<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 December 31, 1997
-----------------
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 Identification No.)
incorporation or organization)
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 February 4, 1998, there were 14,029,901 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>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997
and September 30, 1997 3
Condensed Consolidated Statements of Operations for the three
month periods ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the three
month periods ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Securityholders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
Exhibit Index 24
</TABLE>
2
<PAGE>
PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEC. 31, Sept. 30,
ASSETS 1997 1997
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,065 $ 13,307
Marketable securities 13,753 11,577
Trade accounts receivable, net 33,314 28,315
Inventories 28,206 27,075
Net deferred tax asset 4,868 4,868
Prepaid expenses and other current assets 3,271 2,617
---------------- --------------
Total current assets 91,477 87,759
Property and equipment, net 15,102 14,941
Deposits and other assets 1,552 1,682
---------------- --------------
Total assets $108,131 $104,382
---------------- --------------
---------------- --------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under credit facility $ 939 $ 2,036
Accounts payable 8,175 6,812
Income taxes payable 3,917 3,054
Accrued expenses 12,828 12,886
---------------- --------------
Total current liabilities 25,859 24,788
---------------- --------------
Long-term liabilities 356 401
---------------- --------------
Stockholders' equity:
Common stock and
additional paid-in capital 36,461 35,847
Subscription receivable -- (100)
Retained earnings 45,455 43,446
---------------- --------------
Total stockholders' equity 81,916 79,193
---------------- --------------
Total liabilities and stockholders' equity $108,131 $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
DECEMBER 31,
----------------------
1997 1996
----------------------
<S> <C> <C>
Net sales $32,851 $29,686
Cost of sales 17,415 17,024
------- -------
Gross margin 15,436 12,662
------- -------
Operating expenses:
Research & development 5,037 4,089
Selling, general & administrative 7,521 7,199
------- -------
Total operating expenses 12,558 11,288
------- -------
Operating income 2,878 1,374
Other income (expense), net 126 55
------- -------
Income before provision for income taxes 3,004 1,429
Provision for income taxes 995 500
------- -------
Net income $ 2,009 $ 929
------- -------
------- -------
Net income per share - Basic (see Note 5) $ 0.14 $ 0.07
------- -------
------- -------
Net income per share - Diluted (see Note 5) $ 0.14 $ 0.07
------- -------
------- -------
Weighted average common shares 13,918 13,480
------- -------
------- -------
Weighted average common &
common equivalent shares 14,493 13,670
------- -------
------- -------
</TABLE>
See accompanying notes.
4
<PAGE>
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net cash (used for) provided by operating activities $ (1,594) $ 1,235
-------------- -------------
Cash flows from investing activities:
Purchases of property & equipment (1,090) (1,018)
(Increase) Decrease in marketable securities (2,176) 974
-------------- --------------
Net cash used for investing activities (3,266) (44)
-------------- --------------
Cash flows from financing activities:
Decrease in borrowings under credit facility (1,097) -
Proceeds from issuance of common stock 715 731
-------------- -------------
Net cash (used for) provided by financing activities (382) 731
-------------- -------------
Net (decrease) increase in cash and cash equivalents (5,242) 1,922
Cash & cash equivalents at beginning of period 13,307 11,774
-------------- -------------
Cash & cash equivalents at end of period $ 8,065 $ 13,696
-------------- -------------
-------------- -------------
</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 three months ended
December 31, 1997 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. 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>
Dec. 31, September 30,
1997 1997
------------------- --------------------
(unaudited)
<S> <C> <C>
Raw Materials $ 14,714 $ 13,919
Work in Process 7,015 6,809
Finished Goods 6,477 6,347
------------------- --------------------
$ 28,206 $ 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, 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 the
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 SFAS No. 130, or SFAS No. 131, will have a material impact on
its consolidated financial statement disclosures.
7
<PAGE>
5. 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
the year. Diluted earnings per common share for the three months ended
December 31, 1996 and 1997, 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 month period ended December 31, 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE
---------
FOR THE THREE MONTHS ENDED DEC. 31, 1996 INCOME SHARES AMOUNT
------ ------ ------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 929,000
BASIC EARNINGS PER SHARE
Income available to common stockholders $ 929,000 13,480,000 $ 0.07
Effect of Dilutive Securities:
Options issued to purchase Common stock 190,000
DILUTIVE EARNINGS PER SHARE
Income available to common stockholders $ 929,000 13,670,000 $ 0.07
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE
---------
FOR THE THREE MONTHS ENDED DEC. 31, 1997 INCOME SHARES AMOUNT
------ ------ ------
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 2,009,000
BASIC EARNINGS PER SHARE
Income available to common stockholders $ 2,009,000 13,918,000 $ 0.14
Effect of Dilutive Securities:
Options issued to purchase Common stock 575,000
DILUTIVE EARNINGS PER SHARE
Income available to common stockholders $ 2,009,000 14,493,000 $ 0.14
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<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, 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 first quarter of fiscal 1998 ended December 31, 1997,
increased 10.7% to $32.9 million compared to net sales for the same quarter
in fiscal 1997 of $29.7 million. The increase in sales was principally due to
the sales of the Company's plasma based systems, particularly the single
chamber photoresist removal systems and improved spares and service revenues.
The increased sales of single chamber systems was due to customer demand in
the North American and European markets. Other contibuting factors were the
Company's continued global penetration of its high-productivity Performance
Enhancement Platform (PEP) system and the adoption of its integrated clean
strategy for the process steps between etch and deposition.
Sales to customers in North America, Europe and the Pacific Rim accounted for
approximately 52%, 26% and 22% of net sales, respectively, for the three
month period ended December 31, 1997, compared to approximately 29%, 18% and
53% respectively, for the three month period ended December 31, 1996.
9
<PAGE>
GROSS MARGIN as a percentage of net sales for the first quarter of fiscal
1998 was 47% compared to 43% for the same period of fiscal 1997. The increase
in gross margin percentage for the three month period was due primarily to
the increased volume of single chamber systems, which have higher margins
than other systems of the Company, the success of continued product cost
reduction activities, improvements in manufacturing absorption and improved
utilization of field service operations. The Company's gross margin as a
percentage of net sales is 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 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 Asian countries, including some of the Company's major markets such as
Japan and Korea, changes in product mix and other factors including those
referred to above. 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.
RESEARCH AND DEVELOPMENT EXPENDITURES for the first quarter of fiscal 1998
were $5.0 million or 15.3% of net sales compared to $4.1 million or 13.8% of
net sales for the first quarter of fiscal 1997. Research and development
expenses consist primarily of salaries, project materials, consultant fees
and other costs associated with the Company's research and development
efforts. The increased spending is due to the Company's investments in the
development of the Millennia 300mm platform as well as in advanced cleaning
applications and in LCD product development. The Company anticipates that
research and development spending in absolute dollars may increase in
subsequent quarters due, in part, to the continued emphasis placed by the
Company on new product development, particularly on 300mm and new
applications including post etch residue removal.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the first quarter of fiscal
1998 were $7.5 million or 22.9% of net sales compared to $7.2 million or
24.3% of net sales for the first quarter of fiscal 1997. The increase in
absolute dollars from the corresponding period last year is primarily due to
higher third party commissions which are payable on a significant portion of
the international sales and increased information systems costs. Third party
commissions can fluctuate significantly in any period depending on the mix of
domestic versus foreign sales that are subject to third party commissions.
International sales accounted for approximately 48% of the net sales for the
first quarter of fiscal 1998 as compared to 71% of net sales for the same
quarter of fiscal year 1997. However, in the first quarter of fiscal 1997, a
significant portion of the international sales were not subject to third
party commissions. The Company has 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
10
<PAGE>
has taken steps to manage its spending, it anticipates that selling, general
and administrative spending may increase in absolute dollars in subsequent
quarters.
OTHER INCOME AND EXPENSES primarily consists of interest income and expense
and foreign currency translation loss. Interest expense of approximately
$9,000 for the first quarter of fiscal 1998 as compared to $11,000 for the
same three month period of fiscal 1997, has occurred as a result of borrowing
under a short-term credit facility from the Bank of Tokyo-Mitsubishi made to
the Company's wholly-owned subsidiary in Japan, GaSonics International Japan
K.K. As of December 31, 1997, borrowings under this loan agreement were 117.3
million yen which is equivalent to approximately $939,000. Interest income
from the Company's short-term investments was approximately $268,000 for the
first quarter of fiscal 1998 as compared to $205,000 for the corresponding
three month period of fiscal 1997. Foreign currency translation losses for
the first quarter of fiscal 1998 were approximately $109,000 as compared to
approximately $17,000 for the corresponding three month period of fiscal
1997. The increase was due primarily to the current economic climate in many
Asian countries.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal 1998, cash, cash equivalents and
marketable securities decreased by $3.1 million to $21.8 million at December
31, 1997 from $24.9 million at September 30, 1997. Operating activities used
$1.6 million of cash for the three month period ended December 31, 1997
compared to $1.2 million of cash provided from operations for the
corresponding period of fiscal 1997. Cash used by operating activities was
principally due to an increase in operations assets and liabilities during
the period offset by an increase in net income for the quarter as compared to
the same period last fiscal year.
Investing activities for the first three months of fiscal 1998 used cash of
approximately $3.3 million resulting from the net purchases of marketable
securities of $2.2 million and $1.1 million in purchases of capital
equipment. For the first three months of fiscal 1997, $1.1 million was used
to purchase capital equipment offset by proceeds of $974,000 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 $715,000 for the first three months of fiscal 1998 and $731,000 for
the same period last year. Additionally, for the first three months of fiscal
1998, $1.1 million was used to reduce the borrowings by GaSonics
International Japan K.K. under their credit facility with the Bank of
Tokyo-Mitsubishi.
At December 31, 1997, the Company had working capital of $65.6 million
compared to $63.0 million at September 30, 1997. Accounts receivable at
December 31, 1997, increased $5.0 million from September 30, 1997, due
primarily to higher sales and a greater percentage of shipments occurring
late in the quarter as compared to the quarter ending September 30, 1997.
Inventory increased $1.1 million from September 30, 1997 to December 31,
1997, primarily due to investments in spare parts inventory and investments
in 300mm systems for beta sites and demonstrations. 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
11
<PAGE>
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. An increase in
accounts receivable also subjects the Company to risks that may materially
adversely affect the business, financial condition or results of operations.
The Company's principal sources of liquidity at December 31, 1997, consisted
of approximately $8.1 million in cash and cash equivalents, $13.8 million in
marketable securities and a $20.0 million unsecured 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 are also provided under the credit line. Available borrowing under
the credit line is reduced by the amount of outstanding letters of credit.
The line of credit contains certain covenants, including covenants relating
to financial ratios and tangible net worth which must be maintained by the
Company. As of December 31, 1997, except for $69,193 outstanding under the
letter of credit provision, there were no borrowings outstanding under this
line, and the Company was in compliance with its bank covenants. The line of
credit agreement expires February 28, 1998. On May 1, 1997, GaSonics
International Japan K.K. entered into a 300 million 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 expires on
February 28, 1998. As of December 31, 1997, GaSonics International Japan K.K.
had borrowed 117.3 million yen available under this credit facility, which is
equivalent to approximately $939,000 as of that date. The Company intends to
enter into a new agreement or extend the term of the existing line of credit
with Union Bank and the overdraft facility in Japan with the Bank of
Tokyo-Mitsubishi prior to the due date; however, there can be no assurance
that such financing will be available when required or, will be on reasonable
terms.
The Company believes anticipated cash flows from operations, funds available
under its existing or successor 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 during the next twelve
months. Beyond the next twelve months, the Company may require additional
equity or debt financing to achieve its working capital or capital equipment
needs.
12
<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 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 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 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 impacted by the current 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.
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
13
<PAGE>
sales and operating results for a quarter may depend upon the Company
obtaining orders for systems to be shipped in the same quarter that the order
is received. The Company's business and financial results for a particular
period could be materially adversely affected if an anticipated order for
even one system is not received in time to permit shipment during such
period. Furthermore, most of the Company's quarterly net sales have recently
been realized near the end of the quarter. A delay in a shipment near the end
of a particular quarter, due, for example, to an unanticipated shipment
rescheduling, to cancellations or deferrals by customers, to unexpected
manufacturing difficulties experienced by the Company or to supply shortages,
may cause net sales in a particular quarter to fall significantly below the
Company's expectations and may materially adversely affect the Company's
operating results for such quarter. In addition, significant investments in
research and development, capital equipment and customer service and support
capability worldwide have resulted in significant fixed costs which the
Company will not be able to reduce rapidly if sales goals for a particular
period are not met. 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.
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 has experienced a cyclical downturn. The
Company has experienced significant 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 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 integrated circuit (IC) manufacturers
building or expanding large fabrication facilities, and there can be no
assurance that such demand will exist.
HIGHLY COMPETITIVE INDUSTRY
The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate
capital equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular vendor's capital
equipment, the Company believes that the manufacturer generally relies upon
that equipment for the specific production line application and frequently
will attempt to consolidate its other capital equipment requirements with the
same vendor. Accordingly, the Company expects to experience difficulty in
selling to a particular customer for a significant period of time if that
customer selects a
14
<PAGE>
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 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.
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 and the first
three months of fiscal 1998 accounted for approximately 68%, 51%, 66% and 67%
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
15
<PAGE>
conditions in the semiconductor industry or in the industries that
manufacture products utilizing ICs, could materially adversely affect the
Company's business, financial condition and results of operations. The
Company's ability to increase or maintain current sales levels in the future
will depend in part upon its ability to obtain orders from new customers as
well as the financial condition and success of its customers and the general
economy, of which there can be no assurance.
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
The Company has undergone a period of rapid growth. Since 1993, the Company
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 until there is a substained 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 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 Millennia 300mm
systems. There can be no assurance that any such product will achieve any
16
<PAGE>
significant revenues or contribute to any profitability of the Company.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future demand for the
type of ICs under development by leading IC manufacturers and the equipment
required to produce such ICs. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new
products or in enhancing existing products.
Because of the large number of components in, and the complexity of, the
Company's systems, significant delays can occur between a system's initial
introduction and the commencement of volume production. As is typical in the
semiconductor capital equipment market, the Company has 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.
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 and 4% of total net sales for the first
quarter of fiscal 1998. To date, for its photoresist business, the Company
has not fully developed a customer service and support
17
<PAGE>
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 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 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 semiconductor market.
INTERNATIONAL SALES
International sales accounted for 40%, 54%, 55% and 48% of net sales in
fiscal years 1995, 1996, 1997 and the first quarter 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.
18
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes
that its financial performance will depend more upon the innovation,
technological expertise and marketing abilities of its employees than upon
such protection. There can be no assurance that any of the Company's pending
patent applications will be issued or that foreign intellectual property laws
will protect the Company's intellectual property rights. There can be no
assurance that any patent issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will
provide competitive advantages to the Company. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company.
As is typical in the semiconductor industry, the Company 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.
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
19
<PAGE>
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 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. 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,
20
<PAGE>
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As of December 31, 1997, the Company's officers, directors and members of
their families that 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.
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.
YEAR 2000 ISSUE
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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GASONICS INTERNATIONAL CORPORATION
(Registrant)
\s\ Terry R. Gibson
-------------------------
Date: February 6, 1998 By: Terry R. Gibson
Vice President, Finance
Chief Financial Officer
23
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY
NUMBERED
PAGE
27 Financial Data Schedule
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8065
<SECURITIES> 13753
<RECEIVABLES> 34064
<ALLOWANCES> 750
<INVENTORY> 28206
<CURRENT-ASSETS> 91477
<PP&E> 22541
<DEPRECIATION> 7439
<TOTAL-ASSETS> 108131
<CURRENT-LIABILITIES> 25859
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 81311
<TOTAL-LIABILITY-AND-EQUITY> 108131
<SALES> 32851
<TOTAL-REVENUES> 32851
<CGS> 17415
<TOTAL-COSTS> 17415
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 3004
<INCOME-TAX> 995
<INCOME-CONTINUING> 2009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2009
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
