<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________________
Commission file number: 0-23372
GASONICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2159729
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
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
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
_________ _______
At February 1, 1999, there were 14,332,723 shares of the Registrant's
Common Stock, $0.001 par value per share, outstanding.
<PAGE>
GASONICS INTERNATIONAL CORPORATION
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1998 3
Condensed Consolidated Statements of Operations
for the three month periods ended December 31, 1998
and 1997 4
Condensed Consolidated Statements of Cash Flows for
the three month periods ended December 31, 1998
and 1997 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 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Securityholders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
Exhibit Index 26
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PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEC. 31, Sept. 30,
1998 1998
---------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,354 $ 14,698
Marketable securities 18,217 17,640
Trade accounts receivable, net 14,491 15,026
Inventories 19,004 20,822
Net deferred tax asset 5,697 5,697
Prepaid expenses and other current assets 6,973 7,437
--------- -----------
Total current assets 75,736 81,320
Property and equipment, net 13,936 14,810
Deposits and other assets 1,127 1,086
--------- -----------
--------- -----------
Total assets $ 90,799 $ 97,216
--------- -----------
--------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities:
Borrowings under credit facility $ 2,350 $ 2,116
Accounts payable 4,371 4,008
Income taxes payable 4,750 4,038
Accrued expenses 9,948 11,423
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Total current liabilities 21,419 21,585
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Long-term liabilities 178 223
--------- -----------
Stockholders' equity:
Common stock and
additional paid-in capital 38,348 37,675
Retained earnings 30,854 37,733
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Total stockholders' equity 69,202 75,408
--------- -----------
Total liabilities and stockholders' equity $ 90,799 $ 97,216
--------- -----------
--------- -----------
</TABLE>
See accompanying notes.
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GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------------
1998 1997
------------ ------------------
<S> <C> <C>
Net sales $ 10,023 $ 32,851
Cost of sales 7,870 17,415
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Gross margin 2,153 15,436
-------- --------
Operating expenses:
Costs associated with reduction in force 407 -
Research & development 3,636 5,037
Selling, general & administrative 5,303 7,521
-------- --------
Total operating expenses 9,346 12,558
-------- --------
Operating income (loss) (7,193) 2,878
Other income and expenses, net 314 126
-------- --------
Income (loss) before provision for income taxes (6,879) 3,004
Provision for income taxes - 995
-------- --------
Net income (loss) $ (6,879) $ 2,009
-------- --------
-------- --------
Net income (loss) per share - Basic $ (0.49) $ 0.14
-------- --------
-------- --------
Net income (loss) per share - Diluted $ (0.49) $ 0.14
-------- --------
-------- --------
Weighted average common shares 14,172 13,918
-------- --------
-------- --------
Weighted average common &
common equivalent shares 14,172 14,493
-------- --------
-------- --------
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
GASONICS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------------
1998 1997
------------ ------------------
<S> <C> <C>
Net sales $ 10,023 $ 32,851
Cash flows from operating activities:
Net cash used for operating activities $ (3,383) $ (1,594)
------------ --------------
Cash flows from investing activities:
Purchases of property & equipment (290) (1,090)
Increase in marketable securities (578) (2,176)
------------ --------------
Net cash used for investing activities (868) (3,266)
------------ --------------
Cash flows from financing activities:
Increase (decrease) in borrowings under credit facility 234 (1,097)
Proceeds from issuance of common stock 673 715
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Net cash provided by (used for) financing activities 907 (382)
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Net decrease in cash and cash equivalents (3,344) (5,242)
Cash & cash equivalents at beginning of period 14,698 13,307
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Cash & cash equivalents at end of period $ 11,354 $ 8,065
------------- --------------
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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 three months ended
December 31, 1998 are not necessarily indicative of the operating results to
be expected for the full fiscal year. Such financial statements should be
read in conjunction with the information contained in the Company's Annual
Report on Form 10-K for the year ended September 30, 1998.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
----------- -------------
(unaudited)
<S> <C> <C>
Raw Materials $11,290 $12,547
Work in Process 2,186 2,254
Finished Goods 5,528 6,021
----------- -------------
$19,004 $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).
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which simplifies and replaces the standards for computing earnings
per share previously found in Accounting Principles Board Opinion ("APB") No.
15. SFAS No. 128 requires companies to compute under two different methods,
basic and diluted earnings per share, and to disclose the methodology used
for the calculation. All prior period earnings per share data presented have
been restated to conform to the requirements under SFAS No. 128.
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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 their
consolidated financial statements. There are no interim reporting
requirements in the initial year of adoption under SFAS No. 131.
5. RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Basic earnings per common share for the three months ended December
31, 1998 and 1997 were computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share for the three months ended December 31, 1998 and
1997, were calculated using the treasury stock method to compute the weighted
average common stock outstanding. As a result, the Company's reported
earnings per share for fiscal 1997 were restated (in thousands, except per
share data).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PER SHARE
FOR THE THREE MONTHS ENDED DEC. 31, 1998 INCOME SHARES AMOUNT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $(6,879)
BASIC AND DILUTED LOSS PER SHARE
Loss to common stockholders $(6,879) 14,172 $( 0.49)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PER SHARE
FOR THE THREE MONTHS ENDED DEC. 31, 1997 INCOME SHARES AMOUNT
- -------------------------------------------------------------------------------------------------
Net income $ 2,009
BASIC INCOME PER SHARE
Income available to common stockholders $ 2,009 13,918 $ 0.14
Effect of dilutive securities:
Options issued to purchase common stock 575
DILUTIVE INCOME PER SHARE
Income available to common stockholders $ 2,009 14,493 $ 0.14
- -------------------------------------------------------------------------------------------------
</TABLE>
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6. 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. The following table
reconciles comprehensive income under the provisions of SFAS No.130 for the
three months ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
------------------
<S> <C> <C>
Net income (loss) $(6,879) $2,009
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on
short-term investments - -
-------- -------
Comprehensive income (loss) $(6,879) $2,009
-------- -------
-------- -------
</TABLE>
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, 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 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, available upon request, for a more complete
understanding of the Company's financial position, business and results of
operations.
RESULTS OF OPERATIONS
NET SALES. Net sales for the first quarter of fiscal 1999 ended December 31,
1998 decreased 70% to $10.0 million compared to net sales for the same
quarter in fiscal 1998 of $32.9 million. This decrease was due primarily to
lower sales of the Company's Performance Enhancement Platform ("PEP")
products resulting from the general slowdown in the semiconductor industry.
Continued delays in receiving new orders and rescheduling or cancellations of
previously ordered equipment has materially adversely affected the Company's
sales for the last two and a half years. It is anticipated that the
semiconductor downturn and the resultant 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 63%, 18% and 19% of net sales, respectively, for the quarter
ended December 31, 1998, compared to approximately 52%, 26% and 22%
respectively, for the quarter ended December 31, 1997. 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 current
Asian economic slowdown, however, may have a significant adverse impact on
international net sales in fiscal 1999.
The Company anticipates that its total net sales for the next several
quarters of fiscal 1999 will continue to be significantly below prior
comparable period levels, and may even fall below first quarter of fiscal
1999 levels, due to the continuing financial crisis in Asia and Japan and the
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apparent continued caution by North American customers that has resulted in
reduced spending for capital equipment.
GROSS MARGIN. The Company's gross margin as a percentage of net sales for
the first quarter of fiscal 1999 was 22% compared to 47% for the same period
of fiscal 1998. The decrease in gross margin percentage for the three month
period of fiscal 1999 was due primarily to under utilization of the Company's
field service and support organization and under-absorbed manufacturing
overhead resulting from lower net sales. The Company's gross margin as a
percentage of net sales is affected by a variety of other factors, including
the mix and average selling prices of products sold and the costs to
manufacture, service and support new product introductions and enhancements.
The Company expects that its gross margin 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 some 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, sales of lower margin
multi-chamber and 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 on the PEP systems, targeted cost reduction programs and
controlled spending. However, the Company expects that its gross margin rates
for the next several quarters in fiscal 1999 will be significantly lower than
prior year comparable periods and may be lower than that reported in the
first quarter of fiscal 1999 principally due to the under utilization of
field service and support and under absorption of manufacturing costs
resulting from the anticipated sales volume.
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 EXPENDITURES (R&D). 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 first
quarter of fiscal 1999 were $3.6 million or 36.3% of net sales compared to
$5.0 million or 15.3% of net sales for the first quarter of fiscal 1998. The
increase in R&D expense as a percentage of net sales was due primarily to
lower sales volume. The decrease in spending in terms of total actual dollars
primarily resulted from a reprioritization of R&D projects, the cumulative
impact of two reductions in force that occurred in the second half of fiscal
year 1998 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 market share gain
opportunities. In particular, R&D spending is directed towards programs to
support the expanding number of available applications that target our
integrated clean strategy, the development of the 300mm platform and 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
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comparable periods primarily due to the cost reductions noted above, but may
increase slightly from the first quarter of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses for the first
quarter of fiscal 1999 were $5.3 million or 52.9% of net sales compared to
$7.5 million or 22.9% of net sales for the first quarter of fiscal 1998. 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 two reductions in force and the reduced work
schedule as referred to above and lower third party sales commissions on
international sales. Over 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 and
other expenses associated with building the Company's direct sales and
support organizations. The Company 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 cost reduction
activities previously discussed and may increase slightly compared to the
first quarter of fiscal 1999.
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 $12,000 was incurred
in the first quarter of fiscal 1999 compared to $9,000 in the first quarter
of fiscal 1998 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 Japan K.K. As of December 31, 1998, borrowings
under this loan agreement were 275 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
$277,000 for the first quarter of fiscal 1999 as compared to $268,000 for the
corresponding three month period of fiscal 1998. Foreign currency translation
losses of approximately $40,000 and $109,000 were incurred in the first
quarter of fiscal 1999 and fiscal 1998 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
$78,000. There was no royalty income for the same period of fiscal 1998.
INCOME TAXES. The results for the first quarter of fiscal 1999 do not
include a provision for potential tax benefits due to the unavailability of
tax loss carry-backs. Tax benefits related to the fiscal 1999 first quarter
net loss will be carried forward and will be available to offset any future
tax liabilities. The Company does not anticipate recording tax benefits
until returning to profitability.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal 1999, cash, cash equivalents and
marketable securities decreased by $2.8 million to $29.6 million at December
31, 1998 from $32.3 million at September 30, 1998. Operating activities used
$3.4 million of cash for the three month period ended December 31, 1998
compared to $1.6 million in the corresponding period of fiscal 1998. The
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increase in cash used by operating activities in the first quarter of fiscal
1999 compared to the same quarter of fiscal 1998 is due principally to
operating losses in the current period partly offset by a reduction in
receivables and inventory.
Investing activities for the first three months of fiscal 1999 used cash of
approximately $900,000 resulting from the net purchases of marketable
securities of approximately $600,000 and $300,000 on programs in progress for
improved operating and information systems. For the first three months of
fiscal 1998, a total of $3.3 million was used for investing activities
consisting of $2.2 million for the net purchase of marketable securities and
$1.1 million for the purchase of capital equipment.
Financing activities in the first quarter 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 $673,000 and $234,000 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, $715,000 was provided
from the issuance of common stock under the Company's employee stock purchase
and stock option plans and $1.1 million was used to reduce the borrowings by
GaSonics International Japan K.K. under their credit facility with the Bank
of Tokyo-Mitsubishi.
At December 31, 1998, the Company had working capital of $54.3 million
compared to $59.7 million at September 30, 1998. Accounts receivable and
inventory at December 31, 1998 decreased from September 30, 1998 by
approximately $500,000 and $1.8 million, respective, due primarily to lower
sales. 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 December 31, 1998, consisted
of approximately $11.4 million in cash and cash equivalents, $18.2 million in
marketable securities and a $20.0 million unsecured line of credit with Union
Bank which expires on March 31, 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
December 31, 1998, except for $69,193 outstanding under the letter of credit
provision, there were no borrowings 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 December 31, 1998. However, Union Bank waived
the Company's non-compliance with 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, is secured by a Letter of Guarantee issued by the Company
and expires on March 31, 1999. As of
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December 31, 1998, GaSonics International Japan K.K. had borrowed 275 million
yen under this credit facility, which was equivalent to approximately $2.4
million as of that date. The Company intends to enter into a new agreement
with Union Bank and extend the term of the existing credit facility in Japan
with the Bank of Tokyo-Mitsubishi prior to their respective due dates.
However, there can be no assurance that the Company will be successful in
renewing either such facility or that any such renewal 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 December 31, 1998, 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 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 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 $1.1 million was spent as of December 31, 1998. 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
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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.
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
14
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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 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
15
<PAGE>
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 throughout 1998. During this period, the Company has experienced
significant cancellations and delays of new orders and rescheduling of
existing orders that have materially adversely affected the Company's
financial results 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.
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
16
<PAGE>
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
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
three months of fiscal 1999 accounted for approximately 51%, 66%, 64% and 84%
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 and White Oak Semiconductor each accounted for approximately 21%
of net sales for the first quarter 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 he 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
17
<PAGE>
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.
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 the 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.
18
<PAGE>
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 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 5% of total net sales for the first three
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
19
<PAGE>
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. 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 37% of net sales in
fiscal years 1996, 1997, 1998 and the first quarter 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
20
<PAGE>
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 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.
21
<PAGE>
FUTURE ACQUISITIONS
In the future, the Company may pursue acquisitions of additional product
lines, technologies or businesses. Future acquisitions by the Company may
result in potentially dilutive issuances of equity securities, incurrence of
debt and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's business,
financial condition and results of operations. In addition, acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations, technologies, personnel and products of the acquired companies,
the diversion of management's attention from other business concerns, risks
of entering markets in which the Company has no or limited direct prior
experience, and the potential loss of key employees of the acquired company.
From time to time, the Company has engaged in preliminary discussions with
third parties concerning potential acquisitions of product lines,
technologies and businesses; however, there are currently no agreements with
respect to any such acquisition. In the event that such an acquisition does
occur, there can be no assurance as to the effect thereof on the Company's
business, financial condition or results of operations.
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, 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.
22
<PAGE>
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As of December 31, 1998, the Company's officers, directors and members of
their families who may be deemed affiliates of such persons beneficially
owned approximately 23% of the Company's outstanding shares of Common Stock.
Accordingly, these stockholders will be able to significantly influence the
election of the Company's directors and the outcome of corporate actions
requiring stockholder approval, such as mergers and acquisitions, regardless
of how other stockholders of the Company may vote. Such a high level of
ownership by such persons or entities may have a significant effect in
delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common
Stock. Certain provisions of the Company's Certificate of Incorporation, 1994
Stock Option/Stock Issuance Plan, Bylaws and Delaware law may also discourage
certain transactions involving a change in control of the Company. In
addition to the foregoing, the ability of the Company's Board of Directors to
issue preferred stock without further stockholder approval could have the
effect of delaying, deferring or preventing a change in control of the
Company.
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.
23
<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.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GASONICS INTERNATIONAL CORPORATION
(Registrant)
\s\ Terry R. Gibson
-------------------
Date: February 5, 1999 By: Terry R. Gibson
Vice President, Finance
Chief Financial Officer
(on behalf of the Registrant and as
principal financial and accounting
officer of the Registrant)
25
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY
NUMBERED
PAGE
27 Financial Data Schedule
26
<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 ENIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,354
<SECURITIES> 18,217
<RECEIVABLES> 15,361
<ALLOWANCES> 870
<INVENTORY> 19,004
<CURRENT-ASSETS> 75,736
<PP&E> 25,198
<DEPRECIATION> 11,262
<TOTAL-ASSETS> 90,799
<CURRENT-LIABILITIES> 21,419
<BONDS> 0
0
0
<COMMON> 605
<OTHER-SE> 68,597
<TOTAL-LIABILITY-AND-EQUITY> 90,799
<SALES> 10,023
<TOTAL-REVENUES> 10,023
<CGS> 7,870
<TOTAL-COSTS> 7,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,879)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
