrease (Increase) in marketable securities 974 4,825
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Net cash provided by (used for) investing
activities (44) 3,557
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Cash flows from financing activities:
Proceeds from issuance of common stock 731 922
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Net cash provided by financing activities 731 922
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Net decrease in cash and cash equivalents 1,922 (2,119)
Cash & cash equivalents at beginning of period 11,774 7,595
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Cash & cash equivalents at end of period $ 13,696 $ 5,476
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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 three months ended December 31, 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 in the Company's Annual Report on Form 10-K for the year
ended September 30, 1996.
2. INVENTORIES
Inventories consist of the following (in thousands):
December 31, September 30,
1996 1996
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(unaudited)
Raw Materials $11,935 $12,985
Work in Process 6,418 7,648
Finished Goods5, 553 6,184
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$23,906 $26,817
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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 first quarter of fiscal 1997 ended December 31, 1996 decreased
12.1% to $29.7 million compared to net sales of $33.8 million for the same
quarter in fiscal 1996. This decrease in net sales was principally due to the
effect of the current business slowdown in the semiconductor industry. Order
and shipment levels for the industry had been strong through December 1995, and
the Company shipped record numbers of single chamber ash systems in the first
quarter of last fiscal year. For the quarter ended December 31, 1996, however,
revenues, especially from the sales of single chamber photoresist removal
products and spares and service, were materially adversely impacted by the
current business slowdown. This decrease in the sale of single chamber systems
and in spares and service revenues was partially offset by revenues from
shipments of the Company's new performance enhancing platform (PEP) systems.
Multiple system PEP shipments were made in the first quarter of fiscal 1997 to
fabrication facilities in Taiwan, Southeast Asia and Europe. Also offsetting,
in part, the decrease in revenue from single chamber systems compared to the
last year, was an increase in revenue from the sale of flat panel display
equipment from the Company's liquid crystal display division in Japan and
from the new Vertical High Pressure (VHP) furnace.
The Pacific Rim , North America and Europe accounted for approximately 53%, 29%
and 18% of net sales, respectively, for the three month period ended December
31, 1996 compared to approximately 23%, 49% and 28%, respectively, for the three
month period ended December 31, 1995. The geographic distribution of revenues
in the first quarter of fiscal 1997 reflected two large shipments to customers
located in Southeast Asia and Taiwan.
The Company expects that its future sales will continue to be materially
adversely impacted by the current business climate.
GROSS MARGIN as a percentage of net sales for the first quarter of fiscal 1997
was 43% compared to 55% for the same period last year. The significant decrease
in gross margin percentage was primarily due to several factors, including
significantly lower sales volume of the more mature, higher margin single
chamber systems, underutilization of the manufacturing and field service and
support operations and the higher costs associated with the introduction of new
products including the PEP and flat panel display equipment. The Company's
gross margin as a percentage of sales is 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 margin will continue to be materially
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adversely impacted by inefficiencies associated with new product introductions,
continued increase in sales of lower margin flat panel display equipment
products from the Company's LCD division, competitive pricing pressures, changes
in product mix and other factors including those referred to above.
RESEARCH AND DEVELOPMENT EXPENDITURES for the first quarter of fiscal 1997
decreased 2% to $4.1 million from $4.2 million for the first quarter of fiscal
1996. As a percentage of net sales, research and development expenses increased
from 12.3% in the first quarter of fiscal 1996 to 13.8% in the first quarter of
fiscal 1997. Research and development expenses consist primarily of salaries,
project materials, consultant fees and other costs associated with the Company's
research and development efforts. Although the overall level of spending in the
first quarter of 1997 was essentially unchanged from the same quarter last year,
increased spending for new product development including the PEP and VHP,
customization of current products and next generation programs including 300MM
were offset by reduced spending in the current quarter by the Company's LCD
division in Japan. Additionally, expenses in the first quarter of fiscal 1997
were reduced due to the reduction in work force that occurred late in fiscal
1996. The Company anticipates that research and development spending in
absolute dollars will increase in subsequent quarters due to the emphasis placed
by the Company on new product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased 9% to $7.2 million in the
first quarter of fiscal 1997 from $7.9 million in the same quarter of fiscal
1996. As a percentage of net sales, selling, general and administrative
expenses increased from 23% in the first quarter fiscal 1996 to 24% in the first
quater fiscal 1997. The decrease in absolute dollars from the corresponding
period last year is primarily due to lower third party commissions which are
payable on a significant portion of the overseas business and, to a lesser
extent, to the reduction in headcount that occurred in late fiscal 1996. Third
party commissions can fluctuate significantly depending on the mix of domestic
versus foreign sales in any period that are subject to third party commissions.
While international sales accounted for approximately 71% of the net sales for
the current quarter compared to 51% for the same quarter last fiscal year, a
significant portion of current quarter international sales were not subject to
third party commission. The Company has and is continuing to build
infrastructure worldwide to provide direct sales and support which is lessening
the Company's dependence on third party representatives for these services.
Consequently, third party commissions in some regions have been eliminated or
reduced. Although the Company has taken steps to manage its spending due to the
uncertainties of the current business climate, it anticipates that selling,
general and administrative spending may increase modestly in absolute dollars in
subsequent quarters.
OTHER INCOME AND EXPENSES primarily consists of interest expense, interest
income and amortization of goodwill. Interest expense of approximately $14,000
for the first quarter of fiscal 1997 and $13,000 for the same quarter last
fiscal year is for a short-term loan from the Bank of Tokyo made to the
Company's wholly owned subsidiary in Japan, GaSonics International Japan K.K.,
in the amount of 270 million yen which is equivalent to approximately $2.5
million as of December 31, 1996. Interest income for the first quarter of
fiscal 1997 was $217,000 compared to $310,000 for the same quarter last fiscal
year. This decrease is essentially due to a decline in the Company's
investments in marketable securities, cash and cash equivalents that were used
to fund operating activities. Other expense consisting primarily of goodwill
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amortization was $148,000 for the first quarter of fiscal 1997 compared to
$16,000 for the same quarter of fiscal 1996. This increase is principally due
to $2.0 million of contingent consideration related to the August 1995
acquisition of Tekisco. The contingent consideration was recorded in the fourth
quarter of fiscal 1996, and is being amortized over its useful life of five
years.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $1.2 million of cash for the quarter ended
December 31, 1996compared to the use of $6.6 million for the same period of
fiscal 1996. This increase in cashflow from operating activities was
principally due to an overall decrease in operations assets andliabilities
during the period as compared to the same period last fiscal year.
Investing activities for the first quarter of 1997 provided cash of $1.0
million, primarily due to proceeds from marketable securities offset by $1.0
million used for the purchase of equipment and software. For the same quarter
last year, the Company invested cash of $4.8 million in marketable securities
and used $1.3 million to purchase equipment and leasehold improvements.
Financing activities provided $731,000 and $922,000 for the periods ended
December 31, 1996 and 1995, respectively, primarily from the issuance of stock
in connection with the Company's employee stock purchase and stock option plans.
At December 31, 1996, the Company had working capital of $60.5 million compared
to $59.2 at September 30, 1996. Accounts receivable at December 31, 1996
increased $5.3 million from September 30, 1996 primarily due to an increase in
sales volume from the preceding quarter and to a disproportionately higher
percentage of sales late in the quarter. Inventory decreased $2.9 million from
September 30, 1996 to December 31, 1996 reflecting volume production and
shipment of PEP systems and efforts focused on cycle time reduction. 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 December 31, 1996 consisted of
approximately $13.7 million in cash and cash equivalents, $13.1 million in
marketable securities and a $15.0 million unsecured line of credit with Union
Bank which was entered into on March 4, 1996. A commercial letter of credit
provision of $500,000 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
December 31, 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 $2.5
million from the Bank of Tokyo against a promissory note which is secured by a
Letter of Guarantee issued by the Company. The loan
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carries an interest rate of 1.625% per annum and is due and payable on January
31, 1997. The Company intends to enter into a new loan agreement or extend the
term of the existing loan prior to the due date, however, there can be no
assurance that such financing will be available when required or, if available,
will be on reasonable terms.
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.
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ADDITIONAL RISK FACTORS
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future. The Company anticipates
that factors continuing to affect 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 number of systems manufactured, political and economic
instability and lengthy sales cycles. Gross margins have varied and will
continue to 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 four recently introduced products, the Strata, a high selectivity
etch system, the VHP, a vertical high pressure furnace system, the PEP, a
performance enhancement platform, and the 2106 LPCVD, a low pressure chemical
vapor deposition system. The Company's gross margin and overall gross margin
rate has sharply declined from the level attained less than a year ago due, in
part, to start-up inefficiencies associated with these introductions and sales,
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 last half of fiscal 1996 and the first quarter of
fiscal 1997 were materially adversely impacted by the current semiconductor
business slowdown and, while the Company has and is continuing to attempt to
manage 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 in
fiscal 1997 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 $2.0 million or more for its other products. As a result, the
timing of recognition of revenue for a single transaction could continue to 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
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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, most of the Company's quarterly 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 resulted in significant fixed costs which the Company will not be
able to reduce rapidly if sales goals for a particular period are not met, which
has recently been the case. 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 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 the last several months the semiconductor
industry has experienced a cyclical downturn, as evidenced by recent results of
the industry's book-to-bill ratio as published by the Semiconductor Industry
Association. The Company has experienced significant delays of new orders and
rescheduling of existing orders that have materially adversely affected the
Company's last two quarters of fiscal 1996 and the first quarter of fiscal 1997
financial results and is expected to materially adversely affect future
financial results. Accordingly, the Company can give no assurance that it will
be able to achieve or maintain its current level of sales. Additionally, 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.
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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 announced the introduction of, or have introduced, competitive
products that offer other technologies and improvements. Applied Materials and
Lam Research have introduced and sell 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 has led to reduced demand and lower prices for the
Company's products, thereby materially adversely 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 1994, 1995 and 1996 and the first quarter of
fiscal 1997 accounted for approximately 71%, 68%, 51% and 83% of net sales,
respectively. The Company expects that sales of its products to relatively few
customers 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
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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 reductions from recent buying patterns, market, economic or
competitive conditions in the semiconductor industry or in the industries that
manufacture products utilizing ICs, 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, France, Italy, 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 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. Although the
Company is currently implementing new management information, manufacturing and
cost accounting systems, these systems are not currently expected to be fully
operational until the second quarter of fiscal 1997. 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 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 has led to
intensified price-based competition resulting in lower prices and margins, which
has and could continue to 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
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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 any 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 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.
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 few number of systems to Japanese semiconductor
manufacturers, although there was a significant
15
<PAGE>
increase in the Company's sales from Japan in fiscal 1996 compared to fiscal
1995. 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 which manufactures,
markets and sells LPCVD equipment for the FPD market, but there can be no
assurance that this company will enable the Company to penetrate the photoresist
removal market in 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 41%, 40%, 54% and 71% of net sales in fiscal
years 1994, 1995, 1996 and the first quarter of fiscal 1997, respectively. The
Company has established independent operations in the United Kingdom, France,
Italy, 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, difficulty in
satisfying existing regulatory requirements, exchange rates, foreign currency
fluctuations, tariffs and other barriers, political and economic instability,
potentially adverse tax 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.
16
<PAGE>
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 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
17
<PAGE>
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 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. During the last twelve months, a number of senior management personnel
have left the Company to pursue other opportunities. Although the Company has
replaced most of these senior management personnel, there can be no assurance
that these individuals will successfully integrate into the Company's senior
management team. 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.
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
18
<PAGE>
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 December 31, 1996, the Company's officers, directors and members of their
families that may be deemed affiliates of such persons beneficially owned
approximately 27.9% 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. 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.
19
<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 December
31, 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and 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)
\s\ Terry R. Gibson
---------------------------
Date: February 10, 1997 By: Terry R. Gibson
Vice President, Finance
Chief Financial Officer
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY
NUMBERED
PAGE
27 Financial Data Schedule
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contails summary financial information extracted from The
Consolidated Balance Sheet, 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,696
<SECURITIES> 13,148
<RECEIVABLES> 29,003
<ALLOWANCES> 647
<INVENTORY> 23,906
<CURRENT-ASSETS> 85,217
<PP&E> 16,329
<DEPRECIATION> 4,366
<TOTAL-ASSETS> 99,582
<CURRENT-LIABILITIES> 24,687
<BONDS> 0
0
0
<COMMON> 604
<OTHER-SE> 73,757
<TOTAL-LIABILITY-AND-EQUITY> 99,582
<SALES> 29,686
<TOTAL-REVENUES> 29,686
<CGS> 17,024
<TOTAL-COSTS> 17,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 1,429
<INCOME-TAX> 500
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
