<PAGE>
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 March 31, 1999
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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
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GASONICS INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-2159729
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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 May 3, 1999, there were 14,396,272 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 March 31, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Operations for the three
and six month periods ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended March 31, 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Securityholders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
Exhibit Index 28
</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>
MARCH 31, Sept. 30,
1999 1998
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<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $12,268 $14,698
Marketable securities 17,864 17,640
Trade accounts receivable, net 16,005 15,026
Inventories 15,605 20,822
Net deferred tax asset 5,697 5,697
Prepaid expenses and other current assets 3,813 7,437
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Total current assets 71,252 81,320
Property and equipment, net 12,761 14,810
Deposits and other assets 971 1,086
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Total assets $84,984 $97,216
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under credit facility $ 2,513 $ 2,116
Accounts payable 4,026 4,008
Income taxes payable 5,130 4,038
Accrued expenses 9,365 11,423
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Total current liabilities 21,034 21,585
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Long-term liabilities 134 223
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Stockholders' equity:
Common stock and
additional paid-in capital 38,941 37,675
Retained earnings 24,875 37,733
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Total stockholders' equity 63,816 75,408
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Total liabilities and stockholders' equity $84,984 $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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 13,215 $ 27,616 $ 23,237 $ 60,467
Cost of sales 8,658 14,928 16,528 32,343
-------- -------- -------- --------
Gross margin 4,557 12,688 6,709 28,124
-------- -------- -------- --------
Operating expenses:
Costs associated with reduction in force - - 407 -
Research & development 5,662 5,367 9,298 10,404
Selling, general & administrative 5,136 7,191 10,439 14,711
-------- -------- -------- --------
Total operating expenses 10,798 12,558 20,144 25,115
-------- -------- -------- --------
Operating income (loss) (6,241) 130 (13,435) 3,009
-------- -------- -------- --------
Other income and expenses, net 263 210 577 336
-------- -------- -------- --------
Income (loss) before provision for income taxes (5,978) 340 (12,858) 3,345
Provision for income taxes - 112 - 1,108
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Net income (loss) $ (5,978) $ 228 $(12,858) $ 2,237
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - Basic $ (0.42) $ 0.02 $ ( 0.90) $ 0.16
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - Diluted $ (0.42) $ 0.02 $ ( 0.90) $ 0.15
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares 14,325 14,027 14,249 13,972
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common &
common equivalent shares 14,325 14,408 14,249 14,456
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes.
4
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used for) operating activities $ (3,312) $ 6,045
-------- --------
Cash flows from investing activities:
Purchases of property & equipment (557) (1,817)
Increase in marketable securities (224) (3,036)
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Net cash used for investing activities (781) (4,853)
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Cash flows from financing activities:
Increase (decrease) in borrowings under credit facility 397 (1,593)
Proceeds from issuance of common stock 1,266 1,116
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Net cash provided by (used for) financing activities 1,663 (477)
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Net increase (decrease) in cash and cash equivalents (2,430) 715
Cash & cash equivalents at beginning of period 14,698 13,307
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Cash & cash equivalents at end of period $ 12,268 $ 14,022
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</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 six months ended March 31, 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 report on Form 10-Q for the period ending
December 31, 1998.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
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(unaudited)
<S> <C> <C>
Raw Materials $ 9,318 $ 12,547
Work in Process 2,619 2,254
Finished Goods 3,668 6,021
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$ 15,605 $ 20,822
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</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 six months ended March
31, 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 six months ended March 31, 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 MARCH 31, 1999 INCOME SHARES AMOUNT
------ ------ ------
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<S> <C> <C> <C>
Net loss $ (5,978)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $ (5,978) 14,325 $ ( 0.42)
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</TABLE>
<TABLE>
<CAPTION>
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PER SHARE
---------
FOR THE THREE MONTHS ENDED MARCH 31, 1998 INCOME SHARES AMOUNT
------ ------ ------
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<S> <C> <C> <C>
Net income $ 228
BASIC INCOME PER SHARE
Income available to common stockholders $ 228 14,027 $ 0.02
Effect of dilutive securities:
Options outstanding to purchase common stock 381
DILUTIVE INCOME PER SHARE
Income available to common stockholders $ 228 14,408 $ 0.02
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</TABLE>
<TABLE>
<CAPTION>
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PER SHARE
---------
FOR THE SIX MONTHS ENDED MARCH 31, 1999 INCOME SHARES AMOUNT
------ ------ ------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $ (12,858)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $ (12,858) 14,249 $ ( 0.90)
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</TABLE>
7
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<TABLE>
<CAPTION>
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PER SHARE
---------
FOR THE SIX MONTHS ENDED MARCH 31, 1998 INCOME SHARES AMOUNT
------ ------ ------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $2,237
BASIC INCOME PER SHARE
Income available to common stockholders $2,237 13,972 $0.16
Effect of dilutive securities:
Options outstanding to purchase common stock 484
DILUTIVE INCOME PER SHARE
Income available to common stockholders $2,237 14,456 $0.15
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</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.
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 six months
ended March 31, 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With the exception of historical facts, the following Management's Discussion
and Analysis of Financial Condition and Results of Operations 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, 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 report on Form
10-Q for the period ended December 31, 1998, available upon request, for a more
complete understanding of the Company's financial position, business and results
of operations.
RESULTS OF OPERATIONS
NET SALES. The Company's net sales of $13.2 million for the second quarter of
fiscal year 1999 ended March 31, 1999 represent a decrease of approximately 52%
when compared to net sales for the same quarter in fiscal year 1998 of $27.6
million. For the six month period ending March 31, 1999, net sales decreased
approximately 62% to $23.2 million compared to net sales of $60.5 million for
the same period last fiscal year.
The sales decrease in both periods was due primarily to lower sales of the
Company's single chamber and multi-chamber Performance Enhancement Platform
("PEP") products 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 half of fiscal 1999 compared to VHP
sales of $6.1 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 had a consecutive quarter improvement
in bookings and sales and the semiconductor industry may be showing signs of
upward movement, customers are still very cautious and the Company anticipates
that 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 57%, 9% and 30% of net sales, respectively, for the six months
ended March 31, 1999 compared to
9
<PAGE>
approximately 58%, 24% and 18% respectively, for the six months ended March
31, 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 fiscal 1999. The continuing Asian economic slowdown has had an
adverse impact on the Company's international net sales in the first half of
fiscal 1999 and may have a significant adverse impact on international net
sales for the balance of fiscal 1999.
The Company currently anticipates that its total net sales for the third quarter
of fiscal 1999 will improve compared to the second quarter, but will continue to
be below prior comparable period levels due to the continuing financial crisis
in Asia and Japan and the apparent continued caution by North American customers
that has resulted in reduced spending on capital equipment.
GROSS MARGIN. The Company's gross margin as a percentage of net sales for the
second quarter and six months ended March 31, 1999 was 35% and 29%,
respectively, compared to 46% and 47%, respectively, for the same periods of
fiscal 1998. The decrease in gross margin percentage for both periods of fiscal
1999 compared to fiscal 1998 is due to the Company's 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 the general slowdown in the semiconductor industry, the economic
troubles currently being experienced by many countries in Asia, including
companies in certain of the Company's major markets such as Japan and Korea,
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 the PEP systems, targeted cost
reduction programs and controlled spending. The Company currently anticipates
that its overall gross margins for the third quarter of fiscal year 1999 will
improve from that of the second quarter primarily due to anticipated consecutive
quarter sales growth.
COSTS ASSOCIATED WITH REDUCTION IN FORCE. In December 1998, the Company reduced
its workforce by approximately 5% in response to market conditions and recorded
a charge of $407,000 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 second quarter of
fiscal 1999 were $5.7 million or 43% of net sales compared to $5.4 million or
19% of net sales for the second quarter of fiscal 1998. For the six month period
ended March 31, 1999 and 1998, R&D expenses were $9.3 million or 40% of net
sales and $10.4 million or 17% of net sales, respectively. Included in the
second quarter and six month expenses for fiscal 1999 is a $1.8 million charge
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 has significantly declined in value
10
<PAGE>
since the Company has now transitioned to the next generation of 300mm
product development. Offsetting this charge was a $1.5 million decrease in
spending in the second quarter and a $2.9 million decrease in spending in the
first six months of fiscal 1999 primarily from a reprioritization of R&D
projects, the cumulative impact of three reductions in force that occurred in
the second half of fiscal year 1998 and the first quarter of fiscal 1999 and
a reduced work schedule that has continued since the beginning of the third
quarter of fiscal year 1998. All of the above actions were part of the
Company's cost reduction efforts taken as a result of current business
conditions. Additionally, an engineering grant of $250,000 was funded in the
first quarter of fiscal 1999 and was credited against certain 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. The Company anticipates that
R&D spending in absolute dollars for the next several quarters of fiscal 1999
will decrease compared to prior year comparable periods primarily due to the
cost reductions noted above. However, expenses may increase slightly from the
second quarter of fiscal 1999, before taking into account the $1.8 million
write-off, previously mentioned, due to the Company's return to a full work
schedule in April 1999. The Company decided to return to a full work schedule
based on the improved financial results in the second quarter compared to
that of the first quarter this fiscal year and the anticipation that business
will continue to improve over the next several quarters.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses for the second quarter
of fiscal 1999 were $5.1 million or 39% of net sales and $10.4 million or 45% of
net sales for the six month period of fiscal 1999 compared to $7.2 million or
26% of net sales and $14.7 million or 24% of net sales for the same periods of
fiscal 1998, respectively. The increase in SG&A expense as a percentage of net
sales is primarily due to lower sales volume. The decrease in absolute dollars
primarily results from the cumulative impact of the Company's three reductions
in force and the reduced work schedule and lower third party sales commissions
on international sales. For approximately the last two 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
remaining periods of fiscal 1999 will be lower in absolute dollars from the
comparable periods of fiscal 1998 as a result of the Company's cost reduction
activities. Compared to the second quarter of fiscal year 1999, however, SG&A
expenses may increase slightly due to additional costs related to anticipated
sales increases and the Company's return to a full work schedule.
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 $17,000 for the second quarter and
$26,000 for the first six months of fiscal 1999 as compared to $5,000 in the
second quarter and $25,000 for the first six 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 subsidiary in Japan,
GaSonics International
11
<PAGE>
Japan K.K. As of March 31, 1999, borrowings under this loan agreement were
294 million yen, which was equivalent to approximately $2.5 million as of
that date. Interest income received primarily from the Company's short-term
investments was approximately $226,000 for the second quarter and $504,000
for the six month period of fiscal 1999 as compared to $226,000 and $458,000
for the corresponding periods of fiscal 1998. Foreign currency translation
losses of approximately $25,000 and $65,000 were incurred in the second
quarter and first six months of fiscal 1999, respectively, compared to
$19,000 and $128,000 for the same periods last fiscal year, respectively, due
to fluctuations in currency exchange rates 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 $101,000 and $178,000 for the second quarter and first six
months of fiscal 1999, respectively, compared to $83,000 and $119,000 for the
comparable periods of fiscal 1998.
INCOME TAXES. The results for the second quarter and first six months of fiscal
1999 do not include a provision for tax benefits related to the six months ended
March 31, 1999 net loss due to the unavailability of tax loss carry-backs. The
tax loss and other tax benefits will be carried forward and will be available to
offset any future tax liabilities. The Company does not anticipate recording
these tax benefits until returning to profitability.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 1999, cash, cash equivalents and
marketable securities decreased by $2.2 million to $30.1 million at March 31,
1999 from $32.3 million at September 30, 1998. Operating activities used $3.3
million of cash for the six month period ended March 31, 1999 compared to $6.0
million of cash provided by operations in the corresponding period of fiscal
1998. Cash used by operating activities in the first six 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 six months of fiscal 1999 used cash of
approximately $781,000 resulting from the net purchases of marketable securities
of approximately $224,000 and $557,000 on programs in progress for improved
operating and information systems and demonstration equipment. For the first six
months of fiscal 1998, a total of $4.8 million was used for investing activities
consisting of $3.0 million for the net purchase of marketable securities and
$1.8 million for the purchase of capital equipment and improved operating and
information systems.
Financing activities for the first six 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 $1.3 million and $397,000 from borrowings by
Gasonics International Japan K.K. under its credit facility with the Bank of
Tokyo-Mitsubishi. For the same period of fiscal 1998, $1.1 million was provided
from the issuance of common stock under the Company's employee stock purchase
and stock option plans and $1.6 million was used to reduce the borrowings by
GaSonics International Japan K.K. under its credit facility with the Bank of
Tokyo-Mitsubishi.
12
<PAGE>
At March 31, 1999, the Company had working capital of $50.2 million compared to
$59.7 million at September 30, 1998. Accounts receivable at March 31, 1999
increased by approximately $1.0 million and inventory decreased by approximately
$5.2 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 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 March 31, 1999, consisted of
approximately $12.3 million in cash and cash equivalents, $17.9 million in
marketable securities and a $20.0 million unsecured line of credit with Union
Bank, the maturity date of which has been extended from March 31, 1999 to June
1, 1999. A commercial letter of credit provision of $500,000 and a foreign
exchange contract provision of $1.0 million are also provided under the credit
line. 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. As of March 31, 1999, except for $69,193
outstanding under the letter of credit provision, there were no borrowings
outstanding under this line. The line of credit contains certain covenants,
including covenants relating to financial ratios and tangible net worth that
must be maintained by the Company. The Company was not in compliance with the
line of credit tangible net worth and profitability covenants as of March 31,
1999. However, Union Bank waived the Company's non-compliance with respect to
these covenants. There can be no assurance that Union Bank will waive these
covenants in the future if the Company fails to achieve profitability which
could result in the termination of the credit line. 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 $2.6 million. 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 expiration date of this credit facility
has also been extended from March 31, 1999 to June 1, 1999. As of March 31,
1999, GaSonics International Japan K.K. had borrowed 294 million yen under this
credit facility, which was equivalent to approximately $2.5 million as of that
date. The Company intends to enter into a new agreement with Union Bank and
renew or extend the term of the existing credit facility in Japan with the Bank
of Tokyo-Mitsubishi prior to their respective expiration dates. However, there
can be no assurance that the Company will be successful in renewing or extending
either such 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 March 31, 1999, no 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
13
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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.
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 is in the process of identifying 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 two to three million dollars, of which approximately $1.2 million was
spent as of March 31, 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'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.
14
<PAGE>
ADDITIONAL RISK FACTORS
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated significantly in the past and
will continue to fluctuate significantly in the future. The Company anticipates
that factors continuing to affect its future operating results will include the
cyclicality of the semiconductor industry and the markets served by the
Company's customers, 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 $850,000 for its
photoresist and post-etch residue removal systems and up to approximately $2.0
million or more for many of its other products. As a result, the timing of
revenue recognition for even a single transaction has had and could continue to
15
<PAGE>
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, which has extended through the
second 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.
16
<PAGE>
HIGHLY COMPETITIVE INDUSTRY
The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate capital
equipment into a semiconductor production line. As a result, once a
semiconductor manufacturer has selected a particular vendor's capital equipment,
the Company believes that the manufacturer generally relies upon that equipment
for the specific production line application and frequently will attempt to
consolidate its other capital equipment requirements with the same vendor.
Accordingly, it is difficult for the Company to sell to a particular customer
for a significant period of time if that customer selects a competitor's capital
equipment. The Company currently has only one principal product line and
experiences intense competition worldwide from a number of foreign and domestic
manufacturers, including Canon, Applied Materials, Inc., Eaton Corporation, Lam
Research Corporation, Matrix Semiconductor Systems, Inc., Mattson Technology,
Inc., Plasma Systems and MC Electronics, many of which have substantially
greater installed bases and greater financial, marketing, personnel, technical
and other resources than the Company. One of the Company's competitors, Fusion,
was acquired by Eaton Corporation, a very large corporation, further enhancing
the resources of one of the Company's competitors. The Company believes that the
industry will continue to be subject to increased consolidation which will
increase the number of larger more powerful companies in the industry sector in
which the Company competes. Certain of the Company's competitors have announced
the introduction of, or have introduced or acquired, competitive products that
offer enhanced technologies and improvements. Applied Materials and Lam Research
have modules on their products which remove photoresist using dry chemical
processing and, therefore, compete with the Company's products. The Company
expects its competitors to continue to develop enhancements to and future
generations of competitive products that may offer improved price or performance
features. New product introductions and enhancements by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's systems in addition to intense price competition or
otherwise make the Company's systems or technology obsolete or noncompetitive.
In addition, by virtue of its reliance on sales of advanced dry chemistry
processing equipment, the Company could be at a disadvantage compared to certain
competitors that offer more diversified product lines. The Company believes that
it will continue to face competition from current and new vendors employing
other technologies, such as wet chemistry, traditional dry chemistry and other
ashing techniques, as such competitors attempt to extend the capabilities of
their existing products. Increased competitive pressure has led and may continue
to lead to reduced demand and lower prices for the Company's products, thereby
materially adversely affecting the Company's business, financial condition and
operating results. There can be no assurance that the Company will be able to
compete successfully in the future.
Competitors of the Company's LCD division in Japan include Japan-based companies
and Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh and
ULVAC. These competitors manufacture alternative technology systems and are well
established in Japan and they could, at any time, enter the Company's markets
with improved technology or with systems that are directly competitive with
those of the Company's LCD division. 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
17
<PAGE>
Japanese 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 six months of
fiscal 1999 accounted for approximately 51%, 66%, 64% and 76% 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 16%, Motorola and White Oak Semiconductor each accounted for
approximately 12% of net sales for the first six 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 company 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 breakeven.
18
<PAGE>
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 product 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
materially
19
<PAGE>
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 10% of total net sales for the first six 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 collaborative relationships
with Japanese semiconductor manufacturers.
20
<PAGE>
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 43% of net sales in fiscal
years 1996, 1997, 1998 and the first six 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
21
<PAGE>
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 or 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
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<PAGE>
acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of
the acquired company. From time to time, the Company has engaged in
preliminary discussions with third parties concerning potential acquisitions
of product lines, technologies and businesses; however, there are currently
no agreements with respect to any such acquisition. In the event that such an
acquisition does occur, there can be no assurance as to the effect thereof on
the Company's business, financial condition or results of operations.
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 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 March 31, 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 adversely affect the
voting and other rights of other holders of Common Stock. Certain provisions
23
<PAGE>
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.
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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.
The following proposals were voted upon by the Company's stockholders
at the Annual Meeting of Stockholders held on March 4, 1999.
1. The following six directors nominated to serve until the next Annual
Meeting or until their successors are elected and qualified, were
elected by the stockholders.
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C>
Dave Toole 11,907,508 292,860 - -
F. Joseph Van Poppelen 11,955,625 244,743 - -
Kenneth M. Thompson 11,951,967 248,401 - -
Monte M. Toole 11,939,539 260,829 - -
Kenneth Schroeder 11,955,718 244,650 - -
Asuri Raghavan 11,948,364 252,004 - -
</TABLE>
2. An amendment to the Company's 1994 Stock Option/Stock Issuance Plan
(the "Option Plan") to increase the maximum number of shares of Common
Stock authorized for issuance over the term of the Option Plan from
3,100,000 shares to 3,500,000 shares was not approved with 12,200,368
shares of the Company's voting securities voted on the matter, of which
5,629,282 were voted for the proposal, 6,546,093 were voted against,
24,993 were abstained from voting and there were no broker non-votes.
25
<PAGE>
3. A proposal to ratify the appointment of Arthur Andersen LLP as
independent auditors of the Company for the fiscal year ending
September 30, 1999, was approved with 12,200,368 shares of the
Company's voting securities were voted on the matter, of which
12,164,277 were voted for the proposal, 18,504 were voted against,
17,587 were abstained from voting and there were no broker non-votes.
ITEM 5. OTHER INFORMATION.
Effective April 2, 1999, Terry R. Gibson resigned as Vice President,
Finance and Chief Financial Officer. The Company is in the process of
finding a replacement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
26
<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: May 6, 1999 By: Asuri Raghavan
President/CEO
(on behalf of the Registrant and as
principal financial and accounting
officer of the Registrant)
/s/ John E. Arnold
----------------------------------
Controller
(as Chief Accounting Officer)
27
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY
NUMBERED
PAGE
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
28
<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 10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,268
<SECURITIES> 17,864
<RECEIVABLES> 16,785
<ALLOWANCES> 780
<INVENTORY> 15,605
<CURRENT-ASSETS> 71,252
<PP&E> 25,406
<DEPRECIATION> 12,645
<TOTAL-ASSETS> 84,984
<CURRENT-LIABILITIES> 21,034
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 63,211
<TOTAL-LIABILITY-AND-EQUITY> 84,984
<SALES> 23,237
<TOTAL-REVENUES> 23,237
<CGS> 16,528
<TOTAL-COSTS> 16,528
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> (12,858)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,858)
<EPS-PRIMARY> (.90)
<EPS-DILUTED> (.90)
</TABLE>
