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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
SEPTEMBER 30, 1997 0-22248
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GASONICS INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in charter)
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DELAWARE 94-2159729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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2540 Junction Avenue
San Jose, California 95134
(408) 570-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on December 16, 1997,
as reported on The Nasdaq National Market was approximately $86,314,592. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded from this computation
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of December 16, 1997, the Registrant had outstanding 13,918,910 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended September 30, 1997 are incorporated into Parts II and IV of this
Report on Form 10-K.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on March 6, 1998 are incorporated by reference into
Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
GaSonics International Corporation ("GaSonics" or the "Company") is a
leading global semiconductor equipment manufacturer for the dry photoresist and
residue removal segments of advanced integrated circuit ("IC") manufacturing.
The Company's products consist of photoresist removal systems, residue removal
systems, isotropic etch systems, high pressure furnaces for the semiconductor
industry and low pressure chemical vapor deposition ("LPCVD") systems for the
flat panel display ("FPD") industry. The photoresist removal, residual removal
and isotropic etch systems use proprietary downstream plasma processing
technology to increase yields in the manufacture of advanced ICs. The Company
markets and sells its products to many leading IC manufacturers worldwide
including Intel, Motorola, Samsung, Siemens and Lucent Technologies.
The Company began operations in 1968 and was incorporated in California in
March 1971 and reincorporated in Delaware in March 1994. In February 1991, the
Company acquired Branson International Plasma Corporation, a manufacturer of
photoresist removal equipment. In August 1995, the Company acquired Tekisco,
Ltd. from Kishimoto Sangyo Co. Ltd. of Tokyo, Japan, a manufacturer of LPCVD
equipment for the manufacture of FPDs. The Company's principal executive offices
are located at 2540 Junction Avenue, San Jose, California 95134. The Company's
telephone number is (408) 570-7000 and worldwide website address is
http://www.gasonics.com.
INDUSTRY BACKGROUND
Rapid growth in the worldwide market for advanced ICs and IC-related
products has escalated the demand for semiconductor manufacturing equipment. In
the highly sophisticated IC fabrication process, the Company's products
influence a large number of complex and repetitive processing steps, including
deposition, photolithography and etch. Deposition puts down a layer of either
electrically insulating or electrically conductive material on the surface of a
wafer. The photolithography process then imprints device features, using a
photomask on a light sensitive polymer (photoresist). After the photoresist is
developed, an etch process selectively removes the deposited material from the
portions of the wafer surface not covered by the imprinted pattern. Prior to
processing additional layers on the wafer, the photoresist and post-etch
residues from the previous layer must be carefully removed in order to create a
clean and functional foundation for deposition of the next layer. These
processes between etch and deposition, often referred to as "photoresist
removal" or "ashing", have become increasingly challenging as device geometries
have shrunk to less than 1/500th the size of a human hair.
Today's advanced IC devices incorporate dozens of layers and use a variety
of materials in fabrication. After each layer, the resist and residue removal
process is repeated; as chips increase in capability, numbers of layers and
residue removal steps increase correspondingly. For example, a typical one
megabit Dynamic Random Access Memory chip ("DRAM") requires 11 masking and
subsequent photoresist removal steps. By comparison, a 64 megabit DRAM requires
20 to 25 masking and photoresist removal steps. As line geometries, or feature
sizes, of an IC continue to decrease to below 0.25 microns, wafer cleanliness
becomes increasingly important yet more difficult. New materials such as copper,
low K dielectrics (low dielectric constant materials) and deep ultraviolet
photolithography ("DUV") resists, will complicate photoresist removal and
preparation of the wafer surface for subsequent masking steps. As a result of
these trends, the Company believes that the number and complexity of photoresist
and residue removal systems per production line of advanced ICs will increase
along with the need for application-specific processes.
In the 1970's, photoresist was usually removed by immersing ICs into large
liquid chemical baths ("wet chemistry processing"). In the early 1980's, dry
chemistry processing used gases to remove the photoresist
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and began to replace wet chemistry processing for those advanced processing
steps that wet chemistry processing was unable to complete or added too many
defects (particles). Dry chemical processing has grown as an alternative with
potentially significant cost of ownership savings as compared with wet chemical
processing, especially for complex ICs with feature sizes of 1.0 micron and
below. Wet chemical processing also poses environmental concerns associated with
chemical storage, handling, disposal and operator safety. In the fabrication of
advanced ICs, wet chemical processing for photoresist removal is now typically
used only for noncritical cleaning steps after the application of a dry process.
In traditional dry chemical plasma processing, plasma is created and the wafer
is exposed to the plasma in a single chamber in order to remove the residual
photoresist. However, because certain plasma elements can damage the wafer,
direct exposure can result in reduced yield.
THE GASONICS SOLUTION
Addressing the photoresist removal needs of advanced IC manufacturers,
GaSonics pioneered in 1986 an advanced dry chemical process technology known as
"downstream microwave plasma." This technology separates the area for plasma
creation from that in which the wafer is exposed, thus shielding the wafer from
potential plasma damage while facilitating the chemical reaction. From there,
the Company has evolved a complex mix of product and technology to meet the
challenges of decreased line geometries, increased wafer sizes, new materials
and a series of difficult-to-remove residues. Called Integrated Clean: Solutions
between Etch and Deposition, these advanced photoresist and residue removal
technologies are believed by GaSonics to be critical for the manufacture of
advanced ICs at acceptable yields and costs. Yield, operating costs, throughput,
reliability, uptime and system cost are recognized industry-wide as
contributions to an IC manufacturer's total cost of ownership. The Company
believes that downstream microwave processing and Integrated Clean can impact
each of these factors, offering advanced IC manufacturers a simplified process
solution with cost of ownership benefits. Furthermore, GaSonics'
industry-leading platform technology combines a high degree of reliability,
serviceability, and overall equipment effectiveness to offer additional cost of
ownership benefits.
THE GASONICS STRATEGY
In order to maintain its leadership position in advanced dry chemical
processing equipment for photoresist and residue removal, GaSonics business
strategy is designed to:
ENHANCE STRATEGIC CUSTOMER RELATIONSHIPS. The Company believes that its
long-standing relationships with many leading worldwide IC manufacturers such as
Intel, Motorola, Samsung, and Siemens are critical to ensure its position as a
leading supplier of photoresist removal equipment for semiconductor fabrication.
The Company intends to continue to focus its resources on its key customers in
order to develop future process equipment and to lower the customers' total cost
of ownership for photoresist removal equipment. As part of this focus, the
Company believes that providing dedicated personnel at key customer facilities
will enable relationships, assist in the design of new fabrication process
equipment, and position GaSonics as a principal supplier of volume equipment
orders.
FOCUS ON CAPITAL PRODUCTIVITY. By increasing yields in the manufacture of
advanced ICs, the Company believes its proprietary downstream microwave
processing technology offers customers cost of ownership advantages over wet
chemical processing and traditional dry chemical processing. For example,
consumable chemicals used in wet chemical processing of larger diameter wafers
increase the cost of ownership. Additionally, the Company believes that its
downstream technology offers better yields than traditional dry chemical
processes through reduced damage and contamination. Confident that these
combined advantages position GaSonics as a preferred provider of lower cost of
ownership solutions, the Company intends to introduce additional cost-effective
products and product enhancements, including a new platform for 300mm wafers
which further enhances capital productivity.
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CAPITALIZE ON ADVANCED WAFER FABRICATION TRENDS. The Company will address
the worldwide market opportunity for advanced photoresist removal equipment
created by wafer fabs manufacturing eight-inch wafers with near 0.25 micron line
geometries. The Company believes that the yield benefits from dry chemical
processes in general and GaSonics' downstream processing technology, in
particular, increase significantly at line geometries of 0.25 micron and below.
GaSonics was one of the first companies to target the advanced photoresist
removal market by transitioning from traditional batch processing to a single
wafer design and it currently has an installed base of over 600 systems in the
eight-inch market. The Company intends to become a leading supplier for the 300
millimeter marketplace with the Millennia-TM- 300mm platform introduced in 1997.
PENETRATE ASIA/PACIFIC MARKET. The Asia/Pacific market for IC processing
equipment represents more than one-half of the worldwide market. The Company has
recently been successful with large customers in Korea, Singapore, Taiwan and
Japan, and intends to continue to invest significant resources to further
penetrate the Asia/Pacific market, particularly Japan. Japanese process
equipment manufacturers have typically dominated that market with traditional
dry chemical systems that process multiple wafers in a single batch. Since
advanced IC manufacturers who use larger diameter wafers are increasingly
adopting single wafer processing, the Company believes its single wafer systems,
which incorporate advanced dry chemical processing techniques, are particularly
well-positioned to compete in Japan.
TARGET NEW SYSTEMS AND APPLICATIONS. The Company believes that its strong
customer relationships and technology leadership will enable it to develop new
systems and target applications for specific customer needs. The Company's
fastest-ramping product, the Performance Enhancement Platform ("PEP") system,
illustrates that strategy. A dual chamber photoresist and residue removal system
designed to increase throughput and optimize clean room space, PEP systems allow
a mix-and-match option allowing photoresist removal, residue removal or a
combination of both process chambers on one platform. In addition, PEP's
advanced, flexible operating system with graphical user interface allows for
easy addition of new chamber and system features to continuously improve the
product's process capability. This insures the product spans multiple
generations of device manufacturing needs. For 300mm wafers, the Company has
devised a unique platform that further increases capital productivity over the
dual chamber PEP. It uses the concept of segmenting processes into multiple yet
parallel steps, minimizing wafer handling overhead. It is also being designed to
meet customers' advanced resist and residue removal needs below 0.18 micron.
GASONICS TECHNOLOGY
MICROWAVE DOWNSTREAM PROCESSING.
GaSonics' proprietary microwave downstream processing technology for dry
chemical processing has been a key element in establishing product demand.
In addition to separating the plasma source from the wafer exposure area
("downstream"), the Company's processing technology incorporates microwave
plasma generation. The Company believes that microwave frequency introduced for
semiconductor manufacturing by GaSonics in 1986, has become the preferred source
for plasma creation because it produces a higher concentration of neutral
species and fewer damaging ions than the alternative, radio frequency ("RF")
plasma. Thus, the Company believes its products have higher removal rates with
less damage and can operate at lower temperatures than competitive products that
utilize RF energy.
GaSonics' proprietary microwave downstream processing technology can be
applied to other process applications, such as isotropic etch. In isotropic
etching, plasma selectively removes material such as silicon dioxide, silicon
nitride and polysilicon to create three-dimensional contours on the wafer. To
accommodate the increased number of mask layers, certain silicon layers on the
wafer must be carefully shaped prior to the deposition of the next layer of
material. These etching processes are typically completed by costly wet chemical
process steps. The Company believes that IC manufacturers will soon replace wet
chemical
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processes or high cost etching steps with more cost-effective downstream dry
chemical processes. The Company believes that its proprietary downstream
technology will enable manufacturers to complete these steps with increased
yield and lower cost.
To meet the challenges of a marketplace increasing in complexity, GaSonics
has broadened the Company's offerings of solutions which remove unwanted
materials between the etch process and subsequent deposition. The Company's
twenty-five years of market share and technology leadership in photoresist
removal have facilitated its development of Integrated Clean. The critical
process steps between etch and deposition, specifically those that involve the
removal of unwanted materials, prepare the wafer surface for a better device
connection. These materials, which may be organic, inorganic, metallic or
particulate in nature, can impact device performance, reliability and yield if
they are not removed. GaSonics core business enables this critical process
sequence, which includes photoresist removal and residue removal. These steps
complete the preceding etch step and prepare the wafer for the subsequent
deposition.
HIGH PRESSURE THERMAL PROCESSING
The Company introduced the concept of the application of high pressure to IC
thermal processing with the introduction of its high pressure furnace product.
In IC fabrication, there are a number of thermal process steps that involve the
exposure of the wafer to high temperature over an extended period of time. These
steps include oxidation, which is the growth of insulating materials on the
wafer, and reflow, which is a process that smoothes irregular topographies on a
wafer. By introducing high pressure as a parameter in thermal processing, the
amount of time a wafer must be exposed to high temperatures is reduced. Also, in
some instances, high pressure actually allows for a reduction in the process
temperature. The length of time an IC may be exposed to high temperatures is
known as the "thermal budget" of the device.
Although high pressure is currently utilized primarily for specialized
applications, the Company believes that the use of high pressure in the
fabrication of advanced ICs will increase as feature sizes continue to decrease.
Advanced ICs are more sensitive to long exposure to high temperatures and
require lower processing temperatures and have a lower thermal budget. In
addition, the Company believes that high pressure thermal processing provides
benefits to the IC manufacturer including higher yields resulting from increased
process rates and reduced damage to the wafer that can result from long exposure
to high temperatures and increased die per wafer. The Company began shipping VHP
systems, its most recent high pressure product release, in August 1995.
PRODUCTS
The Company's major product line consists of advanced dry chemical
processing equipment for photoresist removal. The Company also offers advanced
dry chemical processing equipment for post-etch residue removal, isotropic
etching, high pressure furnaces, low-pressure chemical vapor deposition
equipment used for flat panel display manufacturing and products using plasma
chemistry for a variety of non-semiconductor applications. In addition, the
Company provides upgrades, maintenance and spare parts for both current and
previous generation products.
DRY CHEMICAL PROCESSING SYSTEMS
PHOTORESIST REMOVAL. The Company's dry chemical downstream processing
systems are designed to provide advanced IC manufacturers with lower cost of
ownership solutions for photoresist removal. This product line currently
includes the Aura 1000, the Aura 2000-LL, the Aura 3010, the L3510, the PEP3510A
and the PEP3510C. All of these products incorporate the Company's proprietary
microwave downstream processing technology and are designed to be used in the
fabrication of ICs with feature sizes of 0.25 microns and below. Their
throughput rates range from approximately 45 to 140 wafers per hour for single
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chamber systems and up to 160 wafers per hour for dual chamber systems,
depending upon wafer size and customer application. System purchase prices range
from approximately $150,000 to $700,000.
The Company introduced its high productivity platform, the PEP, in 1995. A
dual chamber platform with a proprietary wafer handler and high yield
photoresist removal capability, the PEP delivers a lower cost per wafer pass
while providing yield advantage with GaSonics' downstream microwave processing.
GaSonics introduced photoresist removal chambers for the PEP platform in 1995,
and the residue removal chambers were introduced in 1996. The PEP represents the
Company's migration to a platform strategy which offers flexibility and
customization of single wafer processing on an integrated platform. In 1994, the
Company introduced its two most recent single chamber product enhancements, the
L3510, an enhancement to the L3500, and the Aura 3010, an enhancement to the
Aura 3000, each of which has extended performance capabilities, including higher
reliability, increased operational flexibility and higher throughput.
In 1997 the Company introduced its new 300mm platform the "Millennia" which
will be available for commerical shipment in calendar 1998. Millennia adds a
wafer loadlock giving it the capability to perform more processes with more
chemistry options than PEP. The loadlock allows the use of hazardous gases such
as Chlorine and some Fluorine compounds which gives Millennia the flexibility to
perform isotropic and backside etching as well as soft silicon etch and oxide
etching.
Sales of dry chemistry processing equipment for photoresist removal
accounted for approximately 69%, 62% and 69% of the Company's net sales in
fiscal years 1995, 1996 and 1997, respectively.
POST ETCH RESIDUE REMOVAL. Post etch residue removal is defined as the
processes after etch (metal, poly or oxide) that remove unwanted materials from
the surface of the wafer. Plasma systems like the PEP have proven to be more
cost-effective at removing these materials than traditional wet chemistries.
PEP integrated processing is typically used after a poly or oxide etch step.
Most metal etchers have a photoresist module incorporated in their platforms
designed to passivate the wafer and prevent corrosion. In this process,
photoresist is also removed, leaving behind residues. The PEP3510A has proven
effective at removing some of these residues with the addition of low
concentrations of Fluorine gases. In addition, a modular clean chamber
configured on the PEP becomes a PEP3510C (Clean) tool. This chamber is
specifically designed to accommodate large concentrations of Fluorine gas which
is sometimes needed for removing more difficult residues which form after metal
and oxide etch. The clean chamber optimizes the process chamber with a single
process, greatly improving wafer results, and has been qualified for production
at several fabs for this process. It has also shown capability for post oxide
etch residue removal.
The next step for the Company will be the introduction of the PEP3600, a
dual chamber PEP which will further optimize process wafer flow in the fab. The
product is planned to launch in 1998.
ISOTROPIC ETCHING. Isotropic etching removes materials from a wafer both
horizontally and vertically at uniform rates. With isotropic etching, advanced
IC manufacturers can consistently and uniformly remove materials in a more
controlled environment, generally resulting in a lower cost than traditional wet
chemical processing. In fiscal 1995, the Company completed the development of
its high selectivity isotropic etch system, the Strata, for the removal of
silicon dioxide, silicon nitride and polysilicon from the wafer. The Strata
features the Company's downstream microwave technology.
HIGH PRESSURE FURNACE SYSTEMS
Over the past 18 years, the Company has marketed a horizontal high pressure
furnace system, the HiPOx, and has sold over 150 of such systems to over 30
semiconductor manufacturers worldwide. In fiscal 1995, the Company completed
development of its vertical high pressure furnace system, the VHP. The VHP
system is intended to provide process simplification by eliminating a mask step
and reducing the time the wafer is exposed to elevated temperatures, thereby
permitting smaller geometries and increasing yields in the manufacture of
advanced ICs. As geometries continue to shrink, more customers are exploring the
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compatability of the VHP for ultra thin gate materials as a driver process for
0.18 micron devices. In these thin gate application, the VHP offers superior
nitrogen incorporation into the oxide to improve barrier and strength
characteristics. The VHP also addresses industry requirements for a vertical
furnace design with reduced footprint and small dual batch sizes of
approximately 50 waters.
LOW-PRESSURE CHEMICAL VAPOR DEPOSITION SYSTEMS
In August 1995, the Company acquired its liquid crystal display ("LCD")
division in Japan (formerly called Tekisco, Ltd.), one of Japan's leading
manufacturers of low-pressure chemical vapor deposition systems used for flat
panel display manufacturing. Established in 1990, LCD began shipments of its
proprietary LPCVD systems for polysilicon-on-glass applications for flat panel
displays in 1991. LPCVD systems have been sold to a number of leading Japanese
and Korean flat panel display manufacturers. The Company believes that the
acquisition of LCD has expanded its market presence in Japan. The Company
believes that the equipment needs of flat panel or liquid crystal manufacturers
and semiconductor manufacturers are similar and appear to be converging as the
wafers used in IC manufacturing continue to increase in size.
SPARE PARTS, SERVICE AND SUPPORT
GaSonics also provides a series of products, including spare parts,
retrofits and upgrade kits as well as service, training and support for its
growing installed based. Revenue from these sources accounted for approximately
20%, 21% and 20% of the Company's net sales in fiscal 1995, 1996 and 1997,
respectively. As both the industry's technology and the Company's systems have
become more complex, the Company believes that its customers will increasingly
rely on its expertise for service and support. Since the installed base of the
Company's equipment has increased and is expected to continue to increase, the
Company believes that service and support revenue may also increase in 1998.
CUSTOMERS
The Company sells its products to leading IC manufacturers and flat panel
display manufacturers located throughout the United States, Europe and the
Asia/Pacific. Sales to Intel accounted for approximately 20% and 11% of net
sales in fiscal 1995 and 1996, respectively. In fiscal 1997, Samsung and Promos
Technologies each accounted for approximately 11% of net sales and Intel
accounted for approximately 10% of net sales. The Company expects that sales of
its products to relatively few customers, particularly Intel, Motorola, Samsung,
Siemens and Lucent Technologies will continue to account for a high percentage
of its 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 the Company's 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 by any significant
customer, including reductions due to customer departures from traditional
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.
SALES, SERVICE AND CUSTOMER SUPPORT
The Company believes its sales, service, applications and customer support
organizations are critical to its success in establishing and maintaining
long-term customer relationships and provide the Company with a competitive
advantage in the process equipment market. These relationships are of paramount
importance in the semiconductor capital equipment market, as the Company
believes that once a semiconductor manufacturer has selected a particular
supplier's capital equipment, that manufacturer generally relies upon that
equipment for delivering a technology solution against specific device
processing
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requirements and frequently will attempt to consolidate its other capital
equipment requirements with the same supplier. The Company's sales, service and
applications and customer support organizations develop close working
relationships with customers in order to identify their current and future
semiconductor equipment requirements and to assist customers in overcoming their
technology challenges as they move to fabricating increasingly more complex
devices. As a result, the Company believes it is positioned to continue its
success in the development, marketing and servicing of products which provide
advanced semiconductor manufacturers enabling technology solutions.
The Company markets, sells and services its products domestically and
internationally primarily through its marketing and direct sales and customer
support organization including service, applications and process development
engineering and logistics personnel. Since the end of fiscal 1993, the Company
has established subsidiaries in the U.K., Ireland, France, Israel, Korea and
Japan, and branch offices in Italy, Singapore and Taiwan and has staffed these
subsidiaries and branches with sales, service, technical support, applications
engineering and logistics personnel. During 1997, the Company reduced its
dependence on third party representatives to two representatives to sell and
service its products in Germany and China. The Company has eight United States
sales and service centers located in Austin, Texas; Dallas, Texas; Rockaway, New
Jersey; Aloha, Oregon; Mesa, Arizona; Hopewell, New York; Fishkill, New York;
and its corporate headquarters in San Jose, California.
The Company's field service, technical support and applications engineering
personnel based throughout the United States, Europe and Asia, directly support
domestic and international equipment installations and commissioning, process
development, training, spare parts logistics, warranty service and post-warranty
contract service. The Company's field service engineers include dedicated
site-specific engineers contracted by certain customers, such as Intel,
Motorola, Lucent Technologies and Texas Instruments.
The Company generally offers standard warranty terms for two years on parts
and labor on equipment sales. The Company also offers service contracts to its
customers for continued maintenance of systems that are not covered by warranty.
In support of its numerous field support centers located throughout the
world, the Company also maintains a headquarters-based customer satisfaction
organization. This organization includes advanced technical/product support, a
central response center, technical publications, product training, global field
resource planning and spare parts logistics and planning. This organization,
working in concert with the Company's field sales, service, applications and
customer support centers, link customers with the Company's most advanced
technical problem solving expertise, with an overall goal of providing quality
products and services which meet customer's expectations. In support of the
Company's goal, it is preparing to be in compliance with ISO-9001, which
requires a strict system of standards used primarily in Europe to measure the
Company's ability to achieve certain quality milestones.
The Company has increased and continues to increase its sales, service,
applications and customer support presence in Asia. The Company intends to
continue investing significant resources to further penetrate the Asia market.
The Company's goal is to develop knowledgeable local sales, service,
applications and customer support resources throughout the region to increase
communication between the Company and Asian semiconductor manufacturers, reduce
response times for sales and support inquiries, and co-develop next generation
processes.
In August 1995, the Company acquired its LCD division in Japan from
Kishimoto Sangyo Co. Ltd. of Tokyo, Japan. The LCD division is a manufacturer of
LPCVD equipment used for the manufacture of flat panel displays ("FPD's"). FPDs
are important components of portable computing and telecommunications devices.
FPD or liquid crystal display manufacturing utilizes very similar processes to
IC processing. Approximately 90% of the advanced FPDs produced worldwide are
manufactured in Japan. This acquisition was intended to enable GaSonics to
continue to penetrate this market and to further establish the credibility of
GaSonics as a supplier in Japan.
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Subsequent to 1997 fiscal year end, the Company announced that is has
established a direct presence in Japan for sales, maintenance and service of the
Company's photoresist and residue removal business to better serve its Japanese
customers. As a result, the Company will transition out of its relationship with
Seki Technotron, which has served as the Company's exclusive distributor,
providing sales and field support in Japan since 1995.
BACKLOG
The Company schedules production of its systems based upon backlog, informal
customer commitments and general economic forecasts for its targeted markets.
The backlog includes only those customer orders for systems for which the
Company has accepted purchase order numbers and assigned shipment dates within
twelve months as well as orders for spare parts and service and support of
systems. The Company's backlog for its systems, spare parts and service and
support was approximately $32.4 million and $32.8 million at the end of fiscal
years 1996 and 1997, respectively. Historically, the Company's backlog has
fluctuated significantly primarily as a result of the cyclical nature of
construction and equipping of new IC fabrication facilities. The equipment
requirements of new fabrication facilities cannot be determined with accuracy,
and therefore the Company's backlog at any certain date is not indicative of
future growth. In addition, the Company's backlog at any particular date is not
necessarily representative of actual sales for any succeeding period. Orders are
often received and shipped in the same quarter, system delivery schedules can
change and have changed, cancellations and rescheduled system orders can occur
and have occurred, all orders are subject to cancellation, deferral or
rescheduling by the customer with limited or no penalties, and there are
potential delays, and there have been delays, in system shipments. The Company
has in the past experienced, and will likely continue to experience,
cancellations, deferrals and rescheduling of product orders
MANUFACTURING
The Company's manufacturing strategy is to produce high quality,
cost-effective, and reliable systems and assemblies to support on-going and
growing requirements for more environmental friendly semiconductor processing
equipment. In order to provide the best added value to the customers and to
preserve standards in performance, the Company is placing emphasis on in-house
system integration and test activities that require proprietary core technology
or specialized knowledge and outsourcing routine fabrication and assembly to
subcontractors. The performance of subcontractors is monitored through a supply
management program to ensure that they comply with quality and on-time
expectations. In addition, as part of a continuous quality improvement process,
the Company has embarked on a IS9002 certification program for its Plasma
products manufacturing facility.
The Company's principal manufacturing activities include assembly and test
work and are conducted at the Company's facility in San Jose, California and in
Atsugi City, Japan for the LPCVD business. Assembly includes subassembly and
final assembly. Test includes module test and final system test. The system
products are integrated and tested in Class 100 to 1000 clean rooms to
customers' acceptance criteria prior to shipment. In addition, Class 10 clean
rooms simulating a fab environment are available to provide equipment
performance demos to customers.
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,
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hazardous or toxic substances could subject the Company to significant
liabilities. To ensure that manufacturing and engineering activities are
conducted with heightened awareness on safety and compliance to regulations
regarding the use of toxic or other hazardous substances, training programs are
conducted on a year round basis for existing and new employees.
To measure and improve customer satisfaction with the Company's products and
service, metrics are developed and measured on a weekly or monthly basis, such
as response time, quality, installation discrepancies, on-time, backorders,
employee flexibility, and productivity. In addition, the Company has established
a Customer Response Center ("CRC") to enhance the response time in providing
customers parts and systems support . The CRC has direct access to
Manufacturing, Engineering, and other resources to meet urgent and routine
requests.
RESEARCH AND DEVELOPMENT
The markets for semiconductor manufacturing equipment, including the markets
that utilize the Company's equipment, are characterized by rapid technological
development and product innovation. The Company intends to continue to commit
substantial resources to research and development in both dry chemistry
processing, high pressure thermal processing and LPCVD for the flat panel
display market.
In order to maintain its long-term relationships with existing customers,
the Company commits substantial resources to the continuous improvement of
existing products and developing new products and technology. Customers with
large installed bases increasingly require their suppliers to improve existing
products in order to avoid the long qualifying evaluations required with new
equipment, which can be costly and risky. The Company's research and development
for product improvement includes in-house validation tests of major hardware
changes as well as detailed process characterization in the Company's clean
rooms.
Historically, the Company has devoted a significant portion of its financial
resources to research and development programs and expects to continue to
allocate significant resources to these efforts. For fiscal 1995, 1996 and 1997,
total research and development expenditures were approximately $12.3 million,
$18.0 million and $17.4 million, respectively, and represent approximately 12%,
14% and 14% of the Company's net sales, respectively.
COMPETITION
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 supplier's capital
equipment, the manufacturer often relies upon that equipment for the specific
production line application and frequently will attempt to consolidate its other
capital equipment requirements with the same supplier. Accordingly, the Company
expects to experience difficulty in selling to a particular customer for a
significant period of time if that customer initially selects a competitor's
capital equipment. The Company currently has only one principal product line and
experiences intense competition worldwide from a number of leading foreign and
domestic manufacturers, including Canon, Applied Materials, Inc., Eaton
Corporation, Lam Research Corporation, Matrix Semiconductor Systems, Inc.,
Mattson Technology, Inc., Plasma Systems and MC Electronics, some 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. For example, Applied
Materials and Lam Research have introduced modules to their products which
remove photoresist using dry chemistry processing and thereby compete with the
Company's products. The Company expects its competitors to continue to develop,
enhance or acquire competitive products that may offer improved price or
performance features. New product announcements, introductions and enhancements
by the Company's competitors could cause a significant decline in
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sales or loss of market acceptance of the Company's systems; intense price
competition or other factors that could make the Company's systems or technology
obsolete or noncompetitive. The Company believes that the industry will continue
to be subject to consolidation which will increase the number of larger more
powerful companies in the industry sector in which the Company competes. The
Company also believes competition will continue from current and new suppliers
employing other technologies, such as wet chemistry, traditional dry chemistry
and other techniques. This increased competitive pressure could lead to reduced
demand and lower prices for the Company's products, thereby materially adversely
affecting the Company's operating results.
The principal competitive elements in dry chemistry processing for
photoresist and residue removal and etching are technological innovation, total
cost of ownership of the systems, including yield, price, product performance
and throughput capability, quality, and reliability, and customer service and
support. Although the Company believes that it competes favorably in these
areas, competitive product introductions could cause a decline in sales or loss
of market acceptance of the Company's existing products. 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 to remain competitive it will have to commit
significant financial resources to develop new product features and
enhancements, to introduce next generation photoresist and residue removal
products on a timely basis, and to maintain customer service and support centers
worldwide. In marketing its products, the Company will face competition from
suppliers employing new technologies in order to extend the capabilities of
competitive products beyond their current limits or increase their productivity.
In addition, increased competitive pressure could lead to intensified
price-based competition, resulting in lower prices and margins, which would
materially adversely affect the Company's business, financial condition and
operating results.
In addition, Japanese IC process equipment manufacturers dominate the market
for certain types of integrated circuits which use the Company's systems.
Japanese manufacturers are well-established in the Japanese process equipment
market, making it difficult for non-Japanese manufacturers to penetrate the
Japanese market. Furthermore, Japanese semiconductor manufacturers have extended
their influence outside of Japan by licensing products and process technologies
to non-Japanese semiconductor manufacturers. Such licenses could result in a
recommendation to use certain semiconductor capital equipment manufactured by
Japanese companies. The Company has not established itself as a major competitor
in the Japanese market and there can be no assurance that the Company will be
able to achieve significant sales to Japanese IC manufacturers or compete
successfully in the future.
LCD's competitors in the LPCVD market include Japan-based companies and
Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh and ULVAC.
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 LCD.
INTELLECTUAL PROPERTY RIGHTS
The Company owns 17 United States patents which expire between 1998 and 2017
and has 5 U.S. patents pending. In addition, the Company has 15 foreign patents
which expire between 1998 and 2011 and has applied for 2 additional foreign
patents. Certain of these patents were acquired by the Company from Branson
International Plasma Corporation ("IPC"). One additional U.S. patent application
has been assigned to the Company in connection with the acquisition of LCD. The
Company seeks patents when appropriate on inventions resulting from its ongoing
research and development and manufacturing activities. The Company also has 7
trademarks and has an additional 2 trademarks pending. Nevertheless, the Company
looks primarily for its success from innovation, technological expertise and
marketing abilities of its employees rather than from patent, trademark,
copyright and other intellectual property rights protection.
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Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not develop similar technology independently. 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. Patents issued to the Company could be challenged,
invalidated or circumvented and the rights granted thereunder may not 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 occasionally
receives notices from third parties alleging infringement claims. Although there
currently are no pending material 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 in the future will not be asserted or that such
assertions, if proven to be true, 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 if available on
reasonable terms or at all. The Company could decide, in the alternative, to
resort to litigation to challenge such claims or enforce its proprietary rights.
Such challenges could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations.
EMPLOYEES
At September 30, 1997, the Company had approximately 487 full-time
employees. The Company believes its future success will depend in large part on
its ability to attract and retain highly skilled and motivated employees. None
of the employees of the Company is covered by a collective bargaining agreement.
The Company considers its relationships with its employees to be good.
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, inventory
obsolescence, accounts receivable writeoffs, 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, the ability of any customer to finance its purchases of
the Company's equipment, 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's gross margin and overall gross
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margin rate has sharply declined from the level attained in prior years, in
part, due to start-up inefficiencies associated with new products, competitive
pricing pressures, changes in product mix from fewer higher margin rate and
mature single chamber products to lower margin rate dual chamber products,
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 throughout
fiscal 1997 were materially adversely impacted by the current semiconductor
business slowdown and, although 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 into
next fiscal year and will continue to have a material adverse effect on the
Company's future revenues and operating results. See "Expansion of Operations;
Management of Growth" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 $700,000 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 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 and has caused net sales in a particular quarter to fall
significantly below the Company's expectations and 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 has not been able to reduce rapidly as sales goals for a particular
period have not been 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 materially 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.See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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, beginning in 1996, the semiconductor industry began
experiencing a cyclical downturn. The Company has experienced significant delays
of new orders and reschedulings of existing orders that
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have materially adversely affected the Company's results of operations for the
last two quarters of fiscal 1996 and all of fiscal 1997 financial results and
may 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 IC manufacturers building or
expanding large fabrication facilities, and there can be no assurance that such
demand will exist. See "Business--Industry Background."
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 Canon, Applied Materials, Inc.,
Eaton Corporation, Lam Research Corporation, Matrix Semiconductor Systems, Inc.,
Mattson Technology, Inc., Plasma Systems and MC Electronics, many of which have
substantially greater installed bases and greater financial, marketing,
technical and other resources than the Company. One of the Company's
competitors, Fusion was recently acquired by Eaton Corporation, a very large
corporation. The Company believes that the industry will continue to be subject
to consolidation which will increase the number of larger more powerful
companies in the industry sector in which the Company competes. Certain of the
Company's competitors have announced the introduction of, or have introduced or
acquired, competitive products that offer other technologies and improvements.
Applied Materials and Lam Research have introduced and currently 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. See "Business--Competition."
Competitors of the Company's LCD division in Japan include Japan-based
companies and Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh
and ULVAC. 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 1995, 1996 and 1997 accounted for
approximately 68%, 51% and 66% of net sales, respectively. Sales to Intel
accounted for
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approximately 20% and 11% of net sales in fiscal 1995 and 1996, respectively. In
fiscal 1997, Samsung and Promos Technologies each accounted for approximately
11% of net sales and Intel accounted for approximately 10% of net sales. 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 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. See
"Business--Customers."
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
The Company has undergone a period of rapid growth. From 1993 though mid
1996, the Company had 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,
Ireland, France, Italy, Korea, Japan, Singapore, Taiwan and Israel 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 though at least 1998.
The past 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.
The Company implemented new management information, manufacturing and cost
accounting systems during the second quarter of fiscal 1997. There can be no
assurance, however, 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 marketing and product
performance in the field. In particular, the Company's future performance will
depend in part upon the successful commercialization of the VHP, LPCVD systems
and the Millennia 300mm systems. There can be no assurance that any such product
will achieve any significant revenues or contribute to any
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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 been experiencing delays
from time to time in the introduction of, and certain technical and
manufacturing difficulties with, certain of its systems and enhancements and may
continue to 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. See "Business--Research and Development."
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. Sales in Japan accounted for approximately 2% of the Company's
total net sales in fiscal 1995 and 9% of total net sales in both fiscal 1996 and
fiscal 1997. To date, for its photoresist business, the Company has not fully
developed a customer service and support capability in Japan and remains at a
disadvantage in selling, servicing and supporting such 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 its LCD division in Japan, 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
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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 and has established a direct presence 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. See "Business--Sales, Service and Customer Support."
INTERNATIONAL SALES
International sales accounted for 40%, 54% and 55% of net sales in fiscal
years 1995, 1996 and 1997, respectively. The Company has established independent
operations in the United Kingdom, France, Italy, Korea, Japan, Singapore, Taiwan
and during the third quarter of fiscal 1997, established subsidiaries in Israel
and Ireland. 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. See
"Business--Sales, Service and Customer Support."
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 occasionally
receives notices from third parties alleging infringement claims. Although there
are currently no pending material 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 if available on
reasonable terms or at all. The Company could decide, in the alternative, to
resort to litigation to challenge such claims or enforce its proprietary rights.
Such challenges could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Intellectual Property Rights."
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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, two other companies for microwave power supplies,
and one company for microwave applicators used in all of its ashing systems. The
Company's LCD division in Japan is heavily dependent on one key supplier for
quartz and ceramic fabrication and is seeking alternative sources. The Company
is exploring alternative sources or technology. In addition, the Company has
been establishing longer term contracts with these suppliers to mitigate the
potential risks of inadequate supply of required components and control over
pricing and timely delivery of components and subassemblies. However, 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 suppliers 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Manufacturing."
FUTURE ACQUISITIONS
In August 1995, the Company acquired its liquid crystal display 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,
17
<PAGE>
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. See "Business--Employees" and "Executive Officers of the
Registrant."
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. See "Business-- Manufacturing."
CONCENTRATION OF OWNERSHIP; EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As of September 30, 1997, the Company's officers, directors and members of
their families that may be deemed affiliates of such persons owned approximately
21.8% 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.
18
<PAGE>
ITEM 2. PROPERTIES
The Company maintains its headquarters in San Jose, California in three
leased facilities, aggregating approximately 148,500 square feet, which contain
general administration and finance, marketing and sales, customer service and
support, manufacturing and research and development. The three buildings have
separate leases with two of the leases expiring on December 31, 1999 and the
third lease expiring on August 31, 1998.
The Company also leases seven sales and support offices in the United States
in Austin, Texas; Dallas, Texas; Rockaway, New Jersey; Aloha, Oregon; Mesa,
Arizona; Hopewell, New York; and Fishkill, New York under leases with terms of
one to three years.
Additionally, the Company leases sales and support offices in Korea, Japan,
Scotland, Singapore and Taiwan and Israel. Lease terms vary from two to ten
years.
The Company also leases two facilities totaling approximately 34,000 square
feet in Japan which is dedicated to the Company's LCD division. One of the
facilities totaling approximately 20,000 square feet is used for administration,
marketing and sales, customer service and support, manufacturing and research
and development. The lease on this facility expires September 30, 2000. The
other facility totaling approximately 14,000 square feet was acquired in
December 1995 to expand production capability. The lease on this facility
expires December 31, 1998.
The Company believes that its existing facilities will adequately meet its
anticipated requirements for the next twelve months and that suitable additional
or substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the Company's
fiscal fourth quarter ended September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Monte M. Toole......... 66 Chairman of the Board
Dave Toole............. 42 Chief Executive Officer, President and Director
Avner Shelem........... 44 Vice President, General Manager, Engineering and Operations
Terry Gibson........... 44 Vice President, Finance and Chief Financial Officer
Bill Alexander......... 41 Vice President, Worldwide Sales and Field Operations
</TABLE>
MONTE M. TOOLE founded the Company in March 1971 and has served as Chairman
of the Board since the Company's inception and as Chief Executive Officer from
inception to December 31, 1994. Between March 1971 and May 1993, Mr. Toole also
served as President of the Company. Prior to founding the Company, Mr. Toole was
a representative of semiconductor equipment manufacturers at Monte Toole and
Associates, Inc., a manager at Fairchild Semiconductor and a systems analyst at
IBM. From October 1991 to June 1993, Mr. Toole served on the Board of Directors
of Integrated Process Equipment Corporation, a semiconductor equipment company.
DAVE TOOLE became the Company's President in May 1993 and the Companys'
Chief Executive Officer on December 31, 1994. In addition, Mr. Toole served as
the Company's Chief Operating Officer from
19
<PAGE>
May 1993 to December 1994. Prior to that time, Mr. Toole served as the Company's
Vice President, Sales and Marketing from October 1986 to April 1989 and has
served as a Director since April 1979. Mr. Toole also served as the Company's
Vice President and General Manager from April 1989 to May 1991 and as Vice
President, Commercial Operations from May 1991 to May 1993. Mr. Toole has held
various other positions in purchasing, manufacturing, marketing and sales since
joining the Company in 1979. Prior to 1979, Mr. Toole was employed by Advanced
Micro Devices, a semiconductor manufacturer.
AVNER SHELEM joined the Company as Vice President, Research, Development and
Engineering in March 1994 and was promoted to Vice President, General Manager,
Engineering and Operations in September 1996. Between December 1992 and March
1994, Mr. Shelem was a partner at Intertech Management Group, a management
consulting firm. From September 1990 to December 1992, Mr. Shelem served as
Chief Operating Officer of AG Associates, a manufacturer of rapid thermal
processing equipment. From January 1983 to September 1990, Mr. Shelem held
various positions at Intel Corporation, including Material and General Site
Services Manager, Lithography Manager, Diffusion Manager and Industrial
Engineering Manager.
TERRY GIBSON became the Company's Vice President, Finance and Chief
Financial Officer in May 1996. Before joining GaSonics, Mr. Gibson had been
employed by Lam Research Corporation since 1991 where he served as Vice
President, Corporate Controller. From 1990 to 1991, Mr. Gibson was the Corporate
Controller at Silicon Valley Group and from 1989 to 1990 served as Corporate
Controller of Flextronics, Inc. From 1983 to 1989, Mr. Gibson held various
financial management positions at National Semiconductor and prior to that began
his career with the independent public accounting firm of Deloitte, Haskins and
Sells.
BILL ALEXANDER joined the Company as Vice President, Worldwide Sales and
Field Operations in August 1997. Prior to joining GaSonics, Mr. Alexander was
employed by Tencor Corporation (now KLA-Tencor Corporation) from November 1996
to August 1997 where he served as Vice President of Asia-Pacific Operations.
From 1993 to 1996 he first served as Director of Asia Operations and later as
Vice President of International Operations with Watkins-Johnson Company and from
1990 to 1993 held senior sales and marketing positions at Lam Research
Corporation. From 1981 to 1990, Mr. Alexander held various management positions
with Watkins-Johnson Company, Innovus Corporation, VLSI Technology and FMC
Corporation.
The executive officers serve at the discretion of the Board of Directors,
until their successors are appointed. No family relationships exist among the
officers and directors, except Monte Toole and Dave Toole are father and son.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference from page
22 of the Company's 1997 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from page
22 of the Company's 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is incorporated by reference from
pages 23-27 of the Company's 1997 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants and consolidated financial
statements required by this Item are incorporated by reference from pages 28-43
of the Company's 1997 Annual Report to Stockholders.
21
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant intends to file with the Commission a definitive proxy statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A for
its Annual Meeting of Stockholders to be held March 6, 1998 ( the "Proxy
Statement") and the information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference from the section captioned "Election of Directors" in
the Proxy Statement. The information required by this item relating to the
Company's executive officers is included under the caption "Executive Officers
of the Registrant" in Part I of this Report on Form 10-K. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated by reference from the section captioned "Compliance
with Section 16(a) of the Exchange Act" in the proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "Executive Compensation and Related
Information".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "Election of Directors" and "Ownership of
Securities".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "Certain Transactions".
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K:
(1) Financial Statements
The following consolidated financial statements of GaSonics
International Corporation are set forth in the Company's 1997 Annual
Report to the Stockholders and are incorporated by reference hereto
in Item 8:
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NUMBER
---------------
<S> <C>
Consolidated Balance Sheets--September 30, 1997 and 1996............. 28
Consolidated Statements of Operations--Years Ended September 30,
1997, 1996 and 1995................................................ 29
Consolidated Statements of Stockholders' Equity--Years Ended
September 30, 1997, 1996 and 1995.................................. 30
Consolidated Statements of Cash Flows--Years Ended September 30,
1997, 1996 and 1995................................................ 31
Notes to Consolidated Financial Statements........................... 32-42
Report of Independent Public Accountants............................. 43
</TABLE>
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
<TABLE>
<CAPTION>
PAGE NUMBER
---------------
<S> <C>
Report of Independent Public Accountants on Schedule................. 27
Schedule II--Valuation and Qualifying Accounts....................... 28
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1(1) Form of Agreement and Plan of Merger between Gasonics International Corporation, a California
corporation, and the Registrant
2.2(1) Stock Purchase Agreement dated February 28, 1991 between Emerson Electric Company and the Registrant
2.3(5) Asset Purchase Agreement dated as of July 30, 1995 among the Registrant, GaSonics International
Japan, K.K., Tekisco, Inc. and Kishimoto Sangyo Co. Ltd.
2.4(5) Stock Purchase Agreement dated as of July 30, 1995 between the Registrant and Kishimoto Sangyo Co.
Ltd.
2.5(5) Commission Agreement dated as of July 30, 1995 between the Registrant and Kishimoto Sangyo Co. Ltd.
3.1(1) Certificate of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
3.3(10) Amended and Restated Bylaws of the Registrant
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.1(1) Form of Common Stock Certificate
10.1(1) Form of Indemnification Agreement between the Company and each of its officers and directors
10.2(11) 1994 Stock Option/Stock Issuance Plan and forms of agreements thereunder, as amended and restated
effective December 17, 1996
10.3(11) 1994 Employee Stock Purchase Plan, as amended and restated effective December 17, 1996
10.4(1) Form of Light Industrial Lease between Teachers Insurance and Annuity Association of America and the
Registrant for office space at 2730 Junction Avenue, San Jose, California
10.5(1) Secured Promissory Note dated February 28, 1991 in the principal amount of $4,500,000 issued by the
Registrant and Branson International Plasma Corporation in favor of Emerson Electric Company
10.6(1) Promissory Note dated November 10, 1993 in the principal amount of $359,375 issued by the Registrant
in favor of Robert Champagne
10.7(1) Continuing Guaranty dated November 10, 1993 in the principal amount of $359,375 issued by the
Registrant in favor of Robert Champagne
10.8(1) Promissory Note dated November 10, 1993 in the principal amount of $339,999.60 issued by Dave Toole
in favor of the Registrant
10.9(1) Demand Note dated November 30, 1993 in the principal amount of $62,500 issued by Dave Toole in favor
of the Registrant
10.10(1) Sale of Shares Pursuant to Redemption Agreement dated November 10, 1993 between Robert Champagne and
the Registrant
10.11(1) Non-Compete Agreement dated as of November 10, 1993 and Addendum to Non-Compete Agreement dated as of
November 18, 1993 between Robert Champagne and the Registrant
10.12(1) Credit Agreement dated August 6, 1993 between Union Bank, International Plasma Corporation and the
Registrant
10.13(2) Business Loan Agreement dated April 28, 1994 between Registrant and Union Bank and related Promissory
Note
10.14(3) Lease Agreement dated November 14, 1994 between Registrant and Realtech Properties I, L.P.
10.15(4) Loan Agreement dated April 19, 1995 between Registrant and Union Bank, a California banking
corporation
10.16(4) Lease Agreement dated June 5, 1995 between Registrant and Orchard Investment Company
10.17(6) Underwriting Agreement dated March 21, 1994 by and among the Registrant, the underwriters named
therein and the selling stockholders named therein
10.18(7) Underwriting Agreement dated March 9, 1995 by and among the Registrant, the underwriters named
therein and the selling stockholders named therein
10.19(8) Continuing Guarantee Agreement dated July 31, 1995, executed by the Registrant in favor of the Bank
of Tokyo, Ltd.
10.20(9) Loan Agreement dated March 4, 1996 between Registrant and Union Bank
10.21(11) Loan Agreement dated March 4, 1997 between Registrant and Union Bank
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.22(12) Loan Agreement dated May 1, 1997 between Registrant and Bank of Tokyo-Mitsubishi
13 Annual Report to Stockholders for the year ended September 30, 1997
Such Annual Report, except for those portions that are expressly incorporated herein by reference,
is furnished for the information of the Securities and Exchange Commission and is not to be deemed
as filed as a part of this Form 10-K
16.1(1) Letter from Ernst & Young dated March 8, 1994 regarding the change in the Certifying Accountant of
the Registrant
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Independent Public Accountants
24.1 Power of Attorney (Included on signature page)
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to identically numbered exhibits included in
Registrant's Registration Statement on Form S-1 (File No. 33-74872)
declared effective with the Securities and Exchange Commission on March
21, 1994.
(2) Incorporated by reference to identically numbered exhibit included in
Registrant's Report on Form 10-Q for the quarter ended June 30, 1994.
(3) Incorporated by reference to an exhibit in Registrant's Report on Form
10-Q for the quarter ended December 31, 1994.
(4) Incorporated by reference to exhibits included in Registrant's Report on
Form 10-Q for the quarter ended June 30, 1995.
(5) Incorporated by reference to exhibits filed with Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 24, 1995.
(6) Incorporated by reference to an exhibit in Registrant's Registration
Statement on Form S-1 (File No.33-74872) declared effective with the
Securities and Exchange Commission on March 21, 1994.
(7) Incorporated by reference to an exhibit in Registrant's Registration
Statement on Form S-1 (File No.33-89636) declared effective with the
Securities and Exchange Commission on March 9, 1995.
(8) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1995.
(9) Incorporated by reference to an exhibit included in Registrant's Report on
Form 10-Q for the quarter ended March 31, 1996.
(10) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996
(11) Incorporated by reference to an exhibit included in Registrant's Report on
Form 10-Q for the quarter ended March 31, 1997
(12) Incorporated by reference to an exhibit included in Registrant's Report on
Form 10-Q for the quarter ended June 30, 1997
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter ended
September 30, 1997.
(c) Exhibits. See list of exhibits under (a) (3) above.
(d) Financial Statement Schedules. See list of schedules under (a) (2)
above.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 22, 1997 GASONICS INTERNATIONAL CORPORATION
By: /s/ DAVE TOOLE
-----------------------------------------
Dave Toole
PRESIDENT & CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Monte M. Toole and David J. Toole, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Report on Form 10-K and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated below:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MONTE M. TOOLE
- ------------------------------ Chairman of the Board of December 22, 1997
Monte M. Toole Directors
Chief Executive Officer,
/s/ DAVE TOOLE President and Director
- ------------------------------ (Principal Executive December 22, 1997
Dave Toole Officer)
Vice President, Finance
/s/ TERRY R. GIBSON and Chief Financial
- ------------------------------ Officer (Principal December 22, 1997
Terry R. Gibson Financial and Accounting
Officer)
/s/ KENNETH L. SCHROEDER
- ------------------------------ Director December 22, 1997
Kenneth L. Schroeder
/s/ F. JOSEPH VAN POPPELEN
- ------------------------------ Director December 22, 1997
F. Joseph Van Poppelen
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To GaSonics International Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in GaSonics International Corporation's Annual
Report to Stockholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated October 27, 1997. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in the index under item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
October 27, 1997
27
<PAGE>
SCHEDULE II
GASONICS INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
DESCRIPTIONS PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------------------------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Years Ended September 30,:
1995............................................. $ 288 $ 179 $ -- $ 98 $ 369
1996............................................. $ 369 $ 240 $ 2 $ -- $ 611
1997............................................. $ 611 $ 4,637 $ 2,645 $ 7,173 $ 720
INVENTORY RESERVES
Years Ended September 30,:
1995............................................. $ 1,201 $ 1,212 $ -- $ 851 $ 1,562
1996............................................. $ 1,562 $ 2,266 $ -- $ 1,593 $ 2,235
1997............................................. $ 2,235 $ 1,725 $ -- $ 1,138 $ 2,822
</TABLE>
28
<PAGE>
GASONICS
GaSonics International Corporation 1997 Annual Report
<PAGE>
[Contains black box covering page. Page is otherwise blank]
<PAGE>
GaSonics International
is the world leader in
Integrated Clean-TM- solutions:
an expanding and
increasingly critical
phase of semiconductor
manufacturing.
1
<PAGE>
Geometries are
shrinking.
[Graphic of arrow head]
As device geometries shrink below
.25-MICRON-, the danger increases that
unwanted materials can adversely affect
semiconductor performance and
production yield.
2
<PAGE>
Wafers are
getting larger.
[Graphic of man w/blue circle]
Expanding wafer sizes dramatically
increase the number of finished
semiconductor devices that
can be damaged by interlayer
residues.
3
<PAGE>
And the number
of layers
is increasing.
[Graphic of woman and colored circles]
As material layers increase,
the number and kind of potentially
damaging residues and unwanted
materials increase as well.
4
<PAGE>
Removing unwanted
materials from the etched
wafer is a more challenging
and fragmented process
than ever. GaSonics cuts
through the complexity with
advanced process technology
and integrated solutions.
5
<PAGE>
GaSonics International
helps semiconductor
manufacturers achieve
fundamental goals: higher
yield, higher throughput,
reduced environmental
impact and lower cost
per wafer.
6
<PAGE>
The fundamental
benefits of
Integrated Clean.
[Graphic of man with circle]
c - Cost
y - Yield
t - Throughput
e - Environmental Impact
7
<PAGE>
Clean technologies
are proliferating.
[Graphic of woman and numbered boxes]
Manufacturing processes between etch
and deposition are proliferating as
existing processes fragment and new
ones emerge. GaSonics International
is meeting emerging challenges with
innovative clean technologies.
8
<PAGE>
Readying Tomorrow's
Technologies
GaSonics International has been part of the semiconductor industry's growth
and evolution since the beginning. The Company's products have been used to
manufacture each new generation of the industry's cutting edge products,
including every generation of advanced microprocessors. Today we continue to
lead our served market with advanced technology, superior engineering and
world-class service and support.
GaSonics International is a dominant player in the world market for
photoresist removal equipment, used in the process step immediately following
the etching of semiconductor wafers. From this leadership position GaSonics
recognizes the challenges ahead. Processes for cleaning wafer surfaces,
including photoresist removal, are becoming segmented as manufacturers
introduce new materials. New cleaning processes must be developed to remove
tougher residues from smaller areas. And all the process steps between etch
and deposition must be managed more effectively to improve production yields
and reduce the cost per wafer.
GaSonics International is now developing advanced process technologies to
address these manufacturing challenges. With our long-term customer
relationships, proven R&D expertise and established market position, GaSonics
International continues to provide technology leadership in one of the
world's most important industries.
9
<PAGE>
Integrating Clean
Solutions Between Etch
and Deposition
Higher performance. Smaller size. Lower cost. To maintain the relentless pace
of Moore's Law, semi-conductor manufacturers must continually increase their
productivity. GaSonics International offers a key solution set with the
introduction of Integrated Clean-TM-. With this initiative, we are extending
our advanced photoresist removal technology and integrating it with new
process technologies, to address more of our customers' needs for material
removal between etch and deposition.
Until recently, wafer cleaning processes were physically separate, employed
multiple user interfaces, and fought each other for space in crowded,
expensive wafer fabrication facilities. Then GaSonics created the PEP-TM-
platform, the industry's first Integrated Clean solution for wafer
manufacturing. The PEP system gives customers higher throughput, improved
time to market, flexibility to mix and match different cleaning technologies
in a single machine, and a graphical user interface that remains stable as
new technologies are brought to the PEP platform.
Customers responded immediately to these important productivity benefits,
making the PEP system the fastest-ramping new product in the Company's
history. The PEP system also benefits GaSonics, because it reduces product
development time for new 200 mm manufacturing solutions that fit into the PEP
platform.
We are already applying our Integrated Clean philosophy to 300 mm wafers,
expected to be an industry standard at the turn of the century. The result:
the Millennia-TM- platform, designed to allow semiconductor manufacturers to
operate even more productively in the new millennium.
10
<PAGE>
GaSonics International
integrates clean
technologies.
[Graphic of woman dancing by numbered boxes]
GaSonics International leads the industry
with Integrated Clean solutions that
flexibly combine multiple process
technologies into compact, high-performance
platforms that enable
high-throughput manufacturing of future
generations of semiconductors.
11
<PAGE>
GaSonics meets its
customers' needs,
worldwide.
[Graphic of man w/flag]
GaSonics International operates locally
in the world's important semiconductor
manufacturing countries, and continues
to build a world-class international
infrastructure.
12
<PAGE>
Delivering Integrated
Clean Solutions to
a Global Market
GaSonics International complements its platform and technology leadership
with an expanding international infrastructure that delivers the Company's
solutions to customers around the world. Our international organization
includes sales and service offices in strategic locations in Europe, Japan,
Korea, Singapore, Taiwan and North America.
GaSonics International provides committed customer service both globally and
locally. For example, our Strategic Spares Network is designed to deliver
spare parts to any customer manufacturing site in the world in a matter of
hours, not days. At the same time, GaSonics engineering personnel can be
found at customer sites throughout the world, working day by day to
implement, maintain and enhance the Company's solutions.
When VLSI Research Inc. asked 37,000 semiconductor manufacturing managers
throughout the world to identify the suppliers that served them best last
year, GaSonics International once again won the prestigious VLSI 10 BEST
Award in its industry segment. This award recognizes the quality of the
Company's technology, the reliability of its products, and the organization
that delivers them.
13
<PAGE>
To Our
Stakeholders
[Graphic of flag]
Fiscal 1997 was a productive year for GaSonics
International despite the semiconductor industry's downturn. We have long
been the technology leader in photoresist removal, the semiconductor
manufacturing process step following etch, and during fiscal 1997 we began
extending our capabilities further along the process spectrum that connects
etch to deposition.
Our ability to integrate fragmented, complex process between etch and
deposition is a significant benefit to our customers, which include most of
the major microprocessor, DRAM and logic manufacturers around the world. As
these companies approach the .18-MICRON- 300 mm era early in the next
millennium, they are looking to us for technology leadership, productivity
improvements and responsive global support. We're delivering all three, with
our directional downstream technology, our development of integrated process
platforms, and our world-class international infrastructure.
All three of these strategic advantages contributed to the strong market
acceptance of our integrated PEP platform, which in fiscal 1997 became the
fastest-ramping new product in the Company's history. In fact, the PEP system
contributed 60% of total revenues in the fourth fiscal quarter, just one year
after volume shipments began. The PEP system gives us a stable, common
platform that accelerates our introduction of new technologies and
capabilities. This in turn helps us enter new markets and increase
productivity for our customers. We have already announced our next
breakthrough platform, the Millennia system, which will integrate
etch-to-deposition process steps in 300 mm manufacturing.
14
<PAGE>
For the year, revenues were $121.3 million, the second-highest total in the
Company's history behind the $127.0 million in revenues posted in fiscal
1996. Fiscal year earnings were $5.2 million, or $0.36 per share, excluding a
provision for an uncollectible account receivable and a gain on sale of stock
of a third party. Net income, excluding the items mentioned previously, grew
quarter over quarter throughout the year, and we continued to achieve
excellent balance in our revenue mix, both geographically and between the
logic and memory markets. We broadened our international market leadership by
penetrating important new accounts, most notably in Taiwan, one of Asia's
strongest and most stable regional markets, where we took the lead position
for photoresist removal systems. We also kept up the pace of product
development, to expand our opportunities as the overall semiconductor
manufacturing equipment market shows signs of improvement.
Integrated Clean Solutions
Between Etch and Deposition
For our customers, integrated platforms enable higher manufacturing
throughput, more effective use of limited space in fabrication facilities,
and faster incorporation of new technology. Our PEP system delivers all these
benefits for the fabrication of 200 mm wafers, and it is qualified for
manufacturing processes down to .18-MICRON-. During fiscal 1997 we increased
PEP throughput by 20% and added significant enhancements, including support
for Standard Machine Interface (SMIF), as well as advanced automation
techniques which improve factory utilization.
Our Millennia platform, introduced in the fourth fiscal quarter, is designed
to distinguish us even more clearly as the Integrated Clean leader. The
Millennia combines four different process stations sharing the same
downstream microwave source and the same easy-to-use software interface. It's
designed for the industry's highest-throughput 300 mm wafer manufacturing at
and below .25-MICRON-. We anticipate that I300I, a semiconductor
manufacturing consortium that includes more than a dozen of our customers,
will qualify the Millennia platform for .25-MICRON- applications in 1998.
With common platforms, we now can mix and match process technologies to
provide Integrated Clean solutions between etch and deposition. One of the
defining features of GaSonics platforms is the reduction of toxic chemical
processing in Integrated Clean solutions. This in turn reduces the
environmental impact of semiconductor manufacturing and lowers the cost of
doing business for our customers. I believe all GaSonics International
stakeholders should be proud of this aspect of our work. Cleaner
manufacturing is certainly good for our customers, and it's vital to the
health of our planet.
Readying Tomorrow's
Technologies
The coming generations of semiconductors are challenging manufacturers at a
fundamental level. Smaller device geometries, larger wafers, and more layers
per wafer all put downward pressure on yield -- which translates directly to
reduced profitability. GaSonics is delivering the advanced process
technologies manufacturers need to achieve high yields in a complex, changing
technological domain.
I have already mentioned our historic core competency in photoresist removal,
an area where our down-stream microwave technology gives us an important edge
over competitors employing less advanced plasma-based technologies. We
provide our customers higher throughput and higher yields with photoresist
removal, and we will continue to extend our mastery of this complex,
fundamental process technology.
15
<PAGE>
Many of the PEP systems we sold in fiscal 1997 included a chamber for
post-etch residue removal, a process technology we anticipated would grow in
importance as semiconductor manufacturing technology evolves below
.35-MICRON-. The higher density plasmas and more complex chemistries used in
advanced etching require more effective cleaning before the subsequent
deposition of a new wafer layer, and residue removal will continue to grow in
importance as customers move through .25-MICRON- to .18-MICRON-. We expect
that PEP revenues related to residue removal will continue to grow as a
percentage of sales in fiscal 1998.
We're also preparing a set of emerging process technologies that we believe
will become critical at .18-MICRON- -- an inflection point for new
manufacturing materials and processes. One of the future challenges we are
already addressing in the laboratory is the increasing depth of the extremely
small holes, known as vias, in device interconnect layers. New process
technologies will be required to clear vias of residues that impact yield and
performance, and we are progressing well with several new techniques that
address this need. I expect also that new manufacturing materials and
processes will create opportunities for us to provide additional solutions
for mask removal and preparation before deposition. During fiscal 1997, we
established an advanced interconnect development group to focus on these and
other market opportunities as they evolve.
Strengthening our International
Infrastructure
One of GaSonics International's greatest strengths lies in our existing
relationships with customers around the world. Our platform and technology
roadmaps are designed to meet our customers' existing and future needs;
continued development of our international infrastructure enables us to meet
those needs locally, on a global basis.
Our long-term strategy has always been to enter new geographic markets with
distribution relationships and then to shift to direct operations when we are
established in the region. In fiscal 1997, we reached that transition point
in Korea, Singapore and Taiwan. In Japan, our successful liquid-crystal
display (LCD) manufacturing equipment division is poised to take over
Japanese sales and drive marketing of our semiconductor manufacturing systems
as well; I expect this transition to be complete early in calendar 1998. The
one exception to our direct distribution strategy continues to be Teltec
GmbH, our German distributor of 26 years, which consistently delivers
outstanding performance.
At the heart of GaSonics International's infrastructure is our R&D
organization, which drives our platform and technology efforts. We plan to
grow our R&D investment in absolute dollars over the next few years, and to
aggressively recruit the engineering talent we will need to extend our
existing technology leadership. Our outstanding R&D organization is well
complemented by a worldwide service and support team that during the year
helped GaSonics International earn two of our industry's highest awards.
For the second straight year we received the VLSI Research Inc. 10 BEST Award
in our industry category. In addition, National Semiconductor Corporation
presented us with its first-ever Gold Award in its Quest for Gold supplier
quality program. I should point out that both awards acknowledge the quality
of our service and support on an international basis. We were also pleased to
receive recognition for the PEP 3510A, chosen by the editors of SEMICONDUCTOR
INTERNATIONAL magazine as one of the year's best products. Congratulations to
everyone who helped us earn these awards.
16
<PAGE>
Looking Ahead
In fiscal 1998, we will aggressively drive the technology, platform and
business execution roadmaps described earlier in this letter. I have stressed
throughout the previous few years the importance of establishing sound and
efficient business processes throughout the Company. In combination with
strong management these processes help us stay focused on doing exactly what
we have to do under whatever market conditions apply. In the coming year, we
intend to focus on four key initiatives: extending our global leadership in
the photoresist removal market; qualifying our integrated Millennia platform;
developing new, next-generation Integrated Clean technologies; and converting
to 100% direct operations in Japan.
I believe that in fiscal 1998, the market outlook should become clearer for
our LCD systems and our innovative, vertical high-pressure (VHP) system. One
potential opportunity lies in low thermal budget applications in the
manufacture of high speed logic devices. Another opportunity for VHP lies in
the manufacture of oxynitride transistor gates in .18-MICRON-
semiconductors. This would constitute an entirely new market for the Company,
but it's one I'm confident we have the technology to tackle effectively. Also
in fiscal 1998, we anticipate continued revenue and earnings growth for our
LCD business in Japan, based on the number of customers that have designed
our systems into upcoming production processes.
Turning to the semiconductor market as a whole, we see the expansion in
production capacity for logic devices that began in calendar 1997 continuing
in 1998. We believe that the DRAM market will follow a year later. Based on
our long experience with the cyclical semiconductor manufacturing market, we
took our financial and organizational medicine early in the down cycle. Now
we're ready, willing, and able to accelerate our growth and reap the rewards
of our product and infrastructure investments. I want to thank all our
customers, employees, vendors and stockholders for their support and
contributions during this period, and I look forward to reporting to you on
our progress in the coming year.
Sincerely,
/s/ DAVE TOOLE
DAVE TOOLE
President and
Chief Executive Officer
[Graphic of man in suit]
17
<PAGE>
GaSonics International is
positioned to outpace
market growth.
[Graphic of man running in suit next to a clock]
As semiconductor manufacturing capacity
once again increases, GaSonics
International is ready to leverage its
strong customer relationships and
technology leadership.
18
<PAGE>
With its platform / process
technologies and
business systems in place,
GaSonics International
continues to lead the
market for Integrated Clean
solutions between etch
and deposition.
19
<PAGE>
Financial Statements
[Graphic of man in sitting on stool below an equation]
20
<PAGE>
Selected Financial Data 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Consolidated Balance Sheets 28
Consolidated Statements of Operations 29
Consolidated Statements of Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to the Consolidated Financial Statements 32
Report of Independent Public Accountants 43
21
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Years ended September 30,
-------------------------------------------------------------------------
(in thousands, except per share amounts) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations:
Net sales $121,256 $127,043 $102,047 $66,590 $41,882
Gross margin 53,964 62,626 57,930 37,865 21,509
Operating income 2,780 12,370 19,942 14,450 5,777
Net income(1)(2) 3,007 8,930 16,126 9,890 3,512
Net income per share(1)(2) $ 0.21 $ 0.65 $ 1.21 $ 0.87 $ 0.34
Balance Sheet:
Cash, cash equivalents and
marketable securities $ 24,884 $ 25,909 $ 36,599 $21,230 $ 1,217
Working capital 62,971 59,224 55,130 32,129 9,467
Total assets 104,382 96,430 85,367 43,682 20,083
Long-term debt, less current portion -- -- -- -- 1,807
Stockholders' equity $ 79,193 $ 72,689 $ 63,188 $33,370 $ 8,418
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Quarterly 1997
Unaudited (in thousands, except per share data) 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 29,686 $ 29,592 $30,126 $31,852
Gross margin 12,662 13,187 13,574 14,541
Operating income (loss) 1,374 1,735 (2,574) 2,245
Net income (loss)(1) 929 1,281 (764) 1,561
Net income (loss) per share(1) $ 0.07 $ 0.09 $ (0.06) $ 0.11
Price range per share $6.88-$12.63 $10.25-$19.62 $8.13-$15.63 $12.63-$23.06
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Quarterly 1996
Unaudited (in thousands, except per share data) 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 33,782 $ 36,997 $29,058 $27,206
Gross margin 18,505 19,973 13,182 10,966
Operating income (loss) 6,418 6,225 859 (1,132)
Net income (loss)(2) 4,354 4,270 774 (468)
Net income (loss) per share(2) $ 0.32 $ 0.32 $ 0.06 $ (0.03)
Price range per share $10.25-$24.50 $8.75-$13.88 $9.25-$15.13 $6.63-$11.00
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income for the third quarter and year ended September 30, 1997
includes a $2.9 million or $0.20 per share after tax write-off of an
uncollectible account receivable due from a customer in Thailand (See Note 2
to the Consolidated Financial Statements) and also includes a non-operating
after tax gain of approximately $790,000 or $0.05 per share realized from the
sale of stock from a third party (see Note 8 of Notes to the Consolidated
Financial Statements).
(2) Net income for the third quarter and year ended September 30, 1996
includes a non-operating after tax gain of approximately $93,000 or $0.01 per
share realized from the sale of stock from a third party (see Note 8 of Notes
to the Consolidated Financial Statements).
STOCK AND DIVIDEND INFORMATION. The Company has one class of stock
outstanding, its Common Stock, which has a par value of $.001 per share. The
Company's Common Stock is traded on The Nasdaq National Market under the
symbol "GSNX." The price range per share is the highest and lowest closing
prices as reported by The Nasdaq National Market.
In October 1995, the Company declared a three-for-two stock split in the
form of a 50% stock dividend paid on November 20, 1995. All share and per
share amounts have been restated to give effect to the stock split.
The Company has not paid cash dividends on its Common Stock since
inception, and its Board of Directors presently plans to reinvest the
Company's earnings in its business. Accordingly, it is anticipated that no
cash dividends will be paid to holders of Common Stock in the foreseeable
future. Additionally, certain financial covenants set forth in the Company's
bank line of credit limit the Company's ability to pay cash dividends. On
September 30, 1997, the Company had approximately 150 stockholders of record
and approximately 3,219 beneficial stockholders.
22
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
With the exception of historical facts, the following Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
future sales, gross margins, the anticipated increase in inventories and
operating expenses and the sufficiency of financial resources to support
operations, and are subject to the Safe Harbor provisions created by that
statute. Such statements are based on current expectations that involve
inherent risks and uncertainties, including those discussed below and under
the heading "Additional Risk Factors" in the Company's 1997 Annual Report on
Form 10-K and in the last paragraph of this Overview, that could cause actual
results to differ materially from those expressed. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak as
of the date hereof. The Company undertakes no obligation to publicly release
the results of any revisions to any forward-looking statements, which may be
made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
Overview
The Company is a leading developer and supplier of a portfolio of products
and services used in the fabrication of advanced integrated circuits ("ICs")
and flat panel displays ("FPDs"). The Company's products consist of
photoresist removal systems, residual removal systems, isotropic etch systems
and high-pressure furnaces for the semiconductor industry and low-pressure
chemical vapor deposition systems ("LPCVD") for the flat panel display
industry. In addition, the Company provides spare parts and upgrades, as well
as maintenance and support services.
The Company's operating results have fluctuated significantly in the past and
will 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 relative proportions 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, the ability of any customer to
finance its purchases of the Company's equipment, 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 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 commercial shipments of four products
introduced in fiscal 1995, the Strata, the VHP, the PEP and the 2106 LPCVD.
Gross margins in fiscal 1996 and 1997 decreased from the level attained in
fiscal 1995, in part, due to startup inefficiencies associated with these
introductions and sales, competitive pricing pressures, changes in product
mix, from higher margin single chamber systems to lower margin dual chamber
systems and an increase in lower margin products sold by the Company's LCD
division in Japan, and other factors. In addition, sales and earnings for the
last half of fiscal 1996 and for fiscal 1997 were materially adversely
impacted by the current semiconductor business slowdown. While the Company
has and is continuing to manage its expenses to partially offset this loss of
income from the decline in revenue and gross margins, it is anticipated that
this slowdown in the industry will continue into next fiscal year and will
continue to have a material adverse affect on the Company's future revenues
and operating results.
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth consolidated statements of operations data of
the Company expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 55.5 50.7 43.2
- -------------------------------------------------------------------------------
Gross margin 44.5 49.3 56.8
- -------------------------------------------------------------------------------
Operating expenses:
Non-recurring charges -- -- .6
Provision for uncollectible account (Note 2) 3.7 -- --
Research and development 14.4 14.2 12.1
Selling, general and administrative 24.1 25.4 24.6
- -------------------------------------------------------------------------------
Total operating expenses 42.2 39.6 37.3
- -------------------------------------------------------------------------------
Operating income 2.3 9.7 19.5
Other income (expense):
Interest expense (.1) -- --
Interest and other income .6 1.0 1.1
Gain on sale of investment 1.0 .1 4.6
- -------------------------------------------------------------------------------
Income before provision for income taxes 3.8 10.8 25.2
Provision for income taxes 1.3 3.8 9.4
- -------------------------------------------------------------------------------
Net income 2.5% 7.0% 15.8%
- -------------------------------------------------------------------------------
</TABLE>
NET SALES. Net sales consist of revenues from system sales, spare part and
upgrade sales and maintenance. Net sales increased 24.5% from $102.0 million
in fiscal 1995 to $127.0 million in fiscal 1996, and decreased 4.5% to $121.3
million in fiscal 1997. During these periods, demand for the Company's
photoresist removal systems, specifically the Company's new PEP dual chamber
platform systems, increased as the Company's customers equipped new or
expanded facilities, resulting in certain instances, in multiple system
purchases by major customers, including new customers. The slight decline in
revenue in fiscal 1997 was due primarily to the general slowdown in incoming
orders experienced by the capital equipment industry since March 1996. This
slowdown was first evident in a slowdown of equipment purchases by major
North American IC manufacturers in the spring of 1996 and eventually spread
to nearly all types of IC manufacturers in nearly all geographic regions.
As a result of the semiconductor business slowdown, the Company experienced
significant delays of new orders and rescheduling of existing orders which
materially adversely affected sales for the last half of fiscal 1996 and all
of fiscal 1997. Sales of single chamber ash/strip products were significantly
adversely impacted by the business slowdown, partially offset by a
significant increase in sales of PEP dual chamber systems. Approximately 50%
of the Company's fiscal 1997 revenues were from PEP products, including both
the photoresist removal and the post etch residue removal systems, as
compared to less than 10% in fiscal 1996.
International sales, which are predominantly to customers based in Europe and
Asia Pacific, accounted for approximately 40%, 54% and 55% of total net sales
in fiscal 1995, 1996 and 1997, respectively. The Company continued to invest
significant resources in international markets, particularly in Japan, Korea,
Singapore, Taiwan, France, Italy, Ireland, Israel and the United Kingdom
during fiscal 1997 in an attempt to increase its global market
24
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
share. The Company's growth in international revenues in fiscal 1996 and 1997
as compared to fiscal 1995 is due in part to the investments made in
establishing a direct sales and service presence in Korea, Singapore, and
Taiwan and increased sales of PEP systems. The Company's percentage of
international sales may fluctuate from period to period, but the Company
anticipates that international sales will continue to account for a
significant portion of net sales in fiscal 1998. However, current Asian
economic conditions may have a significant adverse impact on international
revenues in fiscal 1998.
GROSS MARGIN. The Company's gross margin as a percentage of net sales was
56.8% in fiscal 1995, 49.3% in fiscal 1996 and 44.5% in fiscal 1997. The
decrease in gross margin for fiscal years 1996 and 1997 was attributable to
several factors, including significantly lower sales volume of the Company's
more mature, higher margin single chamber systems, underutilization of the
manufacturing and field service and support operations due to the
semi-conductor industry slowdown and increased revenues from lower margin new
products including PEP systems and flat panel display equipment. The
Company's flat panel display equipment has significantly lower gross margins
than its photoresist removal systems. The Company's gross margin as a
percentage of net sales has been affected by a variety of other 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 adversely impacted by inefficiencies associated with new product
introductions, sales of lower margin PEP and flat panel display systems,
competitive pricing pressures, the general slowdown in the semiconductor
industry, the economic troubles currently being experienced by many Asian
countries, including some of the Company's major markets such as Japan, Korea
and Taiwan, changes in product mix and other factors including those referred
to above. The Company, however, will continue to focus on its gross margin
improvement programs, including the introduction of new value-added
applications, features and options on the PEP systems, targeted cost
reduction programs and controlled spending.
NON-RECURRING CHARGES. In the fourth quarter of fiscal 1995, the Company
recorded a non-recurring charge of $575,000 for the write-off of in-process
research and development associated with certain products acquired as part of
the Company's acquisition of Tekisco, Ltd. ("Tekisco") as they had not
achieved technological feasibility and, in management's opinion, had no
probable alternative future use (see Note 4 of Notes to the Consolidated
Financial Statements).
PROVISION FOR UNCOLLECTIBLE ACCOUNT. In the third quarter of fiscal 1997, the
Company recorded an expense of $4.5 million related to the write-off of an
uncollectible account receivable (see Note 2 of Notes to the Consolidated
Financial Statements).
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of salaries, project materials, consultant fees and other costs associated
with the Company's research and development efforts. Research and development
expenses as a percentage of net sales increased from 12.1% in fiscal 1995 to
14.2% in fiscal 1996 and to 14.4% in fiscal 1997. In absolute dollars,
research and development expenses increased from $12.3 million in fiscal 1995
to $18.0 million in fiscal 1996 and decreased to $17.4 million in fiscal
1997. The absolute dollar increase in fiscal year 1996 is primarily
attributable to the hiring of additional personnel to support ongoing and new
product development. The Company has maintained its research and development
spending near pre-slowdown levels to continue critical programs, particularly
the launch of the PEP platform and the support of the expanding number of
available applications, development of the post etch residue removal
applications, the development of the Millenia 300mm platform, the support of
the LCD flat panel business and applications development of the VHP
technology. The Company anticipates that research and development expenses
will increase in absolute dollars in fiscal 1998 due, in part, to the
anticipated significant continued investment in new product development.
25
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $25.1 million in fiscal 1995 to $32.3 million in
fiscal 1996 and decreased to $29.3 million in fiscal 1997. As a percentage of
net sales, selling, general and administrative expenses increased from 24.6%
in fiscal 1995 to 25.4% in fiscal 1996 and decreased to 24.1% in fiscal 1997.
Specifically, expenses increased in fiscal 1996 for employee and third-party
commissions and overall employee compensation relating to the hiring of new
personnel, principally in marketing and sales to support the expansion of
operations in Europe and Asia Pacific. The decrease in selling, general and
administrative expenses from fiscal 1996 to fiscal 1997 was principally due
to lower third party commissions which are payable on a significant portion
of the international sales and, to a lesser extent, to the reduction in
headcount that occurred in the fourth quarter of fiscal 1996. Third party
commissions can fluctuate significantly depending on the mix of domestic
versus foreign sales in any period. The Company has built and is continuing
to build a worldwide direct sales and support organization which is
decreasing 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 the current level of selling, general, and administrative
spending will increase in absolute dollars in fiscal 1998.
OTHER INCOME (EXPENSE). Other income and expense consists primarily of
interest expense, interest income and gain on sale of stock of a third party.
Interest and other income increased from fiscal 1995 to fiscal 1996 primarily
due to interest income resulting from increased investments in marketable
securities that resulted from the investment of proceeds received from the
sale of Common Stock in the Company's secondary offering in March 1995. The
increase in interest and other income from fiscal 1996 to fiscal 1997 was
primarily due to the gain from the sale of stock of a third party offset in
part by the decrease in interest income resulting from a significant use of
cash during the first three quarters and increased interest expense
pertaining to the borrowings by GaSonics International Japan K.K. under the
credit facility.
Net income for fiscal 1995, fiscal 1996 and fiscal 1997 was favorably
impacted by sales of a portion of the shares held by the Company in a
corporation, which shares were received in exchange for technology and
certain services rendered in fiscal 1990. The Company realized pretax gains
in fiscal years 1995, 1996 and 1997 of approximately $4,700,000, $143,000 and
$1,215,000, respectively, from these sales (see Note 8 of Notes to the
Consolidated Financial Statements).
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 37.3% in
fiscal 1995 and 35.0% in fiscal years 1996 and 1997. The decrease in the tax
rate for fiscal years 1996 and 1997 from fiscal 1995 resulted primarily from
the benefit derived from the Company's foreign sales corporation due to the
increase in international sales during fiscal 1996 and 1997 as compared to
fiscal 1995, as well as from benefits derived from research and development
credits and from tax exempt income from certain marketable securities. In the
past, the Company has derived significant benefits from research and
development tax credits, and, to the extent such credits may be unavailable
to the Company in the future, the Company's effective tax rate could increase.
Liquidity and Capital Resources
During fiscal 1997, cash, cash equivalents and marketable securities
decreased by $1.0 million to $24.9 million at September 30, 1997 from $25.9
million at September 30, 1996. Operations provided cash of approximately $6.4
million and $1.9 million in fiscal 1995 and 1997, respectively, and used cash
of approximately $5.6 million in fiscal 1996. Investing activities utilized
cash of approximately $7.4 million, $5.7 million and $5.9 million in fiscal
1995, 1996 and 1997, respectively, for the acquisition of property and
equipment including $2.4 million for the acquisition of Tekisco in 1995.
Capital spending in fiscal years 1996 and 1997 included approximately $2.0
million
26
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
and $2.8 million, respectively, for the purchase and installation of a new
management information system. Investing activities used cash of
approximately $18.5 million in fiscal 1995 for the purchase of marketable
securities and provided cash in fiscal 1996 and fiscal 1997 of approximately
$13.4 million and $1.7 million, respectively. In fiscal 1995, financing
activities provided $14.0 million principally related to the sale of Common
Stock in the Company's secondary public offering in March 1995 and in
connection with an employee stock purchase plan, and borrowings of $2.9
million in connection with the Company's acquisition of Tekisco, partially
offset by repurchases of Common Stock from an existing stockholder. Financing
activities in fiscal 1996 and 1997 provided cash of $2.1 million and $3.9
million, respectively, primarily from the sale of stock under the Company's
employee stock purchase program. In fiscal 1997, financing activities also
included the repayment of a loan by the Company's subsidiary, GaSonics
International Japan K.K., to the Bank of Tokyo-Mitsubishi in the amount of
$2.5 million and the acquisition of a new credit facility with the same bank.
At September 30, 1997 borrowings under this agreement totaled $2.0 million
(see Notes 5 and 6 of Notes to the Consolidated Financial Statements).
At September 30, 1997, the Company had working capital of approximately $63.0
million. Accounts receivable increased to $28.3 million from $23.0 million at
the end of fiscal 1996 primarily due to increased sales in the fourth quarter
of fiscal 1997 compared to fiscal 1996 and longer credit terms related to
receivables in Japan. Inventories remained relatively flat increasing from
$26.8 million at the end of fiscal 1996 to $27.1 million at the end of fiscal
1997. The Company expects future inventory levels to fluctuate from period to
period, and believes that because of the relatively long manufacturing cycle
of its equipment, its investment in inventories will continue to require a
significant portion of working capital. As a result of such investment in
accounts receivable inventories, the Company may be subject to an increasing
risk of inventory obsolescence and accounts receivable write-offs, which could
materially adversely affect the Company's operating results.
At September 30, 1997, the Company's principal sources of liquidity consisted
of approximately $13.3 million of cash and cash equivalents, $11.6 million in
marketable securities, and $20.0 million available under the Company's
unsecured working capital line of credit with Union Bank which was entered
into on March 4, 1997. A commercial letter of credit provision of $500,000
and a foreign exchange contract provision of $1.0 million is also provided
under the line of credit. 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
September 30, 1997, except for $69,193 outstanding under the letter of credit
provision, there were no borrowings under this line, and management believes
the Company was in compliance with its bank covenants. The line of credit
bears interest at the lower of 1.5% above the bank's adjusted Libor-rate or
at the bank's reference rate (8.5% at September 30, 1997) and expires in
February 1998 (see Note 5 of Notes to the Consolidated Financial Statements).
On May 1, 1997 the Company's wholly-owned Japanese subsidiary, GaSonics
International Japan K.K., entered into a 300 million Japanese yen credit
facility with the Bank of Tokyo-Mitsubishi against a promissory note which is
secured by a letter of guarantee issued by the Company. The credit facility
bears interest at 1.65% and expires in February 1998 (see Note 5 of Notes to
the Consolidated Financial Statements). As of September 30, 1997, GaSonics
International Japan K.K. had borrowed approximately 244 million Japanese yen
(equivalent to approximately $2.0 million in U.S. dollars) under this credit
facility.
The Company believes that anticipated cash flows from operations, funds
available under its existing revolving line of credit, funds available under
the 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 address its working capital or
capital equipment needs. There can be no assurance that additional financing
will be available when required or, if available, will be on reasonable terms.
27
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
September 30,
-------------------------
(in thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,307 $11,774
Marketable securities 11,577 14,135
Trade accounts receivable, net of allowance for
doubtful accounts of $720 in 1997 and $611 in 1996 28,315 23,032
Inventories 27,075 26,817
Net deferred tax asset 4,868 3,451
Prepaid expenses and other current assets 2,617 3,204
- ----------------------------------------------------------------------------------------------
Total current assets 87,759 82,413
- ----------------------------------------------------------------------------------------------
Property and equipment:
Furniture and fixtures 758 741
Machinery and equipment 16,602 10,807
Leasehold improvements 4,090 3,762
- ----------------------------------------------------------------------------------------------
21,450 15,310
Less -- accumulated depreciation and amortization (6,509) (3,735)
- ----------------------------------------------------------------------------------------------
Net property and equipment 14,941 11,575
- ----------------------------------------------------------------------------------------------
Deposits and other assets 1,682 2,442
- ----------------------------------------------------------------------------------------------
Total assets $104,382 $96,430
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ -- $ 2,455
Borrowings under credit facility 2,036 --
Accounts payable 6,812 7,318
Income taxes payable 3,054 1,100
Other accrued liabilities 12,886 12,316
- ----------------------------------------------------------------------------------------------
Total current liabilities 24,788 23,189
- ----------------------------------------------------------------------------------------------
Long-term liabilities:
Deferred rent 401 552
Commitments (Note 9)
Stockholder's equity:
Preferred stock, $0.001 par value: Authorized shares -- 2,000,000 -- --
Common stock, $0.001 par value: Authorized shares -- 20,000,000
Outstanding shares -- 13,916,101 and 13,472,276 14 13
Additional paid-in capital 35,833 31,400
Subscription receivable (100) --
Unrealized gain on investments -- 902
Note receivable from stockholder -- (65)
Retained earnings 43,446 40,439
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 79,193 72,689
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $104,382 $96,430
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended September 30,
-------------------------------------------
(in thousands, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $121,256 $127,043 $102,047
Cost of sales 67,292 64,417 44,117
- -------------------------------------------------------------------------------------------------
Gross margin 53,964 62,626 57,930
- -------------------------------------------------------------------------------------------------
Operating expenses:
Non-recurring charges -- -- 575
Provision for uncollectible account (Note 2) 4,517 -- --
Research and development 17,410 18,006 12,346
Selling, general and administrative 29,257 32,250 25,067
- -------------------------------------------------------------------------------------------------
Total operating expenses 51,184 50,256 37,988
- -------------------------------------------------------------------------------------------------
Operating income 2,780 12,370 19,942
Other income (expense):
Interest expense (91) (64) (10)
Interest and other income, net 722 1,289 1,095
Gain on sale of investment 1,215 143 4,700
- -------------------------------------------------------------------------------------------------
Income before provision for income taxes 4,626 13,738 25,727
Provision for income taxes 1,619 4,808 9,601
- -------------------------------------------------------------------------------------------------
Net income $ 3,007 $ 8,930 $ 16,126
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net income per share $ 0.21 $ 0.65 $ 1.21
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares 14,482 13,644 13,285
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized Note
Common Stock Additional Gain on Receivable Total
--------------- Paid-in Subscription Marketable From Retained Stockholders'
(in thousands, except share data) Shares Amount Capital Receivable Securities Stockholder Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 12,142,095 $12 $15,991 -- -- $(265) $17,632 $33,370
Issuance of common stock
from secondary offering 1,110,000 1 12,494 -- -- -- -- 12,495
Issuance of common stock
under employee stock
purchase plan 100,529 -- 754 -- -- -- -- 754
Issuance of common stock
under stock option plan 26,917 -- 219 -- -- -- -- 219
Forgiveness of note
receivable from stockholder -- -- -- -- -- 100 -- 100
Unrealized gain on
marketable securities -- -- -- -- 2,376 -- -- 2,376
Repurchase of common stock (150,000) -- (3) -- -- -- (2,249) (2,252)
Net income -- -- -- -- -- -- 16,126 16,126
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 13,229,541 13 29,455 -- 2,376 (165) 31,509 63,188
Issuance of common stock
under employee stock
purchase plan 197,510 -- 1,708 -- -- -- -- 1,708
Issuance of common stock
under stock option plan 45,225 -- 237 -- -- -- -- 237
Forgiveness of note receivable
from stockholder -- -- -- -- -- 100 -- 100
Change in unrealized gain
on marketable securities -- -- -- -- (1,474) -- -- (1,474)
Net income -- -- -- -- -- -- 8,930 8,930
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 13,472,276 13 31,400 -- 902 (65) 40,439 72,689
Issuance of common stock
under employee stock
purchase plan 138,325 -- 1,348 -- -- -- -- 1,348
Issuance of common stock
under stock option plan 305,500 1 3,085 (100) -- -- -- 2,986
Forgiveness of note receivable
from stockholder -- -- -- -- -- 65 -- 65
Change in unrealized gain
on marketable securities -- -- -- -- (902) -- -- (902)
Net income -- -- -- -- -- -- 3,007 3,007
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 13,916,101 $14 $35,833 $(100) -- -- $43,446 $79,193
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Years ended September 30,
----------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,007 $ 8,930 $ 16,126
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,773 2,901 770
Provision for doubtful accounts 4,637 242 179
Forgiveness of note receivable from stockholder 65 100 100
Write-off of in-process research and development -- -- 575
Gift of stock to employees -- -- 111
Changes in assets and liabilities:
Accounts receivable, net (12,564) (6,300) (7,586)
Inventories 2,387 (7,694) (10,275)
Prepaids and other current assets (830) (3,479) (1,581)
Deposits and other assets 554 (1,697) (123)
Accounts payable (505) (26) 3,796
Income taxes payable 1,954 (293) 1,077
Accrued liabilities 570 2,260 3,242
Deferred Rent (151) (69) (43)
Note payable -- (439) --
- -------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,897 (5,564) 6,368
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (25,636) (55,097) (90,499)
Proceeds from sales of marketable securities 27,292 68,492 71,970
Purchases of property and equipment (5,935) (6,979) (4,965)
Proceeds from sales of property and equipment -- 1,254 --
Payment for purchase of Tekisco, net of cash acquired -- -- (2,409)
- -------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (4,279) 7,670 (25,903)
- -------------------------------------------------------------------------------------------
Cash flows from financing ativities:
Proceeds from note payable to bank -- -- 2,894
Payments of note payable to bank (2,455) -- --
Proceeds from borrowings under credit facility 2,036 -- --
Proceeds from issuance of common stock 4,334 2,073 13,357
Repurchase of common stock from stockholder -- -- (2,252)
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,915 2,073 13,999
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,533 4,179 (5,536)
Cash and cash equivalents at beginning of period 11,774 7,595 13,131
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,307 $ 11,774 $ 7,595
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
31
<PAGE>
Notes to the Consolidated Financial Statements
September 30, 1997
1. Organization and Operations of the Company
GaSonics International Corporation (the "Company") is a developer and
supplier of products and services used in the fabrication of advanced
integrated circuits ("semiconductors" or "ICs") and flat panel displays
("FPDs"). The Company markets its products in the United States, Europe, and
the Asia Pacific region primarily to large semiconductor and liquid crystal
manufacturing concerns. The Company is subject to a number of risks
including, but not limited to, volatility in the semiconductor markets and
the related demand for semiconductor equipment and the risk of inventory
obsolescence resulting from new product developments by competitors.
In October 1995, the Company declared a three-for-two stock split in the form
of a 50% stock dividend paid on November 20, 1995. All common and common
equivalent shares and per share amounts in the accompanying consolidated
financial statements have been restated to give effect to the stock split.
2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries and branches
after elimination of intercompany accounts and transactions.
USE OF ESTIMATES. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ materially from those estimates.
FISCAL YEAR. The Company maintains a fifty-two/fifty-three week fiscal year
cycle ending on the Saturday closest to September 30. Fiscal 1997, fiscal
1996 and fiscal 1995 contain fifty-two weeks. For external reporting
purposes, the Company indicates its fiscal period as ending on September 30.
CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Statements of
Cash Flows, the Company considers all highly liquid investments with an
original maturity of 90 days or less to be cash equivalents.
Cash paid for interest, including amounts paid under capital lease
obligations, and domestic and foreign income taxes was as follows (in
thousands):
- -----------------------------------------------------------
Years ended September 30,
-------------------------------
1997 1996 1995
- -----------------------------------------------------------
Interest $ 94 $ 41 $ 10
Income taxes $625 $6,188 $8,732
- -----------------------------------------------------------
The Company had one significant noncash transaction for the year ended
September 30, 1997, related to the Submicron Technologies PLC (see
Concentration of Credit Risk below) write-off of their uncollectible account.
Noncash activity included a before tax bad debt of $4.5 million.
INVESTMENTS IN MARKETABLE SECURITIES. Pursuant to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company's investments are
classified as available-for-sale and are stated at fair value. The Company's
investments in debt securities mature at various dates through July 1999.
The fair value of available-for-sale securities was determined based on
quoted market prices at the reporting date for the instruments.
32
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
The components of available-for-sale securities by major security type as of
September 30, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Aggregate Gross
Amortized Fair Unrealized
Cost Value Holding Gains
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 1997
Debt securities issued by states of the United States
and political subdivisions of the states $15,750 $15,750 $ --
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Fiscal 1996
Corporate debt securities $ 2,050 $ 2,050 $ --
Debt securities issued by states of the United States
and political subdivisions of the states 11,183 11,183 --
Equity securities -- 902 902
- ------------------------------------------------------------------------------------------------
$13,233 $14,135 $902
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of available-for-sale securities, excluding the Company's
equity securities which are discussed in Note 8, were approximately $27.3
million, $68.5 million and $72.0 million in fiscal 1997, 1996 and 1995,
respectively. Gross realized gains on those sales were approximately $3,000,
$22,000 and $12,000 in fiscal 1997, 1996 and 1995, respectively. The Company
used specific identification as the cost basis in computing realized gains.
The net unrealized holding gain on available-for-sale securities has been
included as a separate component of stockholders' equity.
REVENUE RECOGNITION AND PRODUCT WARRANTY. Revenues from the Company's
products are generally recognized upon shipment. The Company provides for the
estimated costs of installation and warranty at the time revenue is
recognized. Maintenance and service revenues account for less than 10% of net
sales and are recognized as the related work is performed.
MAJOR CUSTOMERS. One customer accounted for 10%, 11% and 20% of net sales for
each of fiscal years 1997, 1996 and 1995, respectively. Two other customers
accounted for 11% of net sales in fiscal 1997.
SOFTWARE DEVELOPMENT COSTS. SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires the
capitalization of certain computer software development costs incurred after
technological feasibility is established. Amounts qualifying for
capitalization under the statement are immaterial and have not been
capitalized to date.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market and include material, labor and manufacturing costs.
Inventory is valued at currently adjusted standards which approximate actual
costs on a first-in, first-out basis.
The Company provides inventory reserves for excess, obsolete, damaged or lost
inventory. The process of estimating required inventory reserves is
judgmental and is based on a number of factors which require input and
discussion among various members of management. Such factors include changes
in customer demand, changes in technology and other economic factors.
Inventories consisted of the following (in thousands):
September 30,
----------------------
1997 1996
- ------------------------------------------------------------
Raw materials $13,919 $12,985
Work-in-process 6,809 7,648
Finished goods 6,347 6,184
- ------------------------------------------------------------
$27,075 $26,817
- ------------------------------------------------------------
- ------------------------------------------------------------
33
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are
generally depreciated over the estimated useful lives of the assets (four to
seven years) using the straight-line method. Leasehold improvements are
amortized on a straight-line basis over the shorter of the useful lives of
the assets or the remaining lease term. Assets acquired under capital leases
are recorded at the present value of the related lease obligations and
amortized on a straight-line basis over the related lease term.
OTHER ACCRUED LIABILITIES. Other accrued liabilities included the following
(in thousands):
September 30,
--------------------
1997 1996
- -------------------------------------------------
- -------------------------------------------------
Warranty $ 3,232 $ 2,916
Sales commissions 2,804 2,526
Employee compensation 3,236 2,514
Accrued purchase price -- 1,261
Other 3,614 3,099
- -------------------------------------------------
$12,886 $12,316
- -------------------------------------------------
- -------------------------------------------------
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 computed using the treasury stock method.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, foreign translation and
exchange gains and losses, which have not been material, are reflected in the
accompanying consolidated statements of operations.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of temporary
cash investments and trade receivables. The Company has cash investment
policies that limit the amount of credit exposure to any one financial
institution evaluated as highly creditworthy. Concentration of credit risk
with respect to trade receivables exists because the Company's revenues are
derived primarily from the sale of photoresist removal equipment to companies
in the semiconductor industry. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
A write-off of accounts receivable was recorded in the third quarter of
fiscal 1997 for the uncollectible account receivable due from SubMicron
Technologies PLC in Thailand. The Company recorded a $4.5 million pre-tax
charge to cover the unpaid balance on accounts receivable, less the value of
the recovered equipment, which the Company anticipates reselling in the
future.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
EFFECT ON RECENT ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" which
requires disclosure of basic and diluted earnings per share and is effective
for periods ending subsequent to December 15, 1997. The pro forma effect of
adoption of SFAS No. 128 would be as follows:
- ----------------------------------------------------------------------------
Years ended September 30,
-----------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Reported net income per share $0.21 $0.65 $1.21
Basic net income per share (pro forma) $0.22 $0.67 $1.26
Diluted net income per share (pro forma) $0.21 $0.65 $1.21
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
34
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structures," which will be
adopted by the Company in fiscal 1998. SFAS No. 129 requires companies to
disclose certain information about their capital structure. The Company does
not anticipate that SFAS No. 129 will have a material impact on its
consolidated financial statement disclosures.
In June 1997, The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" both of which will be
adopted by the Company in fiscal 1998. SFAS No. 130 requires companies to
disclose certain information regarding the nature and amounts of
comprehensive income included in the financial statements. SFAS No. 131
requires companies to disclose certain information about operating segments
within their business. The Company does not anticipate that SFAS No. 130, or
SFAS No. 131, will have a material impact on its consolidated financial
statement disclosures.
3. Geographic Area Data
The Company's operations by geographical area for the three years ended
September 30, 1997 were as follows:
<TABLE>
<CAPTION>
United Other
States Japan Foreign Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales:
Domestic $ 54,899 $7,829 $ 3,280 $ -- $ 66,008
Exports Europe 16,998 -- -- -- 16,998
Exports Asia/Pacific 35,557 -- -- -- 35,557
Exports Japan 2,693 -- -- -- 2,693
Intercompany 1,916 1,155 7,046 (10,117) --
- ---------------------------------------------------------------------------------------------------------
Total revenues $112,063 $8,984 $10,326 $(10,117) $121,256
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Operating income $ 67 $1,729 $ 967 $ 17 $ 2,780
Identifiable assets $ 95,003 $8,273 $ 2,302 $ (1,196) $104,382
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
1996
Net sales:
Domestic $ 58,967 $7,904 $ 1,791 $ -- $ 68,662
Exports Europe 23,788 -- -- -- 23,788
Exports Asia/Pacific 30,554 -- -- -- 30,554
Exports Japan 4,039 -- -- -- 4,039
Intercompany 1,212 1,496 4,744 (7,452) --
- ---------------------------------------------------------------------------------------------------------
Total revenues $118,560 $9,400 $ 6,535 $ (7,452) $127,043
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) $ 12,037 $ (505) $ 835 $ 3 $ 12,370
Identifiable assets $ 86,458 $9,250 $ 1,935 $ (1,213) $ 96,430
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
1995
Net sales:
Domestic $ 60,845 $ 8 $ 201 $ -- $ 61,054
Export Europe 19,885 -- -- -- 19,885
Export Asia/Pacific 18,832 -- -- -- 18,832
Exports Japan 2,276 -- -- -- 2,276
Intercompany -- -- 965 (965) --
- ---------------------------------------------------------------------------------------------------------
Total revenues $101,838 $ 8 $ 1,166 $ (965) $102,047
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) $ 20,334 $ (539) $ 147 $ -- $ 19,942
Identifiable assets $ 80,876 $4,040 $ 451 $ -- $ 85,367
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's operating units. Accordingly, the revenue, operating income (loss)
and identifiable assets shown for each geographic area may not be indicative
of the amounts that would have been reported if the operating units were
independent of one another.
Intercompany sales between areas are accounted for based on established
intercompany sales prices.
Operating income (loss) is revenue less related costs and direct and
allocated operating expenses, excluding interest and, for all areas except
the United States, the unallocated portion of corporate expenses. United
States operating income is net of corporate engineering and development and
administrative expenses.
Corporate assets include assets maintained for general purposes, principally
cash equivalents and marketable securities.
4. Acquisition of Tekisco
In August 1995, the Company purchased the net assets, intellectual property
and all of the outstanding stock of Tekisco, Ltd., a Japanese-based supplier
of low-pressure chemical vapor deposition systems for flat panel display
manufacturing, which is now known as its Liquid Crystal Display ("LCD")
division, for cash of approximately $2.4 million and contingent consideration
of approximately $2.0 million. The contingent consideration was based on
specified future events, including the attainment of certain sales levels and
the provision of marketing and sales services to be provided by Kishimoto
Sangyo Co. Ltd, the company from which Tekisco was acquired. In fiscal 1996,
the Company determined that such contingencies were met or were likely to be
met and recorded the full $2.0 million of the contingent consideration as
goodwill. The related liability, net of amounts paid in fiscal 1996, was
accrued at September 30, 1996. In February 1996, the LCD division was merged
with the Company's wholly-owned subsidiary, GaSonics International Japan, K.K.
The acquisition was accounted for as a purchase, and the results of Tekisco
from the date of acquisition forward have been recorded in the Company's
consolidated financial statements. In connection with the acquisition, net
intangibles of $3.1 million were acquired, including the $2.0 million
contingent consideration recorded in fiscal 1996, of which $575,000 is
reflected as a one time charge to operations for the write-off of in-process
research and development that had not reached technological feasibility and,
in management's opinion, had no probable alternative future use. The one time
charge is reflected in the Company's consolidated statement of operations as
a non-recurring charge within operating expenses in fiscal 1995. The
remaining intangibles, net of accumulated amortization of approximately
$815,000 and the write-off of in-process research and development of
$575,000, are included in Deposits and other assets in the accompanying
consolidated balance sheet and are being amortized over the useful life of
five years. Amortization expense related to the amortization of the goodwill
was $436,000, $210,000 and $0 for the years ended September 30, 1997, 1996
and 1995, respectively, and is included in the accompanying Consolidated
Statements of Operations.
The purchase price, including the amounts payable under the commission
agreement, was allocated to the fair market value of net assets acquired as
follows (in thousands):
- ------------------------------------------------------------------------------
Accounts receivable $ 57
Inventory 176
Prepaid expenses 46
Property and equipment, net 1,875
Other assets 49
Intangibles, including in-process research and development 3,107
Accounts payable and accrued liabilities (901)
- ------------------------------------------------------------------------------
Net assets acquired $4,409
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
36
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
The following unaudited pro forma information shows the results of operations
for the twelve months ended September 30, 1995 as if the acquisition had
occurred at the beginning of the period. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made
at the beginning of the respective period presented or of future operations
of the combined companies. The pro forma results for 1995 combine the
Company's results for the twelve-month period ended September 30, 1995 with
the results of Tekisco, for the same period through the date of acquisition.
The following unaudited pro forma results include the straight-line
amortization of intangibles over a period of five years.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Year ended
(in thousands, except per share data) September 30, 1995
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
<S> <C>
Revenue $104,628
Net income $ 15,286
Net income per share $ 1.15
Weighted average common and common equivalent shares outstanding 13,285
- ----------------------------------------------------------------------------------------
</TABLE>
5. Line of Credit Agreement and Credit Facility
The Company has an unsecured $20,000,000 revolving line of credit agreement
(the "Agreement") with a bank which expires on February 27, 1998. There were
no borrowings outstanding under the Agreement as of September 30, 1997.
Borrowings bear interest at the lower of 1.5% above the bank's adjusted
Libor-rate or at the bank's reference rate (8.5% at September 30, 1997). The
line of credit agreement contains provisions that limit the ability of the
Company to pay cash dividends and require the maintenance of specified levels
of tangible net worth and certain financial ratios. Management believes the
Company was in compliance with the financial covenants of the Agreement as of
September 30, 1997.
Under the Agreement, the Company has a provision for foreign exchange
contracts of up to $1.0 million, and may also request standby letters of
credit not to exceed $500,000. As of September 30, 1997, there were letters
of credit outstanding in the amount of $69,163.
In May 1997, the Company's wholly-owned subsidiary in Japan, GaSonics
International Japan, K.K. entered into an agreement with the Bank of
Tokyo-Mitsubishi to secure a credit facility to provide operating capital to
fund operations. The credit facility provides for borrowings up to a maximum
of 300 million Japanese yen (equivalent to approximately $2.5 million in U.S.
dollars), and is secured by a letter of guarantee issued by the Company. The
outstanding balance bears interest at 1.625% per annum and is due and payable
on demand. This credit facility expires on February 27, 1998. At September
30, 1997, borrowings under this credit facility agreement were approximately
$2.0 million. The Company intends to enter into a new agreement or extend the
term of the existing credit facility prior to the due date; however, there
can be assurance that such financing will be available when required or, will
be on reasonable terms.
6. Note Payable
In August 1995, the Company's wholly-owned subsidiary in Japan, GaSonics
International Japan K.K. borrowed 270 million Japanese yen (equivalent to
approximately $2.5 million in U.S. dollars as of September 30, 1996) to the
Bank of Tokyo against a promissory note which was secured by a letter of
guarantee issued by the Company. The loan carried an interest rate of 1.625%
per annum and was due and payable on January 31, 1997. The primary purpose of
the loan was to fund the purchase of Tekisco (see Note 4 -- Acquisition of
Tekisco). In April 1997, the Company repaid the outstanding balance on the
note.
37
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
7. Income Taxes
The Company accounts for income taxes pursuant to the provisions of SFAS No.
109, "Accounting for Income Taxes," which requires an asset and liability
approach to accounting for income taxes.
The provision (credit) for income taxes consisted of the following (in
thousands):
- ------------------------------------------------------------------------------
Years ended September 30,
--------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Current
Federal $1,509 $4,528 $ 8,464
State 223 518 1,628
- ------------------------------------------------------------------------------
Total current 1,732 5,046 10,092
- ------------------------------------------------------------------------------
Deferred
Federal (98) (211) (437)
State (15) (27) (54)
- ------------------------------------------------------------------------------
Total deferred (113) (238) (491)
- ------------------------------------------------------------------------------
Provision for income taxes $1,619 $4,808 $ 9,601
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory Federal income tax rate of 35.0% in fiscal years 1997,
1996 and 1995, as follows:
- ------------------------------------------------------------------------------
Years ended September 30,
--------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Statutory Federal tax rate 35.0% 35.0% 35.0%
State income taxes, net 3.6 4.0 4.8
Foreign operations 1.7 (1.8) (1.3)
Research and development credit (5.5) (2.7) (2.2)
Tax exempt income (4.6) (2.0) (1.2)
Other 4.8 2.5 2.2
- ------------------------------------------------------------------------------
Provision for income taxes 35.0% 35.0% 37.3%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The major components of the net deferred tax asset are as follows (in
thousands):
September 30,
-----------------------
1997 1996
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Inventory reserves $2,833 $2,176
Accrued warranty 1,230 1,085
Deferred rent 155 207
Accrued vacation 327 256
Other temporary differences 825 533
- -----------------------------------------------------------------------------
Deferred tax asset 5,370 4,257
Deferred tax liabilities (502) (806)
- -----------------------------------------------------------------------------
Total net deferred tax asset $4,868 $3,451
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
38
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
8. Investment in IPEC
During fiscal 1990, the Company and Integrated Process Equipment Corporation
(IPEC) entered into an agreement in which the Company received 294,600 shares
of IPEC Class A common stock in exchange for certain services and technology.
In fiscal 1997, 1996, and 1995, the Company sold 54,673, 5,000, and 136,927
shares of IPEC common stock, respectively, and realized pretax gains of
$1,215,000, $143,000, and $4,700,000, respectively, which are reported in
Other income (expense) in the accompanying Consolidated Statements of
Operations. As of September 30, 1997, the Company holds no shares of IPEC
common stock.
9. Commitments
The Company leases its facilities and certain machinery and equipment under
operating lease agreements that expire at various dates through June 2005.
Minimum commitments under the non-cancelable leases as of September 30, 1997
were as follows (in thousands):
- -------------------------------------------------
Fiscal Year
1998 $1,615
1999 1,198
2000 403
2001 30
2002 30
Thereafter 90
- -------------------------------------------------
$3,366
- -------------------------------------------------
- -------------------------------------------------
Rent expense was approximately $2,113,000, $2,017,000 and $1,190,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
The Company's lease agreement for one of its facilities provides for the
deferral of three months cash rental payments in fiscal 1990 and subsequent
scheduled rent increases. Rent expense under this agreement is being
recognized on a straight-line basis over the term of the lease. The
difference between the amounts paid and the amounts expensed is classified as
deferred rent in the accompanying Consolidated Balance Sheets.
No new capital lease obligations were incurred in fiscal 1997 or 1996.
10. Incentive Stock Option Plans and Stock Purchase Plan
In November 1993, the Company's President and Chief Executive Officer (the
"President") exercised options to purchase an aggregate of 566,665 shares of
common stock at $0.60 per share, with a 5% interest bearing promissory note
payable to the Company in the amount of $340,000. In January 1994, the Board
of Directors authorized a special bonus program for the President, pursuant
to which $100,000 of the principal of the promissory note would be forgiven
upon his completion of each calendar year of service to the Company from
January 1, 1994 through January 1, 1997. Accordingly, the promissory note has
been amortized to compensation expense in the amounts of $65,000 for fiscal
1997 and $100,000 in fiscal years 1996 and 1995, respectively. The promissory
note was fully amortized at September 30, 1997.
1994 STOCK OPTION/STOCK ISSUANCE PLAN. In fiscal 1994, the Board adopted, and
the stockholders subsequently approved, the 1994 Stock Option/Stock Issuance
Plan (the "1994 Stock Option Plan") and authorized a total of 1,450,000
shares for issuance under the Plan. The 1994 Stock Option Plan replaces the
Company's 1985 Stock Option Plan and the Company's 1988 Stock Option Plan
which have both been terminated. During fiscal years 1997 and 1996, the
Company's Board of Directors authorized, and the stockholders subsequently
approved, an additional 500,000 and 750,000 shares, respectively, for
issuance under the Plan.
39
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
The 1994 Stock Option Plan is divided into three separate components: i) the
Discretionary Option Grant Program under which key employees (including
officers) and consultants may, at the discretion of the Plan Administrator,
be granted options to purchase shares of common stock at an exercise price
not less than 85% of the fair market value of such shares on the grant date,
ii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to the nonemployee Board members
to purchase shares of common stock at an exercise price equal to 100% of the
fair market value of the option shares on the grant date, and iii) the Stock
Issuance Program under which key employees (including officers) and
consultants may be issued shares of common stock directly, either through the
purchase of such shares at a price not less than 85% of their fair market
value at the time of issuance or as a bonus tied to the performance of
services or the Company's attainment of financial objectives. In no event may
the aggregate number of shares of common stock for which any individual
participating in the 1994 Plan may be granted stock options and direct stock
issuances exceed 825,000 shares over the term of the Plan. Options granted
under the Discretionary and Automatic Option Grant Programs have a maximum
term of ten years and generally vest over periods of one to five years from
the date of grant, at the discretion of the Plan Administrator. For 1995
there were 8,917 shares issued under the 1994 Stock Option Plan. There were
no stock issuances in fiscal years 1997 and 1996.
In August 1996, holders of the Company's options were given the opportunity
to exchange previously granted stock options for new common stock options.
Option holders, excluding non-employee directors of the Company, who held an
outstanding stock option with an exercise price in excess of $7.25 per share
were granted a new option with an exercise price of $7.25 per share, the
market price of the common stock on that date, in exchange for his or her
higher-priced option. Each optionee was given the choice of accepting the new
option with a new four year vesting schedule and having the higher-priced
option canceled or rejecting the new option and retaining the higher-priced
option with its original vesting schedule. Under the terms of the new
options, one-quarter of the shares vest one year from the date of grant and
the remaining shares vest in 36 monthly installments. Options to purchase
416,725 shares were so exchanged.
Option and stock issuance activity under the 1994 Stock Option Plan was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Options Outstanding
--------------------------------------------------------
Weighted
Shares Average
Available Number of Price Exercise
For Grant Shares per Share Price
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 664,150 769,500 $ 7.17- $ 9.67 $ 7.92
Stock issuances (8,917) -- -- --
Granted (344,925) 344,925 10.67- 19.33 16.00
Exercised -- (18,000) 7.20- 8.67 7.81
Canceled 40,675 (40,675) 7.20- 16.33 9.02
- --------------------------------------------------------------------------------------------------
Balance at September 30, 1995 350,983 1,055,750 7.17- 19.33 10.52
Additional options authorized 750,000 -- -- --
Granted (1,002,325) 1,002,325 7.25- 20.00 8.63
Exercised -- (45,225) 9.13- 14.38 7.55
Canceled 505,580 (505,580) 7.20- 20.00 13.43
- --------------------------------------------------------------------------------------------------
Balance at September 30, 1996 604,238 1,507,270 7.20- 20.00 8.37
Additional options authorized 500,000 -- -- --
Granted (653,850) 653,850 6.88- 23.00 9.82
Exercised -- (305,500) 7.17- 13.25 8.04
Canceled 349,559 (349,559) 7.20- 19.33 10.83
- --------------------------------------------------------------------------------------------------
Balance at September 30, 1997 799,947 1,506,061 $ 6.88- $23.00 $ 8.50
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
As of September 30, 1997, options to purchase 291,383 are vested and
exercisable.
The following table summarizes the options outstanding under the 1994 Stock
Option Plan as of September 30, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Options Outstanding Exercisable Options
----------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
As of Contractual Exercise As of Exercise
Range of Exercise Prices 09/30/97 Life Price 9/30/97 Price
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.88- $ 7.20 236,130 6.73 $ 7.17 89,692 $ 7.20
7.25 595,292 8.87 7.25 132,655 7.25
7.88- 8.67 127,676 8.03 8.44 29,576 8.67
8.88 352,450 9.60 8.88 -- --
9.17- 23.00 194,513 8.59 13.31 39,460 10.34
$6.88- $23.00 1,506,061 8.60 $ 8.50 291,383 $ 7.80
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1994 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1994 Employee Stock Purchase
Plan (the "Purchase Plan") was adopted by the Board of Directors on January
27, 1994 and approved by the stockholders in March 1994. The Purchase Plan is
designed to allow eligible employees of the Company to purchase shares of
common stock, at semiannual intervals, through their periodic payroll
deductions under the Purchase Plan. The Company had initially reserved
300,000 shares of Common Stock for issuance under the Purchase Plan. The
Company's Board of Directors authorized, and the stockholders subsequently
approved, an additional 400,000 shares of Common Stock under the Purchase
Plan in each of fiscal years 1997 and 1996.
Participants in the Purchase Plan may purchase shares at 85% of the lower of
i) the fair market value of the common stock on the participant's entry date
into the offering period or ii) the fair market value on the semi-annual
purchase date. The Purchase Plan will in all events terminate on December 31,
2003.
Of the 1,100,000 shares reserved for the 1994 Employee Stock Purchase Plan,
464,630 shares were purchased as of September 30, 1997.
STOCK BASED COMPENSATION EXPENSE. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based compensation plans and requires additional disclosures for those
companies who elect not to adopt the new method of accounting. The Company
adopted SFAS No. 123 in fiscal 1997, and in accordance with the provisions of
SFAS No. 123, the Company applies APB Opinion 25 and related interpretations
in accounting for its stock option and stock purchase plans.
41
<PAGE>
Notes to the Consolidated Financial Statements, September 30, 1997
The Company's stock plans, as described above, are accounted for under APB
Opinion No. 25, under which no compensation cost has been recognized. Because
the FASB Statement No. 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. Had compensation cost for these plans been determined consistent with
Statement No. 123, the Company's consolidated net income and earnings per
share would have been reduced to the following pro forma amounts:
- -----------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Net income -- as reported $3,007 $8,930
Net income -- pro forma $1,325 $7,615
Earnings per share -- as reported $ 0.21 $ 0.65
Earnings per share -- pro forma $ 0.09 $ 0.56
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
- -----------------------------------------------------------------------------
1997 1996
-----------------------------
Dividend yield 0.0% 0.0%
Expected life of options from vest date 0.9 years 0.9 years
Expected stock volatility 84.8% 84.8%
Risk-free interest rates 5.6%-6.8% 5.4%-6.6%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
The weighted average fair value of option grants using the Black-Scholes
option pricing model was $5.91 and $5.07 for the fiscal years ended September
30, 1997 and 1996, respectively.
42
<PAGE>
Report of Independent Public Accountants
TO GASONICS INTERNATIONAL CORPORATION:
We have audited the accompanying consolidated balance sheets of GaSonics
International Corporation (a Delaware Corporation) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GaSonics International
Corporation and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
October 27, 1997
43
<PAGE>
Corporate Information
BOARD OF DIRECTORS
Monte M. Toole
Chairman,
GaSonics International
Dave Toole
President and
Chief Executive Officer,
GaSonics International
Kenneth L. Schroeder
President, KLA-Tencor
F. Joseph Van Poppelen
The Van Poppelen Company
EXECUTIVE OFFICERS
Dave Toole
President and
Chief Executive Officer
Terry R. Gibson
Vice President, Finance, and
Chief Financial Officer
Avner Shelem
Vice President, General Manager,
Engineering and Operations
Bill Alexander
Vice President, World Wide Sales
and Field Operations
CORPORATE HEADQUARTERS
GaSonics International Corporation
2540 Junction Avenue
San Jose, CA 95134-1909
Telephone: 408-570-7000
Web: http://www.gasonics.com
THE ANNUAL MEETING
The Annual Meeting of stockholders
will be held on March 6, 1998 at
Techmart, 5201 Great America
Parkway, Santa Clara, California.
Those unable to attend the Annual
Meeting are invited to address
questions and comments to
Terry R. Gibson at the Company's
Corporate Headquarters.
FORM 10-K
Stockholders who wish to receive,
without charge, a copy of the
Company's 1997 Annual Report on
Form 10-K filed with the Securities
and Exchange Commission may do
so by writing to the Financial
Relations Board, 180 Montgomery
Street, Suite 940, San Francisco,
California, 94104.
STOCK MARKET INFORMATION
GaSonics International Common
Stock is traded on The Nasdaq
National Market System under the
symbol GSNX.
The following table gives trading
ranges for the Company's Common
Stock during fiscal 1997:
QUARTER STOCK TRADING RANGE,
FISCAL 1997
- -------------------------------------------
First $ 6.88 - $12.63
Second $10.25 - $19.62
Third $ 8.13 - $15.63
Fourth $12.63 - $23.06
TRANSFER AGENT & REGISTRAR
U.S. Stock Transfer Corporation
1745 Gardena Avenue
Glendale, CA 91204-2991
Telephone: 818-502-1404
INVESTOR RELATIONS COUNSEL
The Financial Relations Board
180 Montgomery Street, Suite 940
San Francisco, CA 94104
Telephone: 415-986-1591
INDEPENDENT AUDITORS
Arthur Andersen LLP
River Park Tower
333 West San Carlos Street,
Suite 1500
San Jose, CA 95110-2710
LEGAL COUNSEL
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
GaSonics-Registered Trademark- is a registered trademark of
GaSonics International Corporation
All other trademarks are the property
of their respective owners.
- -C-1998 GaSonics International
Corporation.
All rights reserved.
44
<PAGE>
[Page contains black box, otherwise blank]
45
<PAGE>
[GASONICS INTERNATIONAL LOGO]
GaSonics International Corporation
2540 Junction Avenue
San Jose, CA 95134-1909
Telephone: 408. 570.7000
Web: http://www.gasonics.com
46
<PAGE>
GaSonics International Corporation 1997 Annual Report
47
<PAGE>
Exhibit 21.1
List of Subsidiaries of the Registrant
GaSonics World Trade, Inc.
GaSonics International Europe Limited
GaSonics International Japan, Kabushiki Kaisha
GaSonics International Korea Corporation
GaSonics International France Societe a Responsabilite Limitee
GaSonics International Israel Limited
GaSonics International Ireland Limited
30
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Registration Statements File Nos. 33-76698, 33-79134,
33-89634 and 333-27539 on Form S-8.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
December 19, 1997
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 28 AND 29 IN EXHIBIT 13 OF THE COMPANY'S FORM 10-K FOR THE YEAR AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 13,307
<SECURITIES> 11,577
<RECEIVABLES> 29,035
<ALLOWANCES> 720
<INVENTORY> 27,075
<CURRENT-ASSETS> 87,759
<PP&E> 21,450
<DEPRECIATION> 6,509
<TOTAL-ASSETS> 104,382
<CURRENT-LIABILITIES> 24,788
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 78,588
<TOTAL-LIABILITY-AND-EQUITY> 104,382
<SALES> 121,256
<TOTAL-REVENUES> 121,256
<CGS> 67,292
<TOTAL-COSTS> 67,292
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,637
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> 4,626
<INCOME-TAX> 1,619
<INCOME-CONTINUING> 3,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,007
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
