<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________________ to _______________________
Commission file number: 0-23372
-------
GASONICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2159729
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2540 Junction Avenue, San Jose, California 95134
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 570-7000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
At August 5, 1998, there were 14,169,227 shares of the Registrant's
Common Stock, $0.001 par value per share, outstanding.
<PAGE>
GASONICS INTERNATIONAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and September 30, 1997 3
Condensed Consolidated Statements of Operations for the
three and nine month periods ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Securityholders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
Exhibit Index 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, Sept. 30,
1998 1997
----------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,799 $ 13,307
Marketable securities 16,600 11,577
Trade accounts receivable, net 16,574 28,315
Inventories 23,477 27,075
Net deferred tax asset 4,868 4,868
Prepaid expenses and other current 4,690 2,617
assets
----------- ---------
Total current assets 82,008 87,759
Property and equipment, net 14,973 14,941
Deposits and other assets 1,205 1,682
----------- ---------
Total assets $ 98,186 $104,382
----------- ---------
----------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under credit facility $ 1,141 $ 2,036
Accounts payable 4,027 6,812
Income taxes payable 918 3,054
Accrued expenses 12,968 12,886
----------- ---------
Total current liabilities 19,054 24,788
----------- ---------
Long-term liabilities 267 401
----------- ---------
Stockholders' equity:
Common stock and
additional paid-in capital 37,634 35,847
Subscription receivable - (100)
Note receivable from stockholder (250) -
Retained earnings 41,481 43,446
----------- ---------
Total stockholders' equity 78,865 79,193
----------- ---------
Total liabilities and
stockholders' equity $ 98,186 $104,382
----------- ---------
----------- ---------
</TABLE>
See accompanying notes.
3
<PAGE>
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $23,595 $30,126 $84,062 $89,404
Cost of sales 16,426 16,552 48,769 49,981
------- ------- ------- -------
Gross margin 7,169 13,574 35,293 39,423
------- ------- ------- -------
Operating expenses:
Write-off of accounts receivable (see Note 5) - 4,517 - 4,517
Research & development 5,401 4,425 15,805 12,842
Selling, general & administrative 8,479 7,206 23,190 21,529
------- ------- ------- -------
Total operating expenses 13,880 16,148 38,995 38,888
------- ------- ------- -------
Operating income (loss) (see Note 6) (6,711) (2,574) (3,702) 535
Other income:
Interest and other income, net 433 183 769 474
Gain on sale of stock - 1,215 - 1,215
------- ------- ------- -------
Income (loss) before provision for income taxes (6,278) (1,176) (2,933) 2,224
Provision (credit) for income taxes (2,076) (412) (968) 778
------- ------- ------- -------
Net income (loss) $(4,202) $ (764) $(1,965) $ 1,446
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share - Basic (see Note 7) $ (0.30) $ (0.06) $ (0.14) $ 0.11
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share - Diluted (see Note 7) $ (0.30) $ (0.06) $ (0.14) $ 0.10
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares 14,045 13,600 13,996 13,577
------- ------- ------- -------
------- ------- ------- -------
Weighted average common & common equivalent
shares 14,045 13,600 13,996 14,067
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
4
<PAGE>
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used for) operating activities $ 9,560 $(3,052)
-------- ---------
Cash flows from investing activities:
Purchases of property & equipment (3,037) (3,238)
(Increase) decrease in marketable securities (5,023) 1,679
-------- ---------
Net cash used for investing activities (8,060) (1,559)
-------- ---------
Cash flows from financing activities:
Decrease in borrowings under credit facility (896) -
Proceeds from issuance of common stock 1,888 1,452
-------- ---------
Net cash provided by financing activities 992 1,452
-------- ---------
Net increase (decrease) in cash and cash equivalents 2,492 (3,159)
Cash & cash equivalents at beginning of period 13,307 11,774
-------- ---------
Cash & cash equivalents at end of period $15,799 $ 8,615
-------- ---------
-------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
GASONICS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
financial position and the results of operations of the Company for the
interim periods. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles. The results of operations for the nine months ended
June 30, 1998 are not necessarily indicative of the operating results to be
expected for the full fiscal year. Such financial statements should be read
in conjunction with the information contained in the Company's Annual Report
on Form 10-K for the year ended September 30, 1997 and quarterly report on
Form 10-Q for the periods ended December 31, 1997 and March 31, 1998.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- -------------
(unaudited)
<S> <C> <C>
Raw Materials $13,068 $13,919
Work in Process 4,342 6,809
Finished Goods 6,067 6,347
----------- -------------
$23,477 $27,075
----------- -------------
----------- -------------
</TABLE>
3. NET INCOME PER SHARE
Net income per share data has been computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from stock options
(using the treasury stock method).
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which simplifies and replaces the standards for computing earnings per
share previously found in Accounting Principles Board Opinion ("APB") No. 15.
SFAS No. 128 requires companies to compute under two different methods, basic
and diluted earnings per share, and to disclose the methodology used for the
calculation. All prior period earnings per share data presented have been
restated to conform to the requirements under SFAS No. 128.
6
<PAGE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structures", which will be adopted by the Company in fiscal 1999. The
adoption of SFAS No. 129 is not anticipated to have a material impact on its
consolidated financial statement disclosures of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" both of which will be adopted by the Company in fiscal 1999. 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 either
SFAS No. 130, or SFAS No. 131, will have a material impact on its consolidated
financial statement disclosures.
5. WRITE-OFF ACCOUNTS RECEIVABLE
The three and nine month periods ended June 30, 1997 include a $4.5 million
write-off of an uncollectible accounts receivable due from a customer in
Thailand. The write-off covers the unpaid balance in accounts receivable,
less the value of the recovered equipment, which the Company resold during
fiscal year 1998.
6. CHARGES TAKEN DURING THE QUARTER ENDED JUNE 30, 1998
The three and nine month periods ended June 30, 1998 include pre-tax charges of
approximately $5.0 million, related primarily to reserves for potential excess
inventory, accelerated write-downs of certain demonstration equipment, costs of
a reduction in force completed in June and costs of facility consolidations.
7
<PAGE>
7. RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during this
period. Diluted earnings per common share for the three and nine months ended
June 30, 1997 and 1998, were calculated using the treasury stock method to
compute the weighted average common stock outstanding. As a result, the
Company's reported earnings per share for fiscal 1997 were restated. There has
been no impact on reported earnings per share (EPS) data when compared to basic
and diluted earnings per share calculated under the provisions of SFAS No. 128
for the three and nine month periods ended June 30, 1997.
<TABLE>
<CAPTION>
PER SHARE
---------
FOR THE THREE MONTHS ENDED JUNE 30, 1997 LOSS SHARES AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss $ (764,000)
BASIC LOSS PER SHARE
Loss available to common stockholders $ (764,000) 13,600,000 $(0.06)
Effect of Dilutive Securities:
Options issued to purchase Common stock 0
DILUTIVE LOSS PER SHARE
Loss available to common stockholders $ (764,000) 13,600,000 $(0.06)
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PER SHARE
---------
FOR THE THREE MONTHS ENDED JUNE 30, 1998 LOSS SHARES AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss $(4,202,000)
BASIC LOSS PER SHARE
Loss available to common stockholders $(4,202,000) 14,045,000 $(0.30)
Effect of Dilutive Securities:
Options issued to purchase Common stock 0
DILUTIVE LOSS PER SHARE
Loss available to common stockholders $(4,202,000) 14,045,000 $(0.30)
- ------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PER SHARE
---------
FOR THE NINE MONTHS ENDED JUNE 30, 1997 INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 1,446,000
BASIC EARNINGS PER SHARE
Income available to common stockholders $ 1,446,000 13,577,000 $ 0.11
Effect of Dilutive Securities:
Options issued to purchase Common stock 490,000
DILUTIVE EARNINGS PER SHARE
Income available to common stockholders $ 1,446,000 14,067,000 $ 0.10
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PER SHARE
---------
FOR THE NINE MONTHS ENDED JUNE 30, 1998 LOSS SHARES AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss $(1,965,000)
BASIC LOSS PER SHARE
Loss available to common stockholders $(1,965,000) 13,996,000 $(0.14)
Effect of Dilutive Securities:
Options issued to purchase Common stock 0
DILUTIVE LOSS PER SHARE
Loss available to common stockholders $(1,965,000) 13,996,000 $(0.14)
</TABLE>
9
<PAGE>
ITEM 2. 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", 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 only 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. This discussion should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements
and Notes to the Condensed Financial Statements presented in the Company's
1997 Annual Report on Form 10-K and quarterly report on Form 10-Q for the
periods ended December 31, 1997 and March 31, 1998, available upon request,
for a more complete understanding of the Company's financial position,
business and results of operations.
RESULTS OF OPERATIONS
NET SALES for the quarter ended June 30, 1998 decreased 21.7% to $23.6
million compared to net sales of $30.1 million for the quarter ended June 30,
1997. For the nine month period ending June 30, 1998, net sales decreased
6.0% to $84.1 million compared to net sales of $89.4 million for the same
period last fiscal year.
Sales for the third quarter and first nine months of fiscal 1998 were
negatively impacted by the current poor economic climate in Asia and Japan
and the overall worldwide slowdown in the semiconductor industry. Although
North American sales for the nine months ended June 30, 1998 increased over
the same period last year, North American sales for the third quarter ended
June 30, 1998 decreased 20% from the same period in fiscal 1997. The Company
is continuing to experience order delays and reschedulings of previously
ordered equipment by North American and Asian customers. It is anticipated
that such delays and reschedulings will continue to adversely impact the
Company's business and results of operations for the foreseeable future. In
general, DRAM suppliers continue to be cautious due to continuing pricing
pressure and a supply/demand imbalance. Logic and microprocessor
manufacturers have recently been adversely impacted by the introduction of
the sub $1,000 PC and by the PC industry's move to a quick turns inventory
model. Additionally, the foundry business is experiencing the cumulative
impact of the slowdown in Asia and inventory corrections previously mentioned.
For the third quarter of fiscal 1998 sales to customers in North America,
Europe and Asia Pacific accounted for approximately 51%, 24% and 25% of net
sales, respectively, as compared to
10
<PAGE>
approximately 71%, 16% and 13%, respectively, for the same period last year.
For the nine month period ended June 30, 1998 sales to customers in North
America, Europe and Asia Pacific accounted for approximately 56%, 24% and 20%
of net sales, respectively, compared to approximately 47%, 16% and 36%,
respectively, for the nine month period ended June 30, 1997.
As a result, in part, of the apparent caution on the part of North American
customers and the continuing impact of the poor financial situation in Asia
and Japan, the Company believes that its net sales for the next several
quarters will be below prior year period levels and may fall below net sales
reported in the quarter ended June 30, 1998.
GROSS MARGINS as a percentage of net sales for the third quarter and nine
month periods ended June 30, 1998 were 30.4% and 42.0%, respectively,
compared to 45.1% and 44.1% for the same quarter and nine month periods of
fiscal 1997. Gross margins for the third quarter and nine month periods ended
June 30, 1998 were impacted by approximately $2.5 million of charges to
increase reserves for potentially excess raw materials and spares and service
inventory and for certain potentially obsolete finished units. The charges
for raw materials and spares and service inventory were incurred given the
lack of near term visibility and the concern that such inventory may not be
used within the next twelve to twenty-four months. The charge related to
finished units was for certain older generation single chamber tools which
have not met sales expectations. These charges were also driven partially by
the success of the Company's Performance Enhancement Platform (PEP).
Customers have migrated to the PEP platform at a much higher rate than was
anticipated, resulting in reduced demand for single chamber systems.
Excluding the $2.5 million charge to cost of sales for the above mentioned
inventory reserves, gross margins for the third quarter and nine month
periods ended June 30, 1998 would have been 41.0% and 45.0%, respectively.
The Company's gross margin as a percentage of net sales including service and
support revenues is affected by a variety of other factors, including the mix
and average selling prices of products sold and manufacturing costs and the
costs associated with new product introductions and enhancements. The
Company expects that its gross margin may be materially adversely impacted by
inefficiencies associated with new product introductions, sales of lower
margin PEP systems and flat panel display equipment products, competitive
pricing pressures, the general slowdown in the semiconductor industry, the
economic troubles currently being experienced by many companies in Asia,
including companies in some of the Company's major markets such as Japan and
Korea, changes in product mix and other factors. The Company 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. However, the
Company expects its gross margin rates for the next several quarters will
decline as compared to prior periods due to the impact of anticipated lower
sales volume and the fixed cost of manufacturing and service and support.
A WRITE-OFF OF ACCOUNTS RECEIVABLE was recorded in the third quarter of
fiscal 1997 for the uncollectible accounts 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 has resold during fiscal 1998.
There was no such comparable charge during the third quarter of fiscal 1998.
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
11
<PAGE>
and development expenses for the third quarter of fiscal 1998 were $5.4
million or 22.9% of net sales compared to $4.4 million or 14.6% of net sales
for the third quarter of fiscal 1997. For the nine month periods ended June
30, 1998 and 1997, research and development expenses were $15.8 million or
18.8% of net sales and $12.8 million or 14.4% of net sales, respectively.
The increase in fiscal 1998 spending over fiscal 1997 is primarily
attributable to the Company's continued investment in the development of the
Millennia 300mm platform as well as increased spending in the development of
new technologies, processes and products designed to bring new clean and
advanced strip applications to the marketplace. Research and development
expenses for the third quarter and nine month periods of fiscal 1998 also
included approximately $500,000 in charges related to accelerated write-downs
of certain older generation applications development equipment and consulting
charges. Excluding these charges, research and development spending would
have been $4.9 million for the third quarter of fiscal 1998, representing a
9% reduction from the preceding quarter. However, such expenses for the nine
month period of fiscal 1998 would have been 11% over the comparable period of
fiscal 1997. The Company has taken a number of cost reduction actions over
the past several quarters, including a reduction in discretionary spending,
severe hiring restrictions, reprioritizing programs, reductions in capital
spending and, more recently, shut-down days. In late June 1998, the Company
conducted a reduction in force affecting approximately 8% of the Company's
combined population of temporaries, contractors and regular employees. The
Company anticipates that research and development expenses in absolute
dollars may decrease from its current level over the next two quarters,
exclusive of any special charges.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $8.5 million in the
third quarter of fiscal 1998 and $23.2 million for the first nine months of
fiscal 1998, from $7.2 million and $21.5 million, respectively, for the same
periods of fiscal 1997. Included in the third quarter and nine month periods
ended June 30, 1998 are charges of approximately $800,000. Approximately
$500,000 of which is related to a reduction in force that occurred in late
June, 1998 and $300,000 of which is related to the consolidation of the
Company's San Jose, California operations from three to two buildings. This
consolidation of operations will be completed in August in connection with
the expiration of an existing lease. The facilities consolidation has not
reduced the Company's manufacturing or customer service and support
capability. In addition to the reduction in force and facilities charges,
there were approximately $700,000 in charges primarily for the write-down of
older generation demonstration and evaluation equipment, which is
underutilized and is not likely to be sold. Excluding the above charges,
third quarter expenses for fiscal 1998 would have been $7.0 million as
compared to $7.2 million for the same period the prior year and the second
quarter of fiscal 1998. The Company anticipates that selling, general and
administrative expenses may decrease in absolute dollars from the current
level over the next two quarters, exclusive of any special charges, as a
result of previously mentioned cost reduction activities.
OTHER INCOME AND EXPENSES primarily consists of interest income, interest
expense, foreign currency translation gains and losses and royalty income.
Interest expense of approximately $1,000 for the third quarter and $25,000
for the nine month period ended June 30, 1998 compared to $10,000 for the
quarter and $38,000 for the nine month period ended June 30, 1997, was
incurred as a result of borrowing under a short-term credit facility from the
Bank of Tokyo-Mitsubishi by the Company's wholly-owned subsidiary in Japan,
GaSonics International Japan
12
<PAGE>
K.K. As of June 30, 1998, borrowings under this loan agreement were 161.9
million yen which is equivalent to approximately $1,140,000. Interest income
from the Company's short-term investments was approximately $284,000 for the
third quarter and $742,000 for the nine month period ended June 30, 1998, as
compared to $140,000 and $542,000 for the same periods of fiscal 1997. The
increase in interest income primarily resulted from higher average short-term
investments and cash and cash equivalent balances for the period. Foreign
currency translations resulted in a net gain for the third quarter and nine
month periods of fiscal 1998 of approximately $153,000 and $25,000,
respectively, as compared to net gains of approximately $14,000 and $50,000
for the corresponding periods of fiscal 1997. This foreign currency gain for
the third quarter and nine month periods of fiscal 1998 as compared to the
same periods last year was due to fluctuations in currency exchange rates
primarily in Korea and Japan. For the current third quarter and nine month
periods of fiscal 1998, royalty income was approximately $284,000 and
$743,000, respectively. Royalty income is generated from the terms of the
sale of the Company's industrial plasma cleaning products and services
business that was sold in July, 1997. There was no royalty income for the
same periods last fiscal year. For the third quarter and nine month periods
of fiscal 1997, a gain of $1.2 million was recorded for the sale of third
party stock. There was no such transaction recorded in the same period of
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1998, cash, cash equivalents and
marketable securities increased by $7.5 million to $32.4 million at June 30,
1998 from $24.9 million at September 30, 1997. Operating activities provided
$9.6 million of cash for the nine month period ended June 30, 1998 compared to
$3.1 million of cash used by operations for the corresponding period of fiscal
1997. Cash provided by operating activities was principally due to the decrease
in accounts receivable of $11.2 million as compared to an increase in accounts
receivable of $8.9 million for the same period of fiscal 1997.
Investing activities for the first nine months of fiscal 1998 used cash of
approximately $8.1 million resulting from the investment in marketable
securities of $5.0 million and $3.0 million in purchases of capital equipment.
For the first nine months of fiscal 1997, $3.2 million was used to purchase
capital equipment, partially offset by proceeds of $1.7 million from the sale of
marketable securities.
Financing activities, primarily from the issuance of common stock in connection
with the Company's employee stock purchase and stock option plans, provided $1.9
million for the first nine months of fiscal 1998 and $1.5 million for the same
period last year. Additionally, for the first nine months of fiscal 1998,
$900,000 was used to reduce the borrowings by GaSonics International Japan K.K.
under its credit facility with the Bank of Tokyo-Mitsubishi.
At June 30, 1998 and September 30, 1997, the Company had working capital of
$63.0 million. Accounts receivable at June 30, 1998, decreased $11.2 million
from September 30, 1997, due primarily to lower sales and higher collections of
accounts receivable. Inventory decreased $3.6 million from September 30, 1997
to June 30, 1998, primarily due to charges taken to increase
13
<PAGE>
reserves for potentially excess raw materials and spares and service
inventory and for certain potentially obsolete finished units. The Company
expects future inventory levels to fluctuate from period to period, and
believes that because of the relatively long manufacturing cycle of its
products, its investment in inventories will continue to represent a
significant portion of working capital. As a result of such investment in
inventories, the Company may be subject to an increasing risk of inventory
obsolescence, which could materially adversely affect the Company's operating
results.
The Company's principal sources of liquidity at June 30, 1998, consisted of
approximately $15.8 million in cash and cash equivalents, $16.6 million in
marketable securities and a $20.0 million unsecured line of credit with Union
Bank which expires on March 31, 1999. Under the line of credit, all borrowings
bear interest at the bank's LIBOR rate plus 1.25% per annum. A commercial
letter of credit provision of $500,000 and a foreign exchange contract provision
of $1.0 million are also available under this credit line. Available borrowing
under the credit line is reduced by the amount of any outstanding letters of
credit. As of June 30, 1998, except for $69,193 outstanding under the letter
of credit provision, there were no borrowings outstanding under this line. The
line of credit contains certain covenants, including covenants relating to
financial ratios, profitability and tangible net worth which must be maintained
by the Company. The Company was not in compliance with the line of credit
profitability covenant as of June 30, 1998 because of the Company's loss for the
period. However, Union Bank waived compliance for such period and amended the
Loan Agreement to provide for the payment by the Company of a commitment fee on
the average unused portion of the credit line for the preceding quarter in the
amount of .15% per annum and to amend the profitability convenant to provide
that the Company may not incur a net loss exceeding $5.0 million through
December 31, 1998. After such time, the Company must maintain a net profit to
avoid violating the convenant. GaSonics International Japan K.K. has a credit
facility with the Bank of Tokyo-Mitsubishi, with an available amount under such
facility of 320 million yen which is equivalent to approximately $2.3 million
U.S. dollars. Such facility bears interest at a rate of 1.65% per annum and is
secured by a Letter of Guarantee issued by the Company. The credit facility
expires on March 31, 1999. As of June 30, 1998, GaSonics International Japan
K.K. had borrowed 161.9 million yen available under this credit facility, which
is equivalent to approximately $1,140,000 U.S. dollars as of that date.
The Company believes anticipated cash flows from operations, funds available
under its existing revolving line of credit and separate credit facility and
existing cash, cash equivalents and marketable securities will be sufficient to
meet the Company's cash requirements for the next twelve months. Beyond the
next twelve months, the Company may require additional equity or debt financing
to achieve its working capital or capital equipment needs.
14
<PAGE>
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 and terms 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 write-offs, 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 reschedulings 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 throughout the world, particularly in the
Asia-Pacific region, and lengthy sales cycles. The Company's 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. For example, the Company has experienced and expects to continue
to experience, decreased sales of its single chamber products due to the
introduction of the PEP systems. The Company's gross margin and overall
gross 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 liquid crystal display
manufacturing equipment (LCD) division in Japan, and other factors.
Additionally, sales and earnings for approximately the last two years were
materially adversely affected by the current worldwide semiconductor business
slowdown and it is anticipated that the slowdown in the industry will
continue to have a material adverse effect on the Company's future revenues
and operating results for the next several quarters.
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 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 even a single transaction has had
and 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
15
<PAGE>
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. As a result, the Company's net sales and operating results
for a quarter 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, additional customer configuration requirements or to supply
shortages, may cause net sales in a particular quarter to fall significantly
below the Company's expectations and may materially adversely affect the
Company's operating results for such quarter. In addition, significant
investments in research and development, capital equipment and customer
service and support capability worldwide have resulted in significant fixed
costs which the Company has not been and will not be able to reduce rapidly
if sales goals for a particular period are not met. Because the Company
builds its systems according to forecast, a reduction in customer orders or
backlog could present further difficulties regarding the Company's ability to
plan production and inventory levels, which could materially adversely effect
operating results. The impact of these and other factors on the Company's
operating results in any future period cannot be forecasted accurately.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
The Company's business depends in significant part upon capital expenditures
by manufacturers of semiconductor devices, including manufacturers that are
opening new or expanding existing fabrication facilities, which, in turn,
depend upon the current and anticipated market demand for such devices and
products utilizing such devices. The semiconductor industry is highly
cyclical and historically has experienced periods of oversupply, resulting in
significantly reduced demand for capital equipment, including systems
manufactured and marketed by the Company. Beginning in 1996, the
semiconductor industry has experienced a severe cyclical downturn, which the
Company believes will continue for at least the next several quarters. The
Company has experienced significant cancellations and delays of new orders
and rescheduling of existing orders that have materially adversely affected
the Company's financial results during the last two years and the Company
expects such factors will continue to materially adversely affect its future
financial results. Accordingly, the Company can give no assurance that it
will be able to achieve or even maintain its current level of sales.
Additionally, the Company anticipates that a significant portion of new
orders depend upon demand from integrated circuit (IC) manufacturers building
or expanding large fabrication facilities, and there can be no assurance that
such demand will exist particularly in light of the announcements by several
companies in the IC market of lower than expected earnings, restructurings
and layoffs.
16
<PAGE>
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, it is difficult for the Company to sell 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, personnel, technical and other resources than
the Company. One of the Company's competitors, Fusion, was acquired by Eaton
Corporation, a very large corporation, further enhancing the resources of one
of the Company's competitors. 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 and may continue to lead to
reduced demand and lower prices for the Company's products, thereby
materially adversely affecting the Company's business, financial condition
and operating results. There can be no assurance that the Company will be
able to compete successfully in the future.
Competitors of the Company's LCD division in Japan include Japan-based
companies and Japan-based joint ventures such as Applied Komatsu, Koyo
Lindbergh and ULVAC. These competitors manufacture alternative technology
systems and are well established in Japan 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.
17
<PAGE>
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 and the first
nine months of fiscal 1998 accounted for approximately 68%, 51%, 66% and 53%
of net sales, respectively. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of
net sales in the foreseeable future. None of the Company's customers has
entered into a long-term agreement requiring it to purchase the Company's
products. Moreover, sales to certain of its customers have decreased as 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, has materially
adversely affected and could in the future materially adversely affect the
Company's business, financial condition and results of operations. The
Company's ability to increase or maintain current sales levels in the future
will depend in part upon its ability to obtain orders from new customers as
well as the financial condition and success of its customers and the general
economy, of which there can be no assurance.
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
Since 1993, the Company has significantly increased the scale of its
operations to support sales levels and has generally 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 recently hired a new President and Chief Executive
Officer. The Company's expansion has resulted in significantly higher
operating expenses and until there is a sustained upturn in the economic
climate of the semiconductor industry resulting in an increased demand for
equipment, it is anticipated that the Company's future operating results will
continue to be materially adversely affected through at least the next
several quarters.
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 and continues to
implement new management systems, particularly in the area of inventory
control, to better enable it to manage its business. 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.
18
<PAGE>
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 Millennia 300mm
systems. There can be no assurance that any such product will achieve any
significant revenues or contribute to any profitability of the Company.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future demand for the
type of ICs under development by leading IC manufacturers and the equipment
required to produce such ICs. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new
products or in enhancing existing products and any failure could have a
material adverse effect on the ompany's business, financial condition and
results of operations.
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,
quality 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.
19
<PAGE>
LENGTHY SALES CYCLE
Sales of the Company's systems depend, in significant part, upon the decision
of a prospective customer to increase manufacturing capacity through the
expansion of existing fabrication facilities or the opening of new
facilities, which typically involves a significant capital commitment. The
Company often experiences delays in finalizing system sales following initial
system qualification while the customer evaluates and receives approvals for
the purchase of the Company's systems and completes a new or expanded
facility. Due to these and other factors, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial
funds and management effort. The Company believes that the length of the
sales cycle will continue to increase as certain of its customers centralize
purchasing decisions into one decision making entity and continue to be
cautious in their purchase decisions due to the current severe downturn in
the semiconductor market, which is expected to intensify the evaluation
process and require additional sales and marketing expenditures by the
Company. Lengthy sales cycles subject the Company to a number of significant
risks, including obsolescence and fluctuations and non-predictability of
operating results, over which the Company has little or no control.
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.
To date, however, the Company has sold relatively few systems to Japanese
semiconductor manufacturers. Sales in Japan accounted for approximately 2%
of the Company's total net sales in fiscal 1995, 9% of total net sales in
both fiscal 1996 and fiscal 1997 and 9% of total net sales for the first nine
months of fiscal 1998. 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 to date, this has not
enabled the Company to significantly penetrate the photoresist removal market
in Japan. In addressing this market, the Company is at a distinct
competitive disadvantage compared to leading Japanese suppliers, many of
which have long-standing collaborative relationships with Japanese
semiconductor manufacturers. In addition, since 1992, Japanese semiconductor
manufacturers have substantially reduced their levels of capital spending on
new fabrication facilities and equipment, particularly over the past two
years due to the overall downturn in the Japanese economy, thereby, further
increasing competitive pressures in the Japanese market. Although the Company
is investing significant resources and is establishing a direct presence in
Japan which will significantly increase operating expenses, there can be no
assurance that the Company will be able to achieve significant sales to the
Japanese
20
<PAGE>
semiconductor market, which could materially adversely affect the Company's
business, financial condition and results of operations.
INTERNATIONAL SALES
International sales accounted for 40%, 54%, 55% and 44% of net sales in
fiscal years 1995, 1996, 1997 and the first nine months of fiscal 1998,
respectively. The Company has established independent operations in the
United Kingdom, Ireland, France, Italy, Korea, Japan, Singapore, Taiwan and
Israel. 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.
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 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
21
<PAGE>
and could materially adversely affect the Company's business, financial
condition and results of operations.
SOLE OR LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS; COMPLEXITY IN
MANUFACTURING PROCESS
Certain components, subassemblies and services necessary for the manufacture
of the Company's systems are obtained from a sole supplier or a limited group
of suppliers. Specifically, the Company relies on three companies for supply
of the robotics used in its products, 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. The Company is exploring
alternative sources of 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 sources of supply or to manufacture
such components internally could delay the Company's ability to ship its
products, which could damage relationships with current and prospective
customers and could have a material adverse effect on the Company's business,
financial condition and results of operations.
FUTURE ACQUISITIONS
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 business,
financial condition and results of operations. In addition, acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations, technologies, personnel 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 such 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 results of operations.
22
<PAGE>
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. The Company's future operating results depend in part upon
its ability to attract and retain other qualified management, engineering,
financial and accounting, technical, marketing and sales and support
personnel for its operations. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons
could materially adversely affect the Company's business, financial condition
and results of operations.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances used to manufacture the
Company's products. The Company believes that it is currently in compliance
in all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in
substantial fines being imposed on the Company, suspension of production,
alteration of its manufacturing process or cessation of operations. Such
regulations could require the Company to acquire expensive remediation
equipment or to incur substantial expenses to comply with environmental
regulations. Any failure by the Company to control the use, disposal or
storage of, or adequately restrict the discharge of, hazardous or toxic
substances could subject the Company to significant liabilities.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As of June 30, 1998, the Company's officers, directors and members of their
families who may be deemed affiliates of such persons beneficially owned
approximately 23% 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.
23
<PAGE>
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 such as the Company's, in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. Moreover, in recent years the stocks of
many companies in the semiconductor capital equipment business, including the
stock of the Company, have declined substantially due to the worldwide
semiconductor downturn. There can be no assurance that the market price of
the Company's Common Stock will not continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.
YEAR 2000 COMPLIANCE
The Company is currently in the process of assessing and testing the software
components of its products for year 2000 compliance. There can be no
assurance that the Company's current products do not contain undetected
errors or defects associated with year 2000 date functions that may result in
material costs to the Company, including repair costs and costs incurred in
litigation due to any such defects. Many commentators have stated that a
significant amount of litigation will arise out of year 2000 compliance
issues. Because of the unprecedented nature of such litigation, and the
Company's current lack of knowledge as to whether its products are year 2000
compliant, there can be no assurance that the Company will not be materially
adversely affected by claims related to year 2000 compliance.
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can
be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal operating systems, which are
composed predominantly of third party software and hardware technology.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Effective July 1, 1998, Avner Shelem, Vice President of Engineering
and Operations, resigned. The Company is in the process of finding a
replacement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.21 Amendment to Loan Agreement dated March 23, 1998
between Registrant and Union Bank, a California banking
corporation
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1998
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GASONICS INTERNATIONAL CORPORATION
(Registrant)
\s\ Terry R. Gibson
-------------------
Date: August 10, 1998 By: Terry R. Gibson
Vice President, Finance
Chief Financial Officer
(on behalf of the Registrant and as
principal financial and accounting
officer of the Registrant)
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
10.21 Amendment to Loan Agreement dated March 23, 1998 between
Registrant and Union Bank, a California banking corporation
27 Financial Data Schedule
</TABLE>
27
<PAGE>
[UNION BANK OF CALIFORNIA LETTERHEAD]
July 28, 1998
Mr. Terry Gibson
Chief Financial Officer
Gasonics International Corporation
2730 Junction Ave
San Jose, CA 95134
Dear Terry:
In reference to the Amended and Restated Loan Agreement ("Agreement") between
Union Bank of California, N.A. ("Bank") and Gasonics International
Corporation ("Borrower") dated March 23, 1998, Borrower and Bank desire to
amend said Agreement. This amendment shall be called the Fourth Amendment to
the Agreement.
The following section is hereby added:
"1.9 UNUSED COMMITMENT FEE. On the last calendar day of the third month
following July 1, 1998 and on the last calendar day of each three-month
period thereafter, Borrower shall pay to the Bank a fee of .15 percent (.15%)
per year on the average unused portion of the loan for the preceding quarter
computed on the basis of actual days elapsed of a year of 360 days."
Section 4.9 Profitability is hereby amended in its entirety to read as
follows:
"4.9 PROFITABILITY. For the period July 1, 1998 through December 31, 1998,
Borrower will maintain its net profit, after provision for income
taxes, at a loss of no more than Five Million Dollars ($5,000,000) in
the aggregate. Thereafter, Borrower will maintain a net profit, after
provision for income taxes, of any positive amount for any fiscal
quarter."
Except as amended hereby, the Agreement shall remain unaltered and in full
force and effect. This letter shall not be a waiver of any existing default
or breach of a covenant unless specified herein.
If you agree to accept the terms of this Amendment, please sign below and
return it to the Bank with executed copies of the enclosed documents on or
before August 7, 1998.
Sincerely,
UNION BANK OF CALIFORNIA, N.A.
/s/ Allan Miner
- ------------------------
Allan Miner
Vice President
Accepted this ______ day of ____________, 199_.
GASONICS INTERNATIONAL CORPORATION
- ------------------------
Terry Gibson
Chief Financial Officer
<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 3 AND 4 OF THE COMPANY'S FORM 10Q FOR THE YEAR-TO-DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,799
<SECURITIES> 16,600
<RECEIVABLES> 17,384
<ALLOWANCES> 810
<INVENTORY> 23,477
<CURRENT-ASSETS> 82,008
<PP&E> 24,223
<DEPRECIATION> 9,250
<TOTAL-ASSETS> 98,186
<CURRENT-LIABILITIES> 19,054
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 78,260
<TOTAL-LIABILITY-AND-EQUITY> 98,186
<SALES> 84,062
<TOTAL-REVENUES> 84,062
<CGS> 48,769
<TOTAL-COSTS> 38,995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (2,933)
<INCOME-TAX> (968)
<INCOME-CONTINUING> (1,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,965)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
