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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to __________________________
Commission file number: 0-23372
GASONICS INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-2159729
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2730 Junction Avenue, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 570-7000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At August 3, 1999, there were 14,555,257 shares of the Registrant's
Common Stock, $0.001 par value per share, outstanding.
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GASONICS INTERNATIONAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Operations for the three
and nine month periods ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 2A. Quantitative and Qualitative Disclosure about Market Risks 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Securityholders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
Exhibit Index 29
</TABLE>
2
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PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, Sept. 30,
1999 1998
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<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 17,096 $ 14,698
Marketable securities 11,816 17,640
Trade accounts receivable, net 17,671 15,026
Inventories 16,023 20,822
Net deferred tax asset 5,697 5,697
Prepaid expenses and other current assets 3,323 7,437
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Total current assets 71,626 81,320
Property and equipment, net 11,820 14,810
Deposits and other assets 876 1,086
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Total assets $ 84,322 $ 97,216
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under credit facility $ 2,415 $ 2,116
Accounts payable 4,212 4,008
Income taxes payable 4,728 4,038
Accrued expenses 10,585 11,423
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Total current liabilities 21,940 21,585
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Long-term liabilities 89 223
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Stockholders' equity:
Common stock and
additional paid-in capital 40,295 37,675
Treasury stock (see Note 6) (1,255) -
Retained earnings 23,253 37,733
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Total stockholders' equity 62,293 75,408
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Total liabilities and stockholders' equity $ 84,322 $ 97,216
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</TABLE>
See accompanying notes.
3
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 17,902 $ 23,595 $ 41,139 $ 84,062
Cost of sales 10,280 16,426 26,808 48,769
-------- -------- -------- --------
Gross margin 7,622 7,169 14,331 35,293
-------- -------- -------- --------
Operating expenses:
Costs associated with reduction in force - 503 407 503
Research & development 4,151 5,401 13,449 15,805
Selling, general & administrative 5,454 7,976 15,893 22,687
-------- -------- -------- --------
Total operating expenses 9,605 13,880 29,749 38,995
-------- -------- -------- --------
Operating loss (Note 7) (1,983) (6,711) (15,418) (3,702)
Other income and expenses, net 362 433 939 769
-------- -------- -------- --------
Loss before credit for income taxes (1,621) (6,278) (14,479) (2,933)
Credit for income taxes - (2,076) - (968)
-------- -------- -------- --------
Net loss $ (1,621) $ (4,202) $(14,479) $ (1,965)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - Basic $ (0.11) $ (0.30) $ (1.01) $ (0.14)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - Diluted $ (0.11) $ (0.30) $ (1.01) $ (0.14)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares 14,363 14,045 14,287 13,996
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common &
Common equivalent shares 14,363 14,045 14,287 13,996
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes.
4
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used for) operating activities $ (4,222) $ 9,560
Cash flows from investing activities:
Purchases of property & equipment (867) (3,037)
Decrease (increase) in marketable securities 5,823 (5,023)
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Net cash provided by (used for) investing activities 4,956 (8,060)
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Cash flows from financing activities:
Increase (decrease) in borrowings under credit facility 299 (896)
Repurchase of common stock (1,255) -
Proceeds from issuance of common stock 2,620 1,888
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Net cash provided by financing activities 1,664 992
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Net increase in cash and cash equivalents 2,398 2,492
Cash & cash equivalents at beginning of period 14,698 13,307
-------- --------
Cash & cash equivalents at end of period $ 17,096 $ 15,799
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
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GASONICS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit and reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position and the results of operations of the Company for the interim periods.
The statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles.
The results of operations for the nine months ended June 30, 1999 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, 1998 and quarterly reports on Form 10-Q for the periods
ending December 31, 1998 and March 31, 1999.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
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<S> <C> <C>
(unaudited)
Raw Materials $ 8,071 $ 12,547
Work in Process 4,781 2,254
Finished Goods 3,171 6,021
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$16,023 $ 20,822
------- --------
------- --------
</TABLE>
3. NET INCOME (LOSS) PER SHARE
Net income (loss) 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).
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Basic earnings per common share for the three and nine months ended June
30, 1999 and 1998 were computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per common share for the three and nine months ended June 30, 1999 and 1998,
were calculated using the treasury stock method to compute the weighted average
common stock outstanding (in thousands, except per share data).
6
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<TABLE>
<CAPTION>
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PER SHARE
FOR THE THREE MONTHS ENDED JUNE 30, 1999 INCOME SHARES AMOUNT
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<S> <C> <C> <C>
Net loss $ (1,621)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $ (1,621) 14,363 $ ( 0.11)
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</TABLE>
<TABLE>
<CAPTION>
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PER SHARE
FOR THE THREE MONTHS ENDED JUNE 30, 1998 INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $ (4,202)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $ (4,202) 14,045 $ (0.30)
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</TABLE>
<TABLE>
<CAPTION>
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PER SHARE
FOR THE NINE MONTHS ENDED JUNE 30, 1999 INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $ (14,479)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $ (14,479) 14,287 $ (1.01)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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PER SHARE
FOR THE NINE MONTHS ENDED JUNE 30, 1998 INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $ (1,965)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $ (1,965) 13,996 $ (0.14)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which is being adopted by the Company in
fiscal 1999. SFAS No. 131 requires companies to disclose certain information
about operating segments within their business. The Company does not anticipate
the adoption of SFAS No. 131 having a material impact on its consolidated
financial statements. Interim reporting is not required in the initial year of
adoption under SFAS No. 131.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). It
establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or stockholders'
equity, depending on the nature of
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the transaction. SFAS 133 is effective for fiscal years beginning after June
15, 2000 and cannot be applied retroactively. The effect of SFAS No. 133 is
not expected to be material to the Company's financial statements.
5. COMPREHENSIVE INCOME
Effective December 31, 1998 the Company adopted SFAS No. 130 "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. For the three and nine
months ended June 30, 1999 and 1998, there were no material items of other
comprehensive income (loss), thus comprehensive income for these periods did not
differ materially from net income as reported in the accompanying financial
statements.
6. STOCK REPURCHASE PROGRAM
On December 16, 1998, the Company's Board of Directors authorized a stock
repurchase program. Under this program 500,000 shares of its Common Stock may be
repurchased by the Company in the open market, from time-to-time at market
prices not to exceed $15.00 per share using existing cash. In April, 1999, the
Company's Board of Directors authorized the Company to repurchase up to 100,000
shares of the 500,000 share total prior to its July Board meeting. As of June
30, 1999, the Company had repurchased 100,000 shares of common stock in the open
market at an aggregate cost of approximately $1.3 million.
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts) 1999
- --------------------------------------------------------------------------------------------------
<S> <C>
Stockholders' Equity
Preferred stock, $0.001 par value: Authorized shares - 2,000,000 -
Common stock, $0.001 par value: Authorized shares - 20,000,000 14
Additional paid-in capital 40,281
Retained Earnings 23,253
Treasury stock at cost (shares 100,000) (1,255)
- --------------------------------------------------------------------------------------------------
Net stockholders' equity 62,293
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- --------------------------------------------------------------------------------------------------
</TABLE>
7. CHARGES TAKEN DURING FISCAL YEARS 1999 AND 1998
The nine month period ended June 30, 1999 included pre-tax charges of
approximately $1.8 million, related primarily to the accelerated write-off of
equipment produced and used in connection with the Company's first generation
300mm product development program.
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.
8
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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 may be deemed
to contain 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, product development, product development
expenses, operating expense levels, and the sufficiency of financial
resources to support future 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 Condensed Consolidated
Financial Statements and Notes to the Condensed Financial Statements
presented in the Company's 1998 Annual Report on Form 10-K and quarterly
reports on Form 10-Q for the periods ended December 31,1998 and March 31,
1999, which are available upon request, for a more complete understanding of
the Company's financial position, business and results of operations.
RESULTS OF OPERATIONS
NET SALES. The Company's net sales of $17.9 million for the third quarter of
fiscal year 1999 represent a decrease of approximately 24% when compared to
net sales of $23.6 million for the same quarter in fiscal year 1998. For the
nine month period ending June 30, 1999, net sales decreased approximately 51%
to $41.1 million compared to net sales of $84.1 million for the same period
last fiscal year.
The decreases in both periods reflect continued lower sales of the Company's
multi-chamber Performance Enhancement Platform ("PEP") products and lower
sales of single chamber products for the nine month period resulting from the
general slowdown in the semiconductor industry. In addition, the Company did
not sell any units of its Vertical High Pressure ("VHP") product during the
first nine months of fiscal 1999 compared to VHP sales of $1.5 million and
$7.6 million for the third quarter and nine month periods of fiscal 1998. The
Company's Liquid Crystal Display ("LCD") division sold no flat panel display
equipment in the third quarter of fiscal 1999 compared to $1.1 million in
sales for the third quarter of fiscal 1998. For the first nine months of
fiscal 1999, LCD sales were $1.6 million compared to $2.3 million for the
same period of fiscal 1998. Continued delays in receiving new orders and
rescheduling or cancellations of previously ordered equipment has materially
adversely affected the Company's sales for more than two and a half years.
Although the Company has had three consecutive quarters of improved bookings
and two consecutive quarters of improved sales and with the semiconductor
industry showing signs of upward movement, customers are still very cautious
and the Company anticipates that
9
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delays of new orders and cancellations and rescheduling of existing orders
will continue to adversely impact the Company's business, financial condition
and results of operations for the foreseeable future.
Sales to customers in North America, Europe and Asia Pacific accounted for
approximately 59%, 8% and 33% of net sales, respectively, for the nine months
ended June 30, 1999 compared to approximately 56%, 24% and 20% respectively,
for the nine months ended June 30, 1998. The Company's percentage of
international sales will continue to fluctuate from period to period, but the
Company anticipates that international sales will continue to account for a
significant portion of net sales in the remainder of fiscal 1999 and beyond.
The continuing Asian economic slowdown has had an adverse impact on the
Company's international net sales in the first nine months of fiscal 1999 and
may continue to have a significant adverse impact on international net sales
for the balance of fiscal 1999 and into fiscal 2000.
The Company currently anticipates that its total net sales for the fourth
quarter of fiscal 1999 will show sequential quarter to quarter improvement
and is expected to exceed prior year comparable period levels for the first
time in a year and a half. While fourth quarter revenues will continue to
show the effects of the extended industry slowdown, the industry is showing
signs of a gradual recovery and, as such, the Company's revenues next quarter
are expected to be higher than that reported for the same quarter last year.
GROSS MARGIN. The Company's gross margin as a percentage of net sales for the
third quarter and nine months ended June 30, 1999 was 42.6% and 34.8%,
respectively, compared to 30.4% and 42.0%, respectively, for the same periods
of fiscal 1998. The increase in gross margin for the third quarter of fiscal
1999 is primarily due to a $2.5 million charge in the third quarter of fiscal
1998 to increase reserves for potentially excess inventory and for certain
potentially obsolete finished units. Excluding the $2.5 million charge, the
gross margin rate for the third quarter and nine month period of fiscal 1998
would have been 41.0% and 45.0%, respectively. Additionally, the gross margin
rate in the third quarter of fiscal 1999 is higher than the same quarter last
year due to various cost reduction efforts effected over the last year. The
decrease in gross margin percentage for the nine months of fiscal 1999
compared to the same period of fiscal 1998 is primarily due to lower sales
and the relatively fixed costs and under-utilization of the Company's field
service organization and manufacturing facilities resulting in under-absorbed
overhead. The Company's gross margins are affected by a variety of other
factors, including the mix and average selling prices of products sold and
the costs to manufacture, service and support new product introductions and
enhancements. The Company expects that its gross margin will continue to be
materially adversely impacted by sales volume, changes in product mix and
other factors, including inefficiencies associated with new product
introductions and sales of lower margin flat panel display systems and
competitive pricing pressures. The Company continues to focus on its gross
margin improvement programs, including the introduction of new value-added
applications, features and options for its PEP systems, targeted cost
reduction programs and controlled spending. The Company currently anticipates
that its overall gross margins for the fourth quarter of fiscal year 1999
will show little, if any, improvement over the third quarter. Improved gross
margins from continued increases in the utilization of field service and
manufacturing as a function of higher sales volume coupled with an increase
in overhead absorption, is anticipated to be
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largely offset by lower margins on initial sales of new products, such as the
Company's PEP Iridia product.
COSTS ASSOCIATED WITH REDUCTION IN FORCE. In June 1998 and December 1998, the
Company reduced its workforce in response to market conditions and recorded a
charge of $503,000 and $407,000, respectively, primarily for the costs of
severance compensation.
RESEARCH AND DEVELOPMENT (R & D) EXPENDITURES. R&D expenses consist primarily
of salaries, project materials, consultant fees and other costs associated
with the Company's R&D efforts. The Company's R&D expenditures for the third
quarter of fiscal 1999 were $4.2 million or 23% of net sales compared to $5.4
million or 23% of net sales for the third quarter of fiscal 1998. For the
nine months ended June 30, 1999 and 1998, R&D expenses were $13.4 million or
33% of net sales compared to $15.8 million or 19% of net sales, respectively.
The decrease of $1.2 million in the third quarter of fiscal 1999 is
principally due to a charge of $500,000 recorded in fiscal 1998 related to
accelerated write-downs of certain older generation applications development
equipment and consulting charges, the cumulative impact of three reductions
in force that occurred in the second half of fiscal year 1998 and the first
quarter of fiscal year 1999 and the reprioritization of engineering projects.
Partly offsetting the above was the cost associated with the Company's return
to a full work schedule in the third quarter of fiscal 1999. Since the third
quarter of fiscal 1998, the Company had been on a reduced work schedule to
reduce operating costs as a result of poor business conditions.
The decrease in spending for the nine month period of fiscal 1999 compared to
the same period of fiscal 1998 resulted from the same reasons as stated above
for the third quarter of 1999 partially offset by a $1.8 million charge
recorded in the second quarter of fiscal 1999 primarily for the accelerated
write-off of equipment produced and used in connection with the Company's
first generation 300mm product development program. This equipment which
consisted primarily of 300mm tools produced for test, demonstration and
evaluation had significantly declined in value since the Company has now
transitioned to the next generation of 300mm product development. The
decrease in R&D expenses for the nine month period also reflects an
engineering grant of $250,000 that was funded in the first quarter of fiscal
1999 and was credited to R&D expenses.
The Company continues to focus its R&D efforts on areas where it believes it
may be able to gain market share. In particular, the Company has focused its
R&D spending on programs to support the expanding number of available
applications that target our integrated clean strategy, the development of
the 300mm platform, the support of the LCD flat panel business and
applications development of the VHP technology. In June 1999, the Company
formally introduced the PEP Iridia which is the first in a series of
leading-edge solutions targeting the growing market for application-specific
photoresist and wafer cleaning steps. The Company anticipates that R&D
spending in absolute dollars for at least the remainder of fiscal 1999 will
decrease, although to a lesser extent than last quarter, when compared to the
prior year comparable period. This decrease is expected to primarily result
from the cost reductions noted above partially offset by the cost of the
Company's return to a full work schedule in the third quarter and annual
salary increases that became effective at the beginning of the fourth quarter
of fiscal 1999. The salary increases may also result in slightly higher R&D
expenses in the fourth quarter of fiscal 1999 compared to the
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third quarter of fiscal 1999. The Company decided to return to a full work
schedule in April 1999 and grant annual salary increases, originally
scheduled for January 1999, in July 1999, based on the sequential improved
financial results for the last two quarters and the Company's anticipation
that business will continue to improve over the next several quarters.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses for the third
quarter of fiscal 1999 were $5.5 million or 30% of net sales and $15.9
million or 39% of net sales for the first nine months of fiscal 1999 compared
to $8.0 million or 34% of net sales and $22.7 million or 27% of net sales for
the same periods of fiscal 1998, respectively. The spending decrease in both
periods of fiscal 1999 resulted in part from charges taken in the third
quarter of fiscal 1998 for the consolidation of the Company's San Jose,
California operations of approximately $300,000 and for the write-down of
older generation demonstration and evaluation equipment of approximately
$700,000. The balance of the decrease primarily results from the cumulative
impact of the Company's three reductions in force, the reduced work schedule
and lower third party sales commissions on international sales. For
approximately the last two and a half years, the Company has built a
worldwide direct sales and support organization which has decreased the
Company's dependence on third party representatives for these services.
Consequently, third party commissions in all but two regions have been
eliminated, partially offset by increased expenses related to the hiring of
and other expenses associated with building the Company's direct sales and
support organizations. The Company currently anticipates that SG&A expenses
for the fourth quarter of fiscal 1999 will be lower in absolute dollars from
the comparable period of fiscal 1998 as a result of the Company's cost
reduction activities. Compared to the third quarter of fiscal year 1999,
however, SG&A expenses are expected to increase due to trade show costs,
annual salary increases and additional costs needed to support anticipated
sales increases.
OTHER INCOME (EXPENSE). Other income and expense primarily consists of
interest income and expense, foreign currency translation gains and losses
and royalty income. Interest expense of approximately $8,000 for the third
quarter and $35,000 for the first nine months of fiscal 1999 as compared to
$1,000 in the third quarter and $25,000 for the first nine months of fiscal
1998 is principally related to borrowings under a short-term credit facility
from the Bank of Tokyo-Mitsubishi made to the Company's wholly-owned Japanese
subsidiary, GaSonics International Japan K.K. As of June 30, 1999, borrowings
under this loan agreement were 299 million yen, which was equivalent to
approximately $2.4 million as of that date. Interest income received
primarily from the Company's short-term investments was approximately
$330,000 for the third quarter and $834,000 for the first nine months of
fiscal 1999 as compared to $284,000 and $742,000 for the corresponding
periods of fiscal 1998. The increase in interest income is primarily the
result of changing the Company's investment portfolio from tax exempt
securities to taxable securities since the Company is not incurring a tax
liability due to its net operating losses. There was essentially no net
impact of foreign currency translation gains or losses for the third quarter
and approximately $65,000 in net losses for the nine month period of fiscal
1999 compared to net gains of $153,000 and $25,000, respectively, for the
same periods last fiscal year. The fluctuations in currency exchange rates
are primarily in Japan, Korea, Taiwan and Singapore. Royalty income in
connection with the sale of the Company's industrial plasma cleaning products
and services business in July 1997 was approximately $67,000 and $245,000 for
the third quarter and first nine months of fiscal 1999, respectively,
compared to $146,000 and $265,000 for the comparable periods of fiscal 1998.
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INCOME TAXES. The results for the third quarter and first nine months of
fiscal 1999 do not include a provision for tax benefits related to the nine
months ended June 30, 1999 net loss because the net loss cannot be carried
back to offset previous amounts of taxable income. The tax loss and other tax
benefits will be carried forward and will be available to offset certain
future tax liabilities. The Company does not anticipate recording these tax
benefits until returning to profitability.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1999, cash, cash equivalents and
marketable securities increased by $2.4 million to $28.9 million at June 30,
1999 from $32.3 million at September 30, 1998. Operating activities used cash
of $4.2 million for the nine month period ended June 30, 1999 compared to
$9.5 million of cash provided by operations in the corresponding period of
fiscal 1998. Cash used by operating activities in the first nine months of
fiscal 1999 is due principally to operating losses partly offset by a
reduction in inventory and a reduction in deferred tax assets resulting from
income tax refunds received during the second quarter of fiscal 1999 for
operating loss carry-backs.
Investing activities for the first nine months of fiscal 1999 provided cash
of approximately $5.0 million resulting from the net sale of marketable
securities of approximately $5.8 million and used cash of $867,000 primarily
for improved operating and information systems and demonstration equipment.
The $5.8 million provided by the net sale of marketable securities resulted
from a change in the Company's investment portfolio from tax exempt to
shorter-term taxable securities now classified as cash equivalents. For the
first nine months of fiscal 1998, a total of $8.1 million was used for
investing activities consisting of $5.0 million for the net purchase of
marketable securities and $3.0 million primarily for the purchase of capital
equipment and improved operating and information systems.
Financing activities for the first nine months of fiscal 1999 provided cash
from the issuance of common stock in connection with the Company's employee
stock purchase and stock option plans of $2.6 million, $299,000 from
borrowings by Gasonics International Japan K.K. under its credit facility
with the Bank of Tokyo-Mitsubishi and used cash of approximately $1.3 million
for the open-market repurchase of 100,000 shares of the Company's Common
Stock. For the same period of fiscal 1998, $1.9 million was provided from the
issuance of common stock under the Company's employee stock purchase and
stock option plans and approximately $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, 1999, the Company had working capital of $49.7 million compared
to $59.7 million at September 30, 1998. Accounts receivable at June 30, 1999
increased by approximately $2.6 million and inventory decreased by
approximately $4.8 million from September 30, 1998. The increase in
receivables is due primarily to payment delays from certain customers in
Europe and Taiwan. The decrease in inventory is primarily the result of
decreased purchasing in response to lower sales volume. 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
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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, 1999, consisted of
approximately $17.1 million in cash and cash equivalents, $11.8 million in
marketable securities and a $20.0 million unsecured line of credit with Union
Bank which was renewed on June 30, 1999 and expires on March 31, 2000. A
commercial letter of credit provision of $500,000 and a foreign exchange
contract provision of $1.0 million are included as part of the credit line.
This line of credit bears interest at the bank's LIBOR rate plus 1.25% per
annum. 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 that
must be maintained by the Company. As of June 30, 1999, 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 Company's wholly-owned Japanese subsidiary, GaSonics
International Japan K.K., has a credit facility with the Bank of
Tokyo-Mitsubishi with an available credit line of 300 million Japanese yen
which is equivalent to approximately $2.4 million as of June 30, 1999. This
credit facility bears interest at a rate of 1.65% per annum and is secured by
a Letter of Guarantee issued by the Company. The maturity date of this credit
facility has been extended from March 31, 1999 to September 30, 1999. As of
June 30, 1999, GaSonics International Japan K.K. had borrowed 299 million yen
under this credit facility. The Company intends to enter into a new agreement
or extend the term of the existing credit facility in Japan with the Bank of
Tokyo-Mitsubishi prior to the expiration date. However, there can be no
assurance that the Company will be successful in renewing or extending this
facility or that any such renewal or extension will be on reasonable terms.
On December 16, 1998, the Company's Board of Directors authorized the Company
to repurchase up to 500,000 shares of the Company's Common Stock in the open
market at prevailing prices. As of June 30, 1999, 100,000 shares had been
repurchased.
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.
YEAR 2000 READINESS DISCLOSURE
The Company has assembled a task force that is currently in the process of
assessing internal software, data management, accounting, manufacturing and
operational systems to ensure that they adequately and accurately process or
manage day or date information beyond the year 1999. This task force is also
working with the Company's significant suppliers of components and
sub-assemblies to ensure that the products and systems supplied to the
Company, and the products the Company supplies to its customers, are year
2000 compliant. The Company currently expects that this review process will
be completed by the end of fiscal 1999 and that all material internal
programs and systems will be compliant prior to the beginning of the year
2000.
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To ensure that the Company's products and systems, and the operating systems
incorporated in products sold to its customers, are year 2000 compliant, the
Company expects both to replace some software and systems and to upgrade
others where appropriate. The Company has identified for its customers the
corrective action necessary to ensure that its installed products are year
2000 compliant, including compliance of third-party components and
sub-assemblies incorporated into the Company's products. The Company has
incurred, and will continue to incur throughout fiscal 1999, various expenses
in connection with replacement and upgrading its installed base. The Company
estimates that the costs directly related to addressing Year 2000 issues will
be between $1.2 and $1.5 million, of which approximately $1.1 million was
spent as of June 30, 1999. The Company expects to pass certain of these costs
on to its customers.
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, warranty
costs and costs incurred in litigation due to any such defects. Additionally,
there can be no assurance that unexpected delays or problems, including the
failure to ensure year 2000 compliance by systems and products supplied to
the Company by a third party, will not have a material adverse effect on the
Company's financial performance, or the competitiveness or customer
acceptance of its products. The Company could be subject to litigation in the
event that any of its products, including third party components, are not
year 2000 compliant, which could be substantial and costly. The Company's
current understanding of expected costs is subject to change as the Company's
review continues and does not include potential costs related to customer
claims, or internal software and hardware replaced in the normal course of
business where installation otherwise may be accelerated to provide solutions
to year 2000 compliance issues.
Although the Company is unaware of any material operational issues or costs
associated with preparing its internal systems for the year 2000 as of this
date, there can be no assurance that the Company will not experience serious
unanticipated negative consequences and/or material costs, including a
material disruption in the Company's operations, 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.
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ADDITIONAL RISK FACTORS
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future. The Company
anticipates that factors continuing to affect its future operating results
will include the cyclicality of the semiconductor industry and the markets
served by the Company's customers, particularly the current prolonged, severe
worldwide semiconductor slowdown, 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 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 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 sales volume-related impact on field service and support
utilization and overhead absorption, 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 due to under utilization of the field service infrastructure and
under absorption of manufacturing overhead resulting from lower sales volume
attributed to the current worldwide semiconductor business slowdown, 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. It is anticipated that the slowdown in the
semiconductor industry will continue to have a material adverse effect on the
Company's future revenues and operating results for the next several
quarters. There can be no assurance that the Company will be able to maintain
its sales at current levels.
LIMITED SYSTEM SALES; BACKLOG
The Company derives a substantial portion of its sales from the sale of
systems which typically range in price from approximately $150,000 to $1.0
million for its photoresist and post-etch residue removal systems and up to
approximately $2.0 million or more for many of its other
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products. As a result, the timing of revenue recognition 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
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 to be
expected for any succeeding period. The Company has in the past experienced
and expects to continue to experience, cancellations and rescheduling of
orders. 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 to, for
example, an unanticipated shipment rescheduling, cancellations or deferrals
by customers, unexpected manufacturing difficulties experienced by the
Company, additional customer configuration requirements or 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 any 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 will
lead to excess and possibly inventory obsolescence, increased costs and
reduced margins which could materially adversely effect the Company's
business, financial condition and results of operations. 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 worldwide
semiconductor industry has experienced a severe cyclical downturn and while
there have been recent signs of recovery, the downturn has continued to
impact the financial performance of the Company through the third quarter of
fiscal 1999. During this period, the Company has experienced reduced demand
for its products, significant cancellations and delays of new orders and
rescheduling of existing orders that have materially adversely affected the
Company's financial results 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
increase or even maintain its current level of sales. Additionally, the
Company anticipates that a significant portion of new orders will 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 in 1999 or in 2000.
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HIGHLY COMPETITIVE INDUSTRY
The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate
capital equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular vendor's capital
equipment, the Company believes that the manufacturer generally relies upon
that equipment for the specific production line application and frequently
will attempt to consolidate its other capital equipment requirements with the
same vendor. Accordingly, 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 increased consolidation that 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 enhanced technologies and improvements. Applied Materials and Lam
Research have modules on their products that 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. 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. As a relatively recent entrant, the Company is at a distinct
competitive disadvantage in the Japanese market compared to leading Japanese
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suppliers, many of which have long-standing collaborative relationships with
Japanese semiconductor manufacturers.
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 1996, 1997, 1998 and the first nine
months of fiscal 1999 accounted for approximately 51%, 66%, 64% and 73% of
net sales, respectively. In fiscal 1996, sales to Intel accounted for
approximately 11% of total net sales. In fiscal 1997, sales to Samsung and
Promos Technologies each accounted for approximately 11% of net sales and
Intel accounted for approximately 10% of net sales. Intel and Motorola
accounted for approximately 20% and 11%, respectively, of fiscal 1998 net
sales. Intel accounted for approximately 23% and Motorola accounted for
approximately 12% of net sales for the first nine months of fiscal 1999. The
Company expects that sales of its products to relatively few large 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 due to departures 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 despite recent layoffs 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. In addition, in 1998, the Company
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 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. However, cost reduction efforts implemented during
the last half of fiscal 1998 and the first quarter of fiscal 1999 have
considerably reduced the Company's operating expenses and, hence, the sales
volume level needed to break even.
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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
upgrade and 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.
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 large 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 its VHP, LPCVD systems and 300mm systems.
There can be no assurance that any such products will achieve significant
revenues, if any, or enhance the Company's profitability. 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 Company'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 experienced 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
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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, the Company may experience decreased
sales, loss of customers, increased costs, delays in collecting accounts
receivable and additional service and warranty expenses, any of which 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 which may not ultimately lead to actual sales.
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 9% of
the Company's total net sales in both fiscal 1996 and fiscal 1997, 4% of
total net sales in fiscal 1998 and 6% of total net sales for the first nine
months of fiscal 1999. 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 has
resulted in recommendations 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. As a
relatively recent entrant, the Company is at a distinct competitive
disadvantage in the Japanese market compared to leading Japanese suppliers,
many of which have long-standing
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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 and the severe downturn in the worldwide
semiconductor market, thereby, further increasing competitive pressures in
the Japanese market. Although the Company is investing significant resources
and has established a direct presence in Japan which has and 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, which failure could materially adversely affect the
Company's business, financial condition and results of operations.
INTERNATIONAL SALES
International sales accounted for 54%, 55%, 45% and 41% of net sales in
fiscal years 1996, 1997, 1998 and the first nine months of fiscal 1999,
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 against them by third parties or claims for
indemnification by the Company's
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customers resulting from infringement claims will not be asserted in the
future against the Company 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, two other companies for microwave power supplies, two
companies for platens, one company for magnetrons and one company for
microwave applicators used in its products. The Company's LCD division in
Japan is heavily dependent on one key supplier for quartz and ceramic
fabrication used in its LPCVD systems. The Company is exploring alternative
sources of technology to provide back up for critical materials when the
primary suppliers are unable to deliver. 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 significantly 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
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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.
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. 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,
particularity in the San Francisco Bay Area, and, as a public company, the
Company has experienced difficulty in competing against private companies in
terms of equity compensation packages. 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 and could
result in a material adverse effect on the Company's business, financial
condition and results of operations.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As of June 30, 1999, the Company's officers, directors and members of their
families who may be deemed affiliates of such persons beneficially owned
approximately 22% 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
24
<PAGE>
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, general conditions in the
semiconductor industry or the worldwide economy, natural disasters, outbreaks
of hostilities, 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.
25
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ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
INTEREST RATE RISK
The Company's exposure to market risk for change in interest rates relates
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company
ensures the safety and preservation of its invested principal funds by
limiting default risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in safe and high-credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer, guarantor or depository. The portfolio includes only securities with
active secondary or resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio (in
thousands):
<TABLE>
<CAPTION>
Fiscal Years
Cash equivalents and short-term investments 1999 2000
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate short-term investments $19,317 $4,390
Average interest rate 5.0% 5.12%
</TABLE>
26
<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 June 14, 1999, Graham W. Hills joined the Company
as Vice President, Chief Technical Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.18 Loan Agreement dated June 30, 1999
between Registrant and Union Bank, a
California banking corporation
Exhibit 10.19 Graham W. Hills Employment Agreement
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, 1999.
27
<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\ Asuri Raghavan
---------------------
Date: August 6, 1999 By: Asuri Raghavan
President/CEO
(on behalf of the Registrant and as
principal financial officer of the Registrant)
\s\ John E. Arnold
---------------------
Corporate Controller
(as principal accounting officer)
28
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY
NUMBERED
PAGE
10.18 Loan Agreement dated June 30, 1999 between Registrant and Union
Bank, a California banking corporation
10.19 Graham W. Hills Employment Agreement
27 Financial Data Schedule
29
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[LOGO]
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and entered
into as of June 30, 1999 by and between GASONICS INTERNATIONAL CORPORATION, a
Delaware corporation ("Borrower") and UNION BANK OF CALIFORNIA, N.A. ("Bank").
This Agreement amends and restates in its entirety that certain loan agreement
dated March 23, 1998 between Bank and Borrower.
SECTION 1. THE LOAN
1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount
not to exceed Twenty Million Dollars ($20,000,000) outstanding in the
aggregate at any one time (the "Revolving Loan"). Borrower may borrow,
repay and reborrow all or part of the Revolving Loan in amounts not less than
One Hundred Thousand Dollars ($100,000) in accordance with the terms of the
Revolving Note; provided, however, that for at least thirty (30) consecutive
days during each twelve (12)-month period, the principal amount outstanding
under the Revolving Loan must be zero (0). All borrowings of the Revolving
Loan must be made before March 31, 2000, at which time all unpaid principal
and interest of the Revolving Loan shall be due and payable. The Revolving
Loan shall be evidenced by a promissory note (the "Revolving Note") on the
standard form used by Bank for commercial loans. Bank shall enter each
amount borrowed and repaid in Bank's records and such entries shall be deemed
to accurately evidence advances and payments on the Revolving Loan. Omission
of Bank to make any such entries shall not discharge Borrower of its
obligation to repay in full with interest all amounts borrowed.
1.1.1 THE STANDBY L/C SUBLIMIT. As a sublimit to the
Revolving Loan, Bank shall issue, for the account of Borrower, one or more
irrevocable, standby letters of credit (individually, an "L/C" and collectively,
the "L/Cs"). All such standby L/Cs shall be drawn on such terms and conditions
as are acceptable to Bank. The aggregate amount available to be drawn under all
outstanding L/Cs and the aggregate amount of unpaid reimbursement obligations
under drawn L/Cs shall not exceed Five Hundred Thousand Dollars ($500,000) and
shall reduce, dollar for dollar, the maximum amount available under the
Revolving Loan. No standby L/C shall have an expiry date more than twelve (12)
months from its date of issuance and each L/C shall be governed by the terms of
(and Borrower agrees to execute) Bank's standard form for standby L/C
applications and reimbursement agreements. No L/C shall expire after December
30, 2000.
1.2 GASONICS INTERNATIONAL JAPAN K.K. CREDIT FACILITIES. Borrower
has a subsidiary known as Gasonics International Japan K.K. (AGasonics
International Japan@). Gasonics International Japan has yen credit facilities
aggregating Y320,000,000 with Bank of Tokyo-Mitsubishi, Ltd. Bank and Borrower
have agreed that the aggregate United States Dollar equivalent of these credit
facilities shall reduce, dollar for dollar, the maximum amount available under
the Revolving Loan. For purposes of determining from time to time the United
States Dollar equivalent of the principal amount outstanding under Gasonics
International Japan=s yen facilities with Bank of Tokyo-Mitsubishi, Ltd., Bank
shall convert the yen amount outstanding into United States Dollars at the rate
of exchange which Bank can use to make such conversion, measured by the offered
rate as determined by Bank of yen for United States Dollars prevailing on the
last day of each most recently completed month during the term of Borrower=s
Revolving Loan with Bank (AConversion Figure@). Thereafter, for the following
month, Borrower=s availability under the Revolving Loan shall be reduced by the
Conversion Figure.
1.2.1 The intent of Bank and Borrower is to remove
uncertainties as to what exchange rate should be applied, and to place the risk
of any change in market value of yen on Borrower.
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<PAGE>
1.3 TERMINOLOGY.
As used herein the word "Loan" shall mean, collectively, all
the credit facilities described above.
As used herein the word "Note" shall mean, collectively, all
the promissory notes described above.
As used herein, the words "Loan Documents" shall mean all
documents executed in connection with this Agreement.
1.4 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be
used for general working capital purposes.
1.5 INTEREST. The unpaid principal balance of the Revolving Loan
shall bear interest at the rate or rates provided in the Revolving Note and
selected by Borrower. The Revolving Loan may be prepaid in full or in part
only in accordance with the terms of the Revolving Note and any such prepayment
shall be subject to the prepayment fee provided for therein.
1.6 BALANCES. Borrower shall maintain its major depository
accounts with Bank until the Note and all sums payable pursuant to this
Agreement have been paid in full.
1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.8 CONTROLLING DOCUMENT. In the event of any inconsistency
between the terms of this Agreement and any Note or any of the other Loan
Documents, the terms of such Note or other Loan Documents will prevail over the
terms of this Agreement.
1.9 UNUSED COMMITMENT FEE. On the last calendar day of the
third month following the execution of this Agreement and on the last calendar
day of each three-month period thereafter until March 31, 2000, or the earlier
termination of the Loan, Borrower shall pay to Bank a fee of one fifteenth of a
percent (.15%) per year, on the unused portion of the Loan for the preceding
quarter computed on the basis of actual days elapsed of a year of 360 days.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such disbursement,
the following conditions have been fulfilled to Bank's satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and complied with
all terms and conditions required by this Agreement to be performed or complied
with by it prior to or at the date of the making of such disbursement and shall
have executed and delivered to Bank the Note and other documents deemed
necessary by Bank.
2.2 BORROWING RESOLUTION. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 TERMINATION STATEMENTS. Borrower shall have provided Bank
with UCC-2 termination statements executed by such secured creditors as may be
required by Bank suitable for filing with the Secretary of State in each state
designated by Bank.
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<PAGE>
2.4 CONTINUING COMPLIANCE. At the time any disbursement is to be
made, there shall not exist any event, condition or act which constitutes an
event of default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such event of default; nor
shall there be any such event, condition, or act immediately after the
disbursement were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is the
design and manufacturing of semiconductor manufacturing equipment.
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and
subsidiaries (those entities in which Borrower has either a controlling interest
or at least a 25% ownership interest) and their addresses, and the names of
Borrower's principal shareholders, are as provided on a schedule delivered to
Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and performance
of this Agreement, the Note and all other agreements and instruments required by
Bank in connection with the Loan are not in contravention of any of the terms of
any indenture, agreement or undertaking to which Borrower is a party or by which
it or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of Borrower,
including both a balance sheet at December 31, 1998 together with supporting
schedules, and an income statement for the three (3) months ended December 31,
1998, have heretofore been furnished to Bank, and are true and complete and
fairly represent the financial condition of Borrower during the period covered
thereby. Since December 31, 1998, there has been no material adverse change in
the financial condition or operations of Borrower.
3.5 TITLE. Except for assets which may have been disposed of in
the ordinary course of business, Borrower has good and marketable title to all
of the property reflected in its financial statements delivered to Bank and to
all property acquired by Borrower since the date of said financial statements,
free and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
3.6 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's insurance
coverage.
3.7 DEFAULT. Borrower is not now in default in the payment of any
of its material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.8 ORGANIZATION. Borrower is duly organized and existing under
the laws of the state of its organization, and has the power and authority to
carry on the business in which it is engaged and/or proposes to engage.
3.9 POWER. Borrower has the power and authority to enter into
this Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 AUTHORIZATION. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
-3-
<PAGE>
3.11 QUALIFICATION. Borrower is duly qualified and in good
standing in any jurisdiction where such qualification is required.
3.12 COMPLIANCE WITH LAWS. Borrower is not in violation with
respect to any applicable laws, rules, ordinances or regulations which
materially affect the operations or financial condition of Borrower.
3.13 ERISA. Any defined benefit pension plans as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in
ERISA has occurred with respect to any such plan.
3.14 REGULATION U. No action has been taken or is currently
planned by Borrower, or any agent acting on its behalf, which would cause this
Agreement or the Note to violate Regulation U or any other regulation of the
Board of Governors of the Federal Reserve System or to violate the Securities
and Exchange Act of 1934, in each case as in effect now or as the same may
hereafter be in effect. Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock as one of its
important activities and none of the proceeds of the Loan will be used directly
or indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These representations shall be
considered to have been made again at and as of the date of each disbursement of
the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full, unless Bank waives compliance in
writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan
only as provided in subsection 1.4 above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge
promptly all taxes, assessments and other governmental charges and claims levied
or imposed upon it or its property, or any part thereof, provided, however, that
Borrower shall have the right in good faith to contest any such taxes,
assessments, charges or claims and, pending the outcome of such contest, to
delay or refuse payment thereof provided that adequately funded reserves are
established by it to pay and discharge any such taxes, assessments, charges and
claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve
its existence and assets and all rights, franchises, licenses and other
authority necessary for the conduct of its business and will maintain and
preserve its property, equipment and facilities in good order, condition and
repair. Bank may, at reasonable times, visit and inspect any of the properties
of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have access thereto, to make
examination and photocopies thereof, and to make audits during regular business
hours. Costs for such audits shall be paid by Borrower.
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within Fifty (50) days after the close of each fiscal
quarter, except for the final quarter of each fiscal year, its unaudited
consolidated balance sheet as of the close of such fiscal quarter, its
unaudited consolidated income and expense statement with supportive schedules
and statement of retained earnings for that fiscal quarter, prepared in
accordance with generally accepted accounting principles;
-4-
<PAGE>
(b) Within Fifty (50) days after each fiscal quarter, a
certification of compliance with all covenants under this Agreement, executed by
Borrower's chief financial officer or other duly authorized officer of Borrower,
in form acceptable to Bank;
(c) Within One Hundred Twenty (120) days after the close of
each fiscal year, a copy of its statement of financial condition including at
least its consolidated balance sheet as of the close of such fiscal year, its
consolidated income and expense statement and retained earnings statement for
such fiscal year, examined and prepared on an audited basis by independent
certified public accountants selected by Borrower and reasonably satisfactory to
Bank, in accordance with generally accepted accounting principles applied on a
basis consistent with that of the previous year;
(d) Such other financial statements and information as Bank
may reasonably request from time to time;
(e) In connection with each fiscal year-end statement
required hereunder, any management letter of Borrower's certified public
accountants;
(f) Prompt written notice to Bank of all events of default
under any of the terms or provisions of this Agreement or of any other
agreement, contract, document or instrument entered, or to be entered into with
Bank; and of any litigation which, if decided adversely to Borrower, would have
a material adverse effect on Borrower's financial condition; and of any other
matter which has resulted in, or is likely to result in, a material adverse
change in its financial condition or operations; and
(g) Prior written notice to Bank of any changes in Borrower's
officers and other senior management; Borrower's name; and location of
Borrower's assets, principal place of business or chief executive office.
4.6 QUICK RATIO. Borrower shall maintain at all times a ratio of
cash, accounts receivable and marketable securities to current liabilities of
not less than 1.70:1.0, as such terms are defined by generally accepted
accounting principles.
4.7 TANGIBLE NET WORTH. Effective immediately, Borrower will at
all times maintain Tangible Net Worth of not less than the aggregate of Fifty
Eight Million Dollars ($58,000,000), One Hundred percent (100%) of new equity or
subordinated debt issues, and Seventy Five percent (75%) of Borrower's net
profit after taxes, less any repurchased common stock as allowed under Section
5.7 Retirement of Stock. In the event of a net loss after taxes for any fiscal
quarter or fiscal year, the cumulative tangible net worth requirement shall not
be decreased by the amount of the loss. "Tangible Net Worth" shall mean net
worth increased by indebtedness of Borrower subordinated to Bank and decreased
by patents, licenses, trademarks, trade names, goodwill and other similar
intangible assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors).
4.8 DEBT TO TANGIBLE NET WORTH. Borrower will at all times
maintain a ratio of total liabilities to tangible net worth of not greater than
1.0:1.0.
4.9 PROFITABILITY. Commencing with the combination of fiscal
quarters ended December 31, 1999 and March 31, 2000, Borrower will incur no two
consecutive quarterly losses, after provision for income taxes, as reported at
the end of each fiscal quarter.
4.10 INSURANCE. Borrower will keep all of its insurable property,
real, personal or mixed, insured by good and responsible companies against fire
and such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damages to persons and property.
4.11 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand
by Bank, take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank
-5-
<PAGE>
in its reasonable discretion deems necessary, and promptly supply Bank with
such other information concerning its affairs as Bank may request from time
to time.
4.12 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly to
Bank upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.13 BANK EXPENSES. Borrower will pay or reimburse Bank for all
costs, expenses and fees incurred by Bank in preparing and documenting this
Agreement and the Loan, and all amendments and modifications thereof, including
but not limited to all filing and recording fees, costs of appraisals, insurance
and attorneys' fees, including the reasonable estimate of the allocated costs
and expenses of in-house legal counsel and legal staff.
4.14 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank,
as soon as possible and in any event within 15 days after Borrower knows or has
reason to know that any event or condition with respect to any defined benefit
pension plans of Borrower described in Section 3 above has occurred, a statement
of an authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower will not create, assume or
suffer to exist any mortgage, pledge, security interest, encumbrance, or lien
(other than for taxes not delinquent and for taxes and other items being
contested in good faith) on property of any kind, whether real, personal or
mixed, now owned or hereafter acquired, or upon the income or profits thereof,
except to Bank and except for minor encumbrances and easements on real property
which do not affect its market value, and except for existing liens on
Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased.
5.2 BORROWINGS. Borrower will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to Bank or except to a financial institution at face value
for deposit or collection purposes only and without any fee other than fees
normally charged by the financial institution for deposit or collection
services. Borrower will not borrow any money, become contingently liable to
borrow money, nor enter any agreement to directly or indirectly obtain borrowed
money, except pursuant to agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will neither
liquidate nor dissolve nor enter into any consolidation, merger, partnership or
other combination, nor convey, nor sell, nor lease all or the greater part of
its assets or business, nor purchase or lease all or the greater part of the
assets or business of another; provided, however, Borrower may acquire, merge or
consolidate with another corporation if Borrower is the surviving corporation
and the aggregate value of the assets so transferred does not exceed Ten Million
Dollars ($10,000,000) in any fiscal year and such assets will not be subject to
any lien or encumbrance following the effective date of such combination.
5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except in
the ordinary course of business as currently conducted, make any loans or
advances, become a guarantor or surety, pledge its credit or
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properties in any manner or extend credit exceeding an aggregate of Five
Million Dollars ($5,000,000) with the exception of loans, advances, and
guaranties to support Borrower's Japanese subsidiary, Gasonics International
Japan K.K. and hereafter created consolidated subsidiaries of Borrower.
5.5 INVESTMENTS. Borrower will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of deposit
of Bank, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, provided all
such permitted investments shall mature within three years of purchase.
5.6 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any
dividends, other than a dividend payable in its own common stock, or authorize
or make any other distribution with respect to any of its stock now or hereafter
outstanding.
5.7 RETIREMENT OF STOCK. Borrower may repurchase its shares of
common stock, up to an aggregate maximum of Five Hundred Thousand (500,000)
shares, provided Borrower is not in breach of its liquidity and leverage
covenants at the time of the repurchase or after the repurchase.
5.8 PARENT AND SUBSIDIARY PROPERTY. Borrower will not transfer
any property to its parent or any affiliate of its parent, except for value
received in the normal course of business as business would be conducted with an
unrelated or unaffiliated entity. In no event shall management fees or fees for
services be paid by Borrower to any such direct or indirect affiliate without
Bank's prior written approval.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Note, shall make all sums of
interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance of
any covenant or condition of the Loan Documents;
6.4 Any guaranty or subordination agreement required hereunder is
breached or becomes ineffective, or any Guarantor or subordinating creditor
dies, disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
6.5 There is a change in ownership or control of ten percent (10%) or
more of the issued and outstanding stock of Borrower.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given to
Bank hereunder shall be cumulative and not alternative and shall be in addition
to all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or
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<PAGE>
remedy shall not preclude the further exercise thereof. No waiver shall be
effective unless it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment of Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing
signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more
counterparts to this Agreement, each of which shall be deemed an original.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures at
the end of this Agreement and shall be considered to have been validly given:
(a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the next
business day, if sent by overnight courier service of recognized standing; and
(d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may
be changed from time to time by notice delivered as provided above.
-8-
<PAGE>
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A.
- ------------------------------------
Allan Miner
Vice President
/s/ James B. Goudy
- ------------------------------------
James Goudy
Vice President
San Francisco, CA 94104-1402
Attention: James Goudy
Telecopier: (415) 705-7111
Telephone: (415) 705-7098
GASONICS INTERNATIONAL CORPORATION
/s/ John E. Arnold
- ------------------------------------
John Arnold
Corporate Controller and Acting Chief Financial Officer
3081 North First Street
San Jose, CA 95134
Attention: John Arnold
Telecopier: (408) 325-6691
Telephone: (408) 325-1222
-9-
<PAGE>
Exhibit 10.19
May 19, 1999
Mr. Graham W. Hills
100 Vasona Oaks Drive
Los Gatos, CA 95030
Dear Graham:
We are very pleased to extend GaSonics International's offer to you to join
our organization. The following is our offer to you:
1. The position of Vice President, Chief Technical Officer reporting to the
President and CEO of GaSonics International, Asuri S. Raghavan.
2. Your base salary will be $15,833.33 per month ($190,000 annually).
3. You will receive an executive car allowance of $650.00 per month.
4. You will be eligible to receive an executive incentive of 45% of your
base salary upon achievement of individual and/or financial goals, paid
annually.
5. You will be eligible to participate in our executive deferred
compensation plan.
6. You will be eligible to participate in GaSonics' 401(k) Plan. The
Company contributes 50% of the first 6% of salary deferral made to the
Plan and is vested over a four year schedule.
7. You will receive 50,000 stock options vested over four years. All
options are contingent upon approval by the Board of Directors with
option price set at fair market value established at the time of the
grant. Options expire after 10 years of service. Twenty-five percent
of the option shares shall become excerciseable upon completion of one
year of service. The remaining options will become exerciseable in 36
successive equal monthly installments upon completion of each additional
month of service over the succeeding three years.
8. Upon acceptance of this offer and joining our company, you will receive a
bonus of $20,000.00. If you voluntarily terminate your employment
within 12
<PAGE>
Page 2
months of your date of hire, this amount must be refunded to GaSonics
International on a pro-rated basis.
9. In the unlikely event that you are terminated within the first twelve
(12) months of your employment with the Company and this termination is
the direct result of a Change of Control, GaSonics International will
provide you with a severance package that will include nine (9) months
of salary continuation, paid at regular payroll intervals with option
vesting. This will be paid up to a period of nine (9) months, or until
you begin new employment, whichever comes first.
With your acceptance of this offer, you will receive the standard GaSonics
International benefits package. Benefit coverage will commence on your date
of hire. BENEFITS ORIENTATION WILL BE CONDUCTED ON YOUR FIRST DAY OF
EMPLOYMENT AT 8:00 A.M. IN BUILDING ONE, 2730 JUNCTION AVENUE.
Verification of your citizenship or right to work in the United States is
required, and you will need to provide proof of this upon your first day of
employment. I have attached a copy of U.S. Department of Justice form I-9.
Please complete this form and bring it and the required verification
documents with you to orientation.
Employment with GaSonics International is for no specified period of time.
As a result, either you or GaSonics International are free to terminate your
employment relationship at any time for any reason, with or without cause.
This is the full and complete agreement between us on this term. Although
your job duties, title, compensation and benefits as well as GaSonics
International's personnel policies and procedures may change from time to
time, the "at-will" nature of your employment may only be changed in an
express writing signed by you and the President of the Company.
This offer is open to you until May 26, 1999. To indicate your concurrence
and acceptance, please sign one copy of this letter and return it to my
attention at your earliest convenience.
GaSonics International is a company with a goal of leading the industry in
some of the most challenging and exciting markets. Whether or not we meet
this challenge depends upon the excellence of our people. Thus, the position
offered you is central to the Company's success.
<PAGE>
Page 3
We believe that you have a great deal to contribute to our organization, and
we feel certain that you will find many challenges, satisfaction and
opportunities in your association with GaSonics International. We look
forward to having you on the GaSonics team.
Sincerely,
Asuri S. Raghavan
President and Chief Executive Officer
GASONICS INTERNATIONAL
Agreed and accepted: _______________________________
Name Date
Employment start date: June 14, 1999
--------------------
Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10Q FOR THE YEAR-TO-DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,096
<SECURITIES> 11,816
<RECEIVABLES> 18,511
<ALLOWANCES> 840
<INVENTORY> 16,023
<CURRENT-ASSETS> 71,626
<PP&E> 25,700
<DEPRECIATION> 13,880
<TOTAL-ASSETS> 84,322
<CURRENT-LIABILITIES> 21,940
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 61,688
<TOTAL-LIABILITY-AND-EQUITY> 84,322
<SALES> 41,139
<TOTAL-REVENUES> 41,139
<CGS> 26,808
<TOTAL-COSTS> 26,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (14,479)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,479)
<EPS-BASIC> (1.01)
<EPS-DILUTED> (1.01)
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