-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TFw5Mz7TtRfZu55tinONJGkcbD2JRlTQKz6s3il02+/BW+1rqwBwc1Bd+ktJR2sl /W4YzPmErvHuK/yvgoLsAA== 0000912057-00-004493.txt : 20000209 0000912057-00-004493.hdr.sgml : 20000209 ACCESSION NUMBER: 0000912057-00-004493 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GASONICS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000918647 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942159729 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23372 FILM NUMBER: 527137 BUSINESS ADDRESS: STREET 1: 2540 JUNCTION AVENUE CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085707000 MAIL ADDRESS: STREET 1: 2730 JUNCTION AVE CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 FORM 10-Q 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, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________________ to ________________________ Commission file number: 0-23372 GASONICS INTERNATIONAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 94-2159729 ----------------------------------------- ------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) No.) 2730 JUNCTION AVENUE, SAN JOSE, CALIFORNIA 95134 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 570-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At February 2, 2000, there were 14,611,420 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding. 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, 1999 and September 30, 1999 3 Condensed Consolidated Statements of Operations for the three month period ended December 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the three month period ended December 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 Item 2A. Quantitative and Qualitative Disclosure about Market Risks 23 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
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GASONICS INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
DECEMBER 31, September 30, 1999 1999 ------------ ------------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $ 8,756 $16,858 Marketable securities 18,700 10,899 Trade accounts receivable, net 21,344 18,986 Inventories 17,892 16,523 Net deferred tax asset 5,697 5,697 Prepaid expenses and other current assets 3,322 3,197 ---------- ------------- Total current assets 75,711 72,160 Property and equipment, net 10,708 11,266 Deposits and other assets 660 782 ---------- ------------- Total assets $87,079 $84,208 ---------- ------------- ---------- ------------- LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Borrowings under credit facility $ 2,713 $ 2,832 Accounts payable 6,277 5,691 Income taxes payable 4,121 4,616 Accrued expenses 9,885 9,446 ---------- ------------- Total current liabilities 22,996 22,585 ---------- ------------- Stockholders' equity: Common stock and additional paid-in capital 41,810 40,637 Treasury stock (see Note 8) (2,639) (2,639) Subscription receivable (27) (26) Unrealized loss on investment (50) - Retained earnings 24,989 23,651 ---------- ------------- Total stockholders' equity 64,083 61,623 ---------- ------------- Total liabilities and stockholders' equity $87,079 $84,208 ---------- ------------- ---------- -------------
See accompanying notes. 3 GASONICS INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
THREE MONTHS ENDED DECEMBER 31, -------------------------------- 1999 1998 --------- --------- Net sales $25,603 $10,022 Cost of sales 14,293 7,870 --------- --------- Gross margin 11,310 2,152 --------- --------- Operating expenses: Costs associated with reduction in force - 407 Research & development 4,366 3,636 Selling, general & administrative 5,915 5,303 --------- --------- Total operating expenses 10,281 9,346 --------- --------- Operating income (loss) 1,029 (7,194) Other income and expense, net 309 315 --------- --------- Income (loss) before provision for income taxes 1,338 (6,879) --------- --------- Provision for income taxes - - --------- --------- Net income (loss) $ 1,338 $ (6,879) --------- --------- --------- --------- Net income (loss) per share - Basic $0.09 $ (0.49) --------- --------- --------- --------- Net income (loss) per share - Diluted $0.09 $ (0.49) --------- --------- --------- --------- Weighted average common shares - Basic 14,659 14,172 --------- --------- --------- --------- Weighted average common & common equivalent shares - Diluted 15,258 14,172 --------- --------- --------- ---------
See accompanying notes. 4 GASONICS INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ----------------------------- 1999 1998 -------- --------- Cash flows from operating activities: Net cash used for operating activities $ (709) $ (3,383) -------- --------- Cash flows from investing activities: Purchases of property & equipment (595) (290) Increase in marketable securities (7,850) (578) -------- --------- Net cash used for investing activities (8,445) (868) -------- --------- Cash flows from financing activities: Increase (decrease) in borrowings under credit facility (119) 234 Proceeds from issuance of common stock 1,171 673 -------- --------- Net cash provided by financing activities 1,052 907 -------- --------- Net decrease in cash and cash equivalents (8,102) (3,344) Cash & cash equivalents at beginning of period 16,858 14,698 -------- --------- Cash & cash equivalents at end of period $ 8,756 $ 11,354 -------- --------- -------- ---------
See accompanying notes. 5 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, 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 fiscal year ended September 30, 1999. 2. INVENTORIES Inventories consist of the following (in thousands):
December 31, September 30, 1999 1999 ------------- ------------- (unaudited) Raw Materials $ 7,780 $ 7,784 Work in Process 6,179 5,409 Finished Goods 3,933 3,330 ------------- ------------- $17,892 $16,523 ------------- ------------- ------------- -------------
3. RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION 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 months ended December 31, 1999 and 1998 were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share for the three months ended December 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
- ------------------------------------------------------------------------------------------------------------------ PER SHARE FOR THE THREE MONTHS ENDED DEC. 31, 1999 INCOME SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------ Net income $ 1,338 BASIC EARNINGS PER SHARE Income available to common stockholders $ 1,338 14,659 $ 0.09 Effect of dilutive securities: Options issued to purchase common stock 599 DILUTED EARNINGS PER SHARE Income available to common stockholders $ 1,338 15,258 $ 0.09 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ PER SHARE FOR THE THREE MONTHS ENDED DEC. 31, 1998 LOSS SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------ Net loss $ (6,879) BASIC AND DILUTED LOSS PER SHARE Loss to common stockholders $ (6,879) 14,172 $ (0.49) - ------------------------------------------------------------------------------------------------------------------
4. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires companies to record derivative financial instruments including standalone instruments, such as forward currency exchange contracts and interest rate swaps or embedded derivatives and requires that these instruments be marked-to-market on an ongoing basis. These market value adjustments are to be included either in the income statement or stockholders' equity, depending on the nature of the transaction. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000 and cannot be applied retroactively. The effect of SFAS No. 133 is not expected to be material to the Company's financial statements. 5. SEGMENT REPORTING In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the Company's results of operations or financial position, but did affect the disclosure of segment information. The Company is organized on the basis of products and services. All of the Company's business units have been aggregated into one operating segment. The Company's 7 service business is a separate operating segment: however, this segment does not meet the quantitative thresholdsprescribed in SFAS No. 131. As a result, in the opinion of management, no additional operating segment information is required to be disclosed. 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. For the three months ended December 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. 7. CHARGES TAKEN DURING FISCAL YEAR 1999 The three month period ended December 31, 1998 included pre-tax charges of approximately $407,000, related primarily to costs of a reduction in force completed in December 1998. As of December 31, 1999, these costs have been paid. 8. STOCK REPURCHASE PROGRAM On December 16, 1998, the Company's Board of Directors authorized a stock repurchase program. Under this program 500,000 shares of its Common Stock may be repurchased by the Company in the open market, from time-to-time at market prices not to exceed $15.00 per share using available cash. As of December 31, 1999, the Company had repurchased 200,000 shares of common stock in the open market at an aggregate cost of approximately $2.6 million. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements relating 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 1999 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. OVERVIEW The Company currently has only one principal product line and is a leading developer and supplier of a portfolio of products and services used in the fabrication of advanced integrated circuits ("ICs") and flat panel displays ("FPDs"). The Company's products consist of photoresist removal systems, residual removal systems, isotropic etch systems and high pressure furnaces for the semiconductor industry and low-pressure chemical vapor deposition systems ("LPCVD") for the flat panel display industry. In addition, the Company provides spare parts and upgrades, as well as maintenance and support services 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 including the recent, prolonged and severe downturn in the worldwide semiconductor industry, the timing of significant orders, patterns of capital spending by customers, the proportion of international sales to net sales, changes in pricing by the Company, its competitors, customers or suppliers, market acceptance of the Company's products, the mix of products sold, financial systems, procedures and controls, credit terms, discounts, the timing of new product announcements and releases by the Company or its competitors, delays, cancellations or rescheduling of orders due to customer financial difficulties or otherwise, the Company's ability to produce systems in volume and meet customer requirements, the ability of any customer to finance its purchases of the Company's equipment, changes in overhead absorption levels due to changes in the number of systems manufactured, political and economic instability and lengthy sales cycles. The Company's gross margins have varied and will continue to vary materially based on a variety of factors including the mix and average selling prices of systems sales, the mix of revenues, including service and support revenues, overhead absorption levels, utilization of field service and support resources, and costs associated with new product introductions and enhancements and the customization of systems. Furthermore, announcements 9 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. NET SALES. Net sales consist of revenues from system sales, spare part and upgrade sales and maintenance and support. Net sales in the first quarter of fiscal 2000 increased 155% to $25.6 million compared to net sales of $10.0 million in the first quarter of fiscal 1999. The severe worldwide business slowdown in the semiconductor industry, which resulted in many IC manufacturers in nearly all geographic regions reducing and delaying capital equipment purchases, is the principal reason for the low sales level last fiscal year. The industry climate began to slowly improve throughout fiscal 1999 and the company believes is now beginning to accelerate. As a result, the Company's sales are increasing due to increased demand across most geographies and most products. Assuming the global semiconductor industry continues and sustains this recovery, the Company anticipates that quarter to quarter sales for at least the balance of fiscal 2000 will continue to increase compared to the first quarter of fiscal 2000. Sales to customers in North America, Europe, Asia/Pacific and Japan, accounted for approximately 62%, 22%, 13% and 3%, respectively, of total net sales for the first quarter of fiscal 2000, compared to approximately 63%, 18%, 14% and 5%, respectively, of total net sales for the same period in fiscal 1999. 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 2000. GROSS MARGIN. The Company's gross margin as a percentage of net sales for the first quarter of fiscal 2000 was 44.2% compared to 21.5% for the same period of fiscal 1999. The increase in gross margin for the first quarter of fiscal year 2000 was primarily due to increased utilization of the Company's field service organization and manufacturing capability resulting from higher sales volume. The Company continues to focus on its gross margin improvement programs, including the introduction of new value-added applications, features and options on its PEP systems, targeted cost reduction programs and controlled spending. The Company expects that its gross margin rates for the next several quarters of fiscal 2000 will be higher than prior year comparable periods and slightly higher than that reported in the first quarter of fiscal 2000 due to further utilization of field service and manufacturing capability, product cost reductions, and improved efficiencies in manufacturing. Gross margins, however, will continue to be at risk and could be materially adversely impacted by inefficiencies associated with new product introductions, sales of lower margin flat panel display systems, competitive pricing pressures, the semiconductor industry climate, the economic troubles still 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. COSTS ASSOCIATED WITH REDUCTION IN FORCE. In the first quarter of fiscal 1999, the Company reduced its workforce in response to market conditions and recorded a charge of $407,000 primarily for costs of severance compensation. As of December 31, 1999 the $407,000 had been paid RESEARCH AND DEVELOPMENT (R&D). The Company's R&D expenses as a percentage of net sales decreased to 17.1% in the first quarter of fiscal 2000 compared to 36.3% of net sales in the first quarter of fiscal 1999 due primarily to the Company's higher sales volume. In absolute dollars, R&D expenses for the first quarter of fiscal 2000 increased to $4.4 million from $3.6 million in the same period of fiscal 1999. This increase principally reflects increased salaries in general and 10 specifically, increased development costs associated with the Company's 300mm product development and new process development for advanced photoresist and advanced clear applications. Additionally, the R&D expenses in the current quarter were higher compared to the same period last fiscal year due to the reduced work schedule that was in effect during the first half of fiscal 1999 that was part of the Company's cost reduction efforts taken as a result of poor business conditions attributable primarily to the industry downturn. 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 its integrated clean strategy, the development of the 300mm platform, the support of the LCD flat panel business and applications development of the VHP technology. In June 1999, the Company formally introduced the PEP Iridia which is a leading-edge solution targeting the growing market for application-specific photoresist and wafer cleaning steps. The Company anticipates that R&D spending in absolute dollars for the next several quarters of fiscal 2000 will increase when compared to prior year periods. This increase will primarily result from 300mm product development, new process applications primarily for integrated clean applications and, for the second quarter of fiscal 2000, the increase will also reflect that the Company was on a reduced work schedule for the first half of fiscal 1999. SELLING, GENERAL AND ADMINISTRATIVE (SG&A). The Company's SG&A expenses for the first quarter of fiscal 2000 increased to $5.9 million from $5.3 million in the first quarter of fiscal 1999. As a percentage of net sales, SG&A expenses decreased to 23.1% from 52.9% in the same period last fiscal year due primarily to higher sales volume. The increase in spending was attributable to increased sales and marketing activities, specifically sales and third party commissions and increased marketing demonstration and evaluation costs. Additionally, expenses in the first quarter of fiscal 2000 were higher due to the reduced work schedule that was in effect during the first half of fiscal 1999. The Company anticipates that SG&A expenses for the next several quarters of fiscal 2000 will increase when compared to the same periods last fiscal year due to hiring and other expenses needed to support the increased business levels that the Company is now experiencing and due to the lower expenses incurred in the first half of fiscal 1999 that resulted from the Company's reduced work schedule during that period. OTHER INCOME (EXPENSE). Other income and expense generally consists of interest expense, interest income, currency translation gains and losses and royalty income. Interest expense of approximately $19,000 was incurred in the first quarter of fiscal 2000 compared to $12,000 in the first quarter of fiscal 1999 primarily as a result of 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. and due to an accounts receivable factoring arrangement in Japan. As of December 31, 1999, borrowings under this loan agreement were approximately 285 million yen, which is equivalent to approximately $2.7 million. Interest income received, which is primarily derived from the Company's short-term investments was approximately $330,000 for the first quarter of fiscal 2000 compared to $277,000 for the same period of fiscal 1999. Foreign currency translations were a net loss of approximately $45,000 and $40,000 in the first quarter of fiscal 2000 and fiscal 1999, respectively, due to fluctuations in currency exchange rates primarily in Japan. Royalty income in connection with the sale of the industrial plasma cleaning products was approximately $49,000 and $78,000 for the first quarter of fiscal 2000 and fiscal 1999, respectively. 11 PROVISION FOR INCOME TAXES/BENEFITS. The Company did not record a provision for income taxes related to the fiscal quarter ended December 31, 1999 net income because of the Company's tax loss carry-forward that is available to offset certain future tax liabilities. The Company may however, begin to record a tax provision later in fiscal 2000, should the Company's projected pretax income exceed the Company's net tax loss carry-forward. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of fiscal 2000, cash, cash equivalents and marketable securities decreased by approximately $300,000 to $27.5 million at December 31, 1999 from $27.8 million at September 30, 1999. Operations used cash of approximately $700,000 for the first quarter of fiscal 2000 compared to $3.4 million in the first quarter of fiscal 1999. The decrease in cash used by operating activities in the first quarter of fiscal 2000 compared to the same quarter of last fiscal year is primarily the result of the Company's operating income in fiscal 2000 compared to an operating loss for the same period last year partly offset by increases in receivables and inventory resulting from increased business levels. Investing activities in the first quarter of fiscal 2000 used cash of approximately $8.4 million resulting from the net purchases of marketable securities of approximately $7.8 million and $600,000 for the acquisition of equipment and programs in progress for improved operating and information systems. For the first quarter of fiscal 1999, a total of approximately $900,000 was used for investing activities consisting of approximately $600,000 used for the net purchases of marketable securities and approximately $300,000 on programs for improved operating and information systems. Financing activities in the first quarter of fiscal 2000 provided cash of approximately $1.2 million from the issuance of common stock in connection with the Company's employee stock purchase and stock option programs and used cash of approximately $119,000 to reduce borrowings by GaSonics International Japan K.K. under its credit facility with the Bank of Tokyo-Mitsubishi (BTM). This compares to the first quarter of fiscal 1999 where $673,000 was provided from the issuance of common stock under the Company's stock purchase and option plans and $234,000 provided from borrowings by Gasonics International Japan K.K. under their credit facility. At December 31, 1999, borrowings under this line of credit agreement with BTM totaled $2.7 million. At December 31, 1999, the Company had working capital of approximately $52.7 million compared to $49.6 million at September 30, 1999. Accounts receivable and inventory at December 31, 1999 increased by approximately $2.4 million and $1.4 million, respectively, from September 30, 1999. Receivables increased primarily due to higher sales levels in the current period and inventory is increasing due to increased demand for the company's products. The Company expects future inventory levels to fluctuate from period to period, and believes that because of the relatively long manufacturing cycle of its equipment, its investment in inventories will continue to require 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. At December 31, 1999, the Company's principal sources of liquidity consisted of approximately $8.8 million of cash and cash equivalents, $18.7 million in marketable securities, and $20.0 million available under the Company's unsecured working capital line of credit with Union Bank 12 of California which expires on March 31, 2000. A commercial letter of credit provision of $500,000 is also provided under the line of credit. 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, 1999, except for $69,193 outstanding under the letter of credit provision, there were no borrowings under this line. This line of credit contains certain covenants, including covenants relating to financial ratios and tangible net worth which must be maintained by the Company. As of December 31, 1999, the Company was in compliance with its bank covenants. The Company's wholly-owned Japanese subsidiary, GaSonics International Japan K.K., has a credit facility with the Bank of Tokyo-Mitsubishi with an available credit line of 300 million Japanese yen which, as of December 31, 1999, is equivalent to approximately $2.9 million U.S. dollars. This credit facility was renewed on October 1, 1999, bears interest at a rate of 1.375% per annum, is secured by a Letter of Guarantee issued by the Company and expires on March 31, 2000. As of December 31, 1999, GaSonics International Japan K.K. had borrowed 285 million yen under this credit facility, which is equivalent to approximately $2.7 million as of that date. The Company anticipates renewing both the working capital line of credit with Union Bank of California and the credit line with Bank of Tokyo-Mitsubishi prior to expiration. However, there can be no assurance that it will be successful in renewing either such facility or that the Company will be able to secure other sources of funding on acceptable terms or at all. The Company believes that its existing cash, cash equivalents, marketable securities and available lines of credit at December 31, 1999 are sufficient to meet the Company's working capital 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. There can be no assurance that additional financing will be available when required or, if available, will be on reasonable terms. 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 recent 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 the mix and average selling prices of systems sales, the mix of revenues, including service and support revenues, and the 13 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 (dual-chamber) systems. The Company's gross margin and overall gross margin rate has declined from the level attained in prior years, in part, due to an increased under absorption of manufacturing overhead and under utilization of the field service and support infrastructure resulting from lower net sales, changes in product mix from fewer higher margin rate and mature single chamber products to lower margin rate dual chamber products, start-up inefficiencies associated with new products, competitive pricing pressures, products sold by the Company's liquid crystal display manufacturing equipment (LCD) division in Japan, and other factors. Additionally, the Company's sales and earnings for approximately the last two years were materially adversely affected by the worldwide semiconductor business slowdown. Beginning in fiscal 1999, the industry showed signs of an initial recovery and the Company's revenues have improved sequentially quarter to quarter beginning with the second quarter of fiscal 1999. Although the Company currently anticipates that revenues for at least the next several quarters of fiscal 2000 will increase moderately from the level achieved in the first quarter of fiscal 2000, there can be no assurance that the Company will be able to increase or even 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 $950,000 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 in which the order is received. The Company's business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment during such period. Furthermore, most of the Company's quarterly net sales have recently been realized near the end of the quarter. A delay in a shipment near the end of a particular quarter due, for example, to an unanticipated shipment rescheduling, to cancellations or deferrals by customers, to unexpected manufacturing difficulties experienced by the Company, additional customer configuration requirements or to supply shortages, may cause net sales in a particular quarter to fall significantly below the Company's expectations and may materially adversely affect the Company's operating results for 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 14 according to forecast, a reduction in customer orders or backlog will lead to excess inventory 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 experienced a severe cyclical downturn, which extended throughout 1998. During this period, the Company experienced significant cancellations and delays of new orders and rescheduling of existing orders that have materially adversely affected the Company's financial results. In early 1999, the industry began a slow recovery which now appears to be accelerating. The Company, however, 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 IC manufacturers building or expanding large fabrication facilities, and there can be no assurance that such demand will exist in the near future or at all. 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 supplier's product, the manufacturer often relies for a significant period of time upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same supplier. Accordingly, it is difficult for the Company to sell to a particular customer for a significant period of time once that customer selects a competitor's product. 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, some of which have substantially greater installed bases and greater financial, marketing, personnel, technical and other resources than the Company. 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. For example, 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, enhance or acquire competitive products that may offer improved price or performance features. New product announcements, 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 15 addition to intense price competition or could otherwise make the Company's systems or technology obsolete or non-competitive. 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 suppliers employing other technologies, such as wet chemistry, traditional dry chemistry and other 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. The Company believes that to remain competitive it will have to commit significant financial resources to develop new product features and enhancements, to introduce next generation photoresist and residue removal products on a timely basis, and to maintain customer service and support centers worldwide. In marketing its products, the Company will face competition from suppliers employing new technologies in order to extend the capabilities of competitive products beyond their current limits or increase their productivity. In addition, increased competitive pressure could lead to intensified price-based competition, resulting in lower prices and margins, which would materially adversely affect the Company's business, financial condition and operating results. 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. Japanese IC process equipment manufacturers dominate the market for certain types of integrated circuits which use the Company's systems. Japanese manufacturers are well established in the Japanese process equipment market, making it difficult for non-Japanese manufacturers to penetrate the Japanese market. Furthermore, Japanese semiconductor manufacturers have extended their influence outside of Japan by licensing products and process technologies to non-Japanese semiconductor manufacturers. Such licenses could result in a recommendation to use certain semiconductor capital equipment manufactured by Japanese companies. The Company has not established itself as a major competitor in the Japanese market and there can be no assurance that the Company will be able to achieve significant sales to Japanese IC manufacturers or compete successfully in the future. 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 the first quarter of fiscal 2000 and for the fiscal years 1999, 1998 and 1997 accounted for approximately 82%, 69%, 64% and 66% of net sales, respectively. In the first quarter of fiscal 2000, three customers each accounted for greater than 10% of total net sales. In fiscal 1999, one customer accounted for greater than 10% of net sales. In fiscal 1998, two customers each accounted for greater than 10% of total net sales and in fiscal 1997, three customers each accounted for greater than 10% of total net sales. The Company expects that sales of its products to relatively few large 16 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 customer 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, Germany, Italy, Korea, Japan, Singapore, Taiwan and Israel and significant investments in research and development to support product development. 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 17 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. 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, the Company may experience decreased sales, loss of customers, reduced orders or higher manufacturing costs, 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 recent 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 ASIA/PACIFIC MARKET 18 The Company believes that increased penetration of the Asia/Pacific market, particularly Japan and Taiwan, will be essential to its future financial performance. To date, the Company has sold relatively few systems to Japanese semiconductor manufacturers. Sales in Japan accounted for approximately 3% of the Company's total net sales in first quarter of fiscal 2000, 7% of total net sales in fiscal 1999, 4% of total net sales in fiscal 1998 and 9% of total net sales in fiscal 1997. 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. Taiwan currently represents approximately 17% of the worldwide demand for capital semiconductor equipment and this percentage is expected to increase in the future. The success of the Company will, in part, be dependent upon its ability to succeed in this very competitive marketplace. Currently, the Company's primary competitors in the Taiwan bulk ash market are Mattson, Plasma Systems Taiwan (PST) and Kokusai, Ramco (KEM). The Company's sales in Taiwan accounted for approximately 3% of the Company's total net sales in the first quarter of fiscal 2000, 9% of total net sales in fiscal 1999, and 12% of total net sales in fiscal 1998 and 1997. INTERNATIONAL SALES International sales accounted for 38%, 46%, 45% and 55% of total net sales for the first three months of fiscal 2000 and for the fiscal years 1999, 1998 and 1997, respectively. The Company has established independent operations in the United Kingdom, Ireland, France, Italy, Germany, 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 19 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. 20 INTELLECTUAL PROPERTY RIGHTS Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that the Company will be able to protect its technology adequately or that competitors will not develop similar technology independently. 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. Patents issued to the Company could be challenged, invalidated or circumvented and the rights granted thereunder may not 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 currently are no pending material claims or lawsuits against the Company regarding any possible infringement claims, there can be no assurance that infringement claims by third parties or claims for indemnification 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 be true, 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. Any such license would increase the Company's expenses and could cause a material adverse effect on the Company's business, financial condition and results of operations. The Company could decide, in the alternative, to resort to litigation to challenge such claims or enforce its proprietary rights. Litigation, even if unsuccessful, 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 fabrication used in its LPCVD and thermal annealing 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 21 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, the Company is inexperienced in negotiating, effecting and assimilating such acquisitions and all 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 that such an acquisition will not have a material adverse effect 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, particularly in the San Francisco Bay Area where the Company is based, 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 22 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 December 31, 1999, the Company's officers, directors and members of their families who may be deemed affiliates of such persons beneficially owned approximately 19% 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, either by the Company or its existing stockholders, 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 ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Interest Rate Risk The Company's exposure to market risk for change in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company invests in high-credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company ensures the safety and preservation of its invested principal funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in safe and high-credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The portfolio includes only securities with active secondary or resale markets to ensure portfolio liquidity. The table below presents principal amounts and related weighted average interest rates by date of maturity for the Company's investment portfolio (in thousands):
Fiscal Years Cash equivalents and short-term investments 2000 2001 ----------------------------------------------------------------------------------------------- Fixed rate short-term investments $18,462 $4,243 Average interest rate 5.90% 6.18%
24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. None. ITEM 5. OTHER INFORMATION. Effective January 12, 2000, Rammy Rasmussen joined the Company as Vice President, Chief Financial Officer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 10.21 Rammy Rasmussen Employment Agreement Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1999. 25 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/ Rammy Rasmussen ------------------- by: Rammy Rasmussen Vice President, Finance Chief Financial Officer (signing on behalf of the registrant and as principal financial officer) Date: February 7, 2000 26 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY NUMBERED PAGE 10.21 Rammy Rasmussen Employment Agreement 27 Financial Data Schedule 27 EX-10.21 2 EX 10.21 [LETTERHEAD] Exhibit 10.21 January 12, 2000 Rammy Rasmussen 480 South Clark Los Altos, CA 94024 Dear Rammy: We are very pleased to extend GaSonics International's offer to you to join our organization. The following is our offer to you: 1. The position of Vice President, Chief Financial Officer reporting to the President and CEO of GaSonics International, Asuri S. Raghavan. 2. Your base salary will be $16,666.67 per month ($200,000.00 annually). 3. You will receive an executive car allowance of $650.00 per month. 4. You will be eligible to receive an executive incentive of 45% of your base salary upon achievement of individual and/or financial goals, paid annually. 5. You will be eligible to participate in our executive deferred compensation plan. 6. You will receive 50,000 stock options vested over four years. All options are contingent upon approval by the Board of Directors with option price set at fair market value established at the time of the grant. Options expire after 10 years. 25% of the option shares shall become exercisable upon completion of one year of service. The option will become exercisable for the balance of the option shares in 36 successive equal monthly installments upon completion of each additional month of service over the succeeding three years. 7. Upon acceptance of this offer and joining our company, you will receive a bonus of $20,000.00. If you voluntarily terminate your employment within 12 months from your date of hire, this amount must be refunded to GaSonics International on a pro-rated basis. 8. You will be eligible to participate in GaSonics' 401(K) Plan. The Company contributes 50% of the first 6% of salary deferral made to the Plan and is vested over a four-year schedule. Rammy Rasmussen 1/12/00 Page 3 9. In the event that your employment is terminated within the first twelve (12) months of employment with the Company and this termination is the result of a Change of Control, you will receive one (1) year salary and benefit continuation, and continued stock option vesting for that period. This will be paid up to a period of twelve (12) months, or until you begin new employment, whichever comes first. Upon accepting this offer, you will receive the standard GaSonics International benefits package. Benefit coverage will commence on your date of hire. Verification of your citizenship or right to work in the United States is required, and you will need to provide proof of this on your first day of employment. BENEFITS ORIENTATION WILL BE CONDUCTED ON YOUR FIRST DAY OF EMPLOYMENT AT 8:00 AM IN BUILDING ONE, 2730 JUNCTION AVENUE. Employment with GaSonics International is for no specified period of time. As a result, either you or GaSonics International are free to terminate your employment relationship at any time for any reason, with or without cause. This is the full and complete agreement between us on this term. Although your job duties, title, compensation and benefits, as well as GaSonics International's personnel policies and procedures may change from time to time, the "at-will" nature of your employment may only be changed in an express writing signed by you and the President of the Company. This offer is open to you until January 21, 2000. To indicate your concurrence and acceptance, please sign one copy of this letter and return it to my attention at your earliest convenience. GaSonics International is a company with a goal of leading the industry in some of the most challenging and exciting markets. We have the potential for being one of the premier growth companies of the 90's. Whether or not we meet this challenge depends upon the excellence of our people. Thus, the position offered you is central to the company's success. We believe that you have a great deal to contribute to our organization, and we feel certain that you will find many challenges, satisfaction and opportunities in your association with GaSonics International. We look forward to having you on the GaSonics team. Rammy Rasmussen 1/12/00 Page 3 Sincerely, /s/ Robert Meams Robert Meams Director, Human Resources GaSonics International Agreed and Accepted: /s/ Rammy Rasmussen 1/12/00 ------------------------------ --------- Name Date Employment Start Date: 1/12/00 ------------------------------ Date EX-27 3 EX 27
5 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. 1,000 3-MOS SEP-30-2000 OCT-01-1999 DEC-31-1999 8,756 18,700 21,344 714 17,892 75,711 25,566 14,858 87,079 22,996 0 0 0 606 63,477 87,079 25,603 25,603 14,293 14,293 0 60 19 1,338 0 1,338 0 0 0 1,338 0.09 0.09
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