-----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, Fgu6YbFNakgaa0yRi99RuVGTazpor7GHp7ZkfSxtBpwLTKUkOiGrvjgnEKA4GYPl iF4rMtlTUmHj1NmBViqh7w== 0001047469-97-008741.txt : 19971224 0001047469-97-008741.hdr.sgml : 19971224 ACCESSION NUMBER: 0001047469-97-008741 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-23372 FILM NUMBER: 97743685 BUSINESS ADDRESS: STREET 1: 2540 JUNCTION AVENUE CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4083251200 MAIL ADDRESS: STREET 1: 2730 JUNCTION AVE CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER SEPTEMBER 30, 1997 0-22248
------------------------ GASONICS INTERNATIONAL CORPORATION (Exact name of Registrant as specified in charter) DELAWARE 94-2159729 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2540 Junction Avenue San Jose, California 95134 (408) 570-7000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 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 ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on December 16, 1997, as reported on The Nasdaq National Market was approximately $86,314,592. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 16, 1997, the Registrant had outstanding 13,918,910 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 1997 are incorporated into Parts II and IV of this Report on Form 10-K. 2. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on March 6, 1998 are incorporated by reference into Part III of this Report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS THE COMPANY GaSonics International Corporation ("GaSonics" or the "Company") is a leading global semiconductor equipment manufacturer for the dry photoresist and residue removal segments of advanced integrated circuit ("IC") manufacturing. The Company's products consist of photoresist removal systems, residue removal systems, isotropic etch systems, high pressure furnaces for the semiconductor industry and low pressure chemical vapor deposition ("LPCVD") systems for the flat panel display ("FPD") industry. The photoresist removal, residual removal and isotropic etch systems use proprietary downstream plasma processing technology to increase yields in the manufacture of advanced ICs. The Company markets and sells its products to many leading IC manufacturers worldwide including Intel, Motorola, Samsung, Siemens and Lucent Technologies. The Company began operations in 1968 and was incorporated in California in March 1971 and reincorporated in Delaware in March 1994. In February 1991, the Company acquired Branson International Plasma Corporation, a manufacturer of photoresist removal equipment. In August 1995, the Company acquired Tekisco, Ltd. from Kishimoto Sangyo Co. Ltd. of Tokyo, Japan, a manufacturer of LPCVD equipment for the manufacture of FPDs. The Company's principal executive offices are located at 2540 Junction Avenue, San Jose, California 95134. The Company's telephone number is (408) 570-7000 and worldwide website address is http://www.gasonics.com. INDUSTRY BACKGROUND Rapid growth in the worldwide market for advanced ICs and IC-related products has escalated the demand for semiconductor manufacturing equipment. In the highly sophisticated IC fabrication process, the Company's products influence a large number of complex and repetitive processing steps, including deposition, photolithography and etch. Deposition puts down a layer of either electrically insulating or electrically conductive material on the surface of a wafer. The photolithography process then imprints device features, using a photomask on a light sensitive polymer (photoresist). After the photoresist is developed, an etch process selectively removes the deposited material from the portions of the wafer surface not covered by the imprinted pattern. Prior to processing additional layers on the wafer, the photoresist and post-etch residues from the previous layer must be carefully removed in order to create a clean and functional foundation for deposition of the next layer. These processes between etch and deposition, often referred to as "photoresist removal" or "ashing", have become increasingly challenging as device geometries have shrunk to less than 1/500th the size of a human hair. Today's advanced IC devices incorporate dozens of layers and use a variety of materials in fabrication. After each layer, the resist and residue removal process is repeated; as chips increase in capability, numbers of layers and residue removal steps increase correspondingly. For example, a typical one megabit Dynamic Random Access Memory chip ("DRAM") requires 11 masking and subsequent photoresist removal steps. By comparison, a 64 megabit DRAM requires 20 to 25 masking and photoresist removal steps. As line geometries, or feature sizes, of an IC continue to decrease to below 0.25 microns, wafer cleanliness becomes increasingly important yet more difficult. New materials such as copper, low K dielectrics (low dielectric constant materials) and deep ultraviolet photolithography ("DUV") resists, will complicate photoresist removal and preparation of the wafer surface for subsequent masking steps. As a result of these trends, the Company believes that the number and complexity of photoresist and residue removal systems per production line of advanced ICs will increase along with the need for application-specific processes. In the 1970's, photoresist was usually removed by immersing ICs into large liquid chemical baths ("wet chemistry processing"). In the early 1980's, dry chemistry processing used gases to remove the photoresist 1 and began to replace wet chemistry processing for those advanced processing steps that wet chemistry processing was unable to complete or added too many defects (particles). Dry chemical processing has grown as an alternative with potentially significant cost of ownership savings as compared with wet chemical processing, especially for complex ICs with feature sizes of 1.0 micron and below. Wet chemical processing also poses environmental concerns associated with chemical storage, handling, disposal and operator safety. In the fabrication of advanced ICs, wet chemical processing for photoresist removal is now typically used only for noncritical cleaning steps after the application of a dry process. In traditional dry chemical plasma processing, plasma is created and the wafer is exposed to the plasma in a single chamber in order to remove the residual photoresist. However, because certain plasma elements can damage the wafer, direct exposure can result in reduced yield. THE GASONICS SOLUTION Addressing the photoresist removal needs of advanced IC manufacturers, GaSonics pioneered in 1986 an advanced dry chemical process technology known as "downstream microwave plasma." This technology separates the area for plasma creation from that in which the wafer is exposed, thus shielding the wafer from potential plasma damage while facilitating the chemical reaction. From there, the Company has evolved a complex mix of product and technology to meet the challenges of decreased line geometries, increased wafer sizes, new materials and a series of difficult-to-remove residues. Called Integrated Clean: Solutions between Etch and Deposition, these advanced photoresist and residue removal technologies are believed by GaSonics to be critical for the manufacture of advanced ICs at acceptable yields and costs. Yield, operating costs, throughput, reliability, uptime and system cost are recognized industry-wide as contributions to an IC manufacturer's total cost of ownership. The Company believes that downstream microwave processing and Integrated Clean can impact each of these factors, offering advanced IC manufacturers a simplified process solution with cost of ownership benefits. Furthermore, GaSonics' industry-leading platform technology combines a high degree of reliability, serviceability, and overall equipment effectiveness to offer additional cost of ownership benefits. THE GASONICS STRATEGY In order to maintain its leadership position in advanced dry chemical processing equipment for photoresist and residue removal, GaSonics business strategy is designed to: ENHANCE STRATEGIC CUSTOMER RELATIONSHIPS. The Company believes that its long-standing relationships with many leading worldwide IC manufacturers such as Intel, Motorola, Samsung, and Siemens are critical to ensure its position as a leading supplier of photoresist removal equipment for semiconductor fabrication. The Company intends to continue to focus its resources on its key customers in order to develop future process equipment and to lower the customers' total cost of ownership for photoresist removal equipment. As part of this focus, the Company believes that providing dedicated personnel at key customer facilities will enable relationships, assist in the design of new fabrication process equipment, and position GaSonics as a principal supplier of volume equipment orders. FOCUS ON CAPITAL PRODUCTIVITY. By increasing yields in the manufacture of advanced ICs, the Company believes its proprietary downstream microwave processing technology offers customers cost of ownership advantages over wet chemical processing and traditional dry chemical processing. For example, consumable chemicals used in wet chemical processing of larger diameter wafers increase the cost of ownership. Additionally, the Company believes that its downstream technology offers better yields than traditional dry chemical processes through reduced damage and contamination. Confident that these combined advantages position GaSonics as a preferred provider of lower cost of ownership solutions, the Company intends to introduce additional cost-effective products and product enhancements, including a new platform for 300mm wafers which further enhances capital productivity. 2 CAPITALIZE ON ADVANCED WAFER FABRICATION TRENDS. The Company will address the worldwide market opportunity for advanced photoresist removal equipment created by wafer fabs manufacturing eight-inch wafers with near 0.25 micron line geometries. The Company believes that the yield benefits from dry chemical processes in general and GaSonics' downstream processing technology, in particular, increase significantly at line geometries of 0.25 micron and below. GaSonics was one of the first companies to target the advanced photoresist removal market by transitioning from traditional batch processing to a single wafer design and it currently has an installed base of over 600 systems in the eight-inch market. The Company intends to become a leading supplier for the 300 millimeter marketplace with the Millennia-TM- 300mm platform introduced in 1997. PENETRATE ASIA/PACIFIC MARKET. The Asia/Pacific market for IC processing equipment represents more than one-half of the worldwide market. The Company has recently been successful with large customers in Korea, Singapore, Taiwan and Japan, and intends to continue to invest significant resources to further penetrate the Asia/Pacific market, particularly Japan. Japanese process equipment manufacturers have typically dominated that market with traditional dry chemical systems that process multiple wafers in a single batch. Since advanced IC manufacturers who use larger diameter wafers are increasingly adopting single wafer processing, the Company believes its single wafer systems, which incorporate advanced dry chemical processing techniques, are particularly well-positioned to compete in Japan. TARGET NEW SYSTEMS AND APPLICATIONS. The Company believes that its strong customer relationships and technology leadership will enable it to develop new systems and target applications for specific customer needs. The Company's fastest-ramping product, the Performance Enhancement Platform ("PEP") system, illustrates that strategy. A dual chamber photoresist and residue removal system designed to increase throughput and optimize clean room space, PEP systems allow a mix-and-match option allowing photoresist removal, residue removal or a combination of both process chambers on one platform. In addition, PEP's advanced, flexible operating system with graphical user interface allows for easy addition of new chamber and system features to continuously improve the product's process capability. This insures the product spans multiple generations of device manufacturing needs. For 300mm wafers, the Company has devised a unique platform that further increases capital productivity over the dual chamber PEP. It uses the concept of segmenting processes into multiple yet parallel steps, minimizing wafer handling overhead. It is also being designed to meet customers' advanced resist and residue removal needs below 0.18 micron. GASONICS TECHNOLOGY MICROWAVE DOWNSTREAM PROCESSING. GaSonics' proprietary microwave downstream processing technology for dry chemical processing has been a key element in establishing product demand. In addition to separating the plasma source from the wafer exposure area ("downstream"), the Company's processing technology incorporates microwave plasma generation. The Company believes that microwave frequency introduced for semiconductor manufacturing by GaSonics in 1986, has become the preferred source for plasma creation because it produces a higher concentration of neutral species and fewer damaging ions than the alternative, radio frequency ("RF") plasma. Thus, the Company believes its products have higher removal rates with less damage and can operate at lower temperatures than competitive products that utilize RF energy. GaSonics' proprietary microwave downstream processing technology can be applied to other process applications, such as isotropic etch. In isotropic etching, plasma selectively removes material such as silicon dioxide, silicon nitride and polysilicon to create three-dimensional contours on the wafer. To accommodate the increased number of mask layers, certain silicon layers on the wafer must be carefully shaped prior to the deposition of the next layer of material. These etching processes are typically completed by costly wet chemical process steps. The Company believes that IC manufacturers will soon replace wet chemical 3 processes or high cost etching steps with more cost-effective downstream dry chemical processes. The Company believes that its proprietary downstream technology will enable manufacturers to complete these steps with increased yield and lower cost. To meet the challenges of a marketplace increasing in complexity, GaSonics has broadened the Company's offerings of solutions which remove unwanted materials between the etch process and subsequent deposition. The Company's twenty-five years of market share and technology leadership in photoresist removal have facilitated its development of Integrated Clean. The critical process steps between etch and deposition, specifically those that involve the removal of unwanted materials, prepare the wafer surface for a better device connection. These materials, which may be organic, inorganic, metallic or particulate in nature, can impact device performance, reliability and yield if they are not removed. GaSonics core business enables this critical process sequence, which includes photoresist removal and residue removal. These steps complete the preceding etch step and prepare the wafer for the subsequent deposition. HIGH PRESSURE THERMAL PROCESSING The Company introduced the concept of the application of high pressure to IC thermal processing with the introduction of its high pressure furnace product. In IC fabrication, there are a number of thermal process steps that involve the exposure of the wafer to high temperature over an extended period of time. These steps include oxidation, which is the growth of insulating materials on the wafer, and reflow, which is a process that smoothes irregular topographies on a wafer. By introducing high pressure as a parameter in thermal processing, the amount of time a wafer must be exposed to high temperatures is reduced. Also, in some instances, high pressure actually allows for a reduction in the process temperature. The length of time an IC may be exposed to high temperatures is known as the "thermal budget" of the device. Although high pressure is currently utilized primarily for specialized applications, the Company believes that the use of high pressure in the fabrication of advanced ICs will increase as feature sizes continue to decrease. Advanced ICs are more sensitive to long exposure to high temperatures and require lower processing temperatures and have a lower thermal budget. In addition, the Company believes that high pressure thermal processing provides benefits to the IC manufacturer including higher yields resulting from increased process rates and reduced damage to the wafer that can result from long exposure to high temperatures and increased die per wafer. The Company began shipping VHP systems, its most recent high pressure product release, in August 1995. PRODUCTS The Company's major product line consists of advanced dry chemical processing equipment for photoresist removal. The Company also offers advanced dry chemical processing equipment for post-etch residue removal, isotropic etching, high pressure furnaces, low-pressure chemical vapor deposition equipment used for flat panel display manufacturing and products using plasma chemistry for a variety of non-semiconductor applications. In addition, the Company provides upgrades, maintenance and spare parts for both current and previous generation products. DRY CHEMICAL PROCESSING SYSTEMS PHOTORESIST REMOVAL. The Company's dry chemical downstream processing systems are designed to provide advanced IC manufacturers with lower cost of ownership solutions for photoresist removal. This product line currently includes the Aura 1000, the Aura 2000-LL, the Aura 3010, the L3510, the PEP3510A and the PEP3510C. All of these products incorporate the Company's proprietary microwave downstream processing technology and are designed to be used in the fabrication of ICs with feature sizes of 0.25 microns and below. Their throughput rates range from approximately 45 to 140 wafers per hour for single 4 chamber systems and up to 160 wafers per hour for dual chamber systems, depending upon wafer size and customer application. System purchase prices range from approximately $150,000 to $700,000. The Company introduced its high productivity platform, the PEP, in 1995. A dual chamber platform with a proprietary wafer handler and high yield photoresist removal capability, the PEP delivers a lower cost per wafer pass while providing yield advantage with GaSonics' downstream microwave processing. GaSonics introduced photoresist removal chambers for the PEP platform in 1995, and the residue removal chambers were introduced in 1996. The PEP represents the Company's migration to a platform strategy which offers flexibility and customization of single wafer processing on an integrated platform. In 1994, the Company introduced its two most recent single chamber product enhancements, the L3510, an enhancement to the L3500, and the Aura 3010, an enhancement to the Aura 3000, each of which has extended performance capabilities, including higher reliability, increased operational flexibility and higher throughput. In 1997 the Company introduced its new 300mm platform the "Millennia" which will be available for commerical shipment in calendar 1998. Millennia adds a wafer loadlock giving it the capability to perform more processes with more chemistry options than PEP. The loadlock allows the use of hazardous gases such as Chlorine and some Fluorine compounds which gives Millennia the flexibility to perform isotropic and backside etching as well as soft silicon etch and oxide etching. Sales of dry chemistry processing equipment for photoresist removal accounted for approximately 69%, 62% and 69% of the Company's net sales in fiscal years 1995, 1996 and 1997, respectively. POST ETCH RESIDUE REMOVAL. Post etch residue removal is defined as the processes after etch (metal, poly or oxide) that remove unwanted materials from the surface of the wafer. Plasma systems like the PEP have proven to be more cost-effective at removing these materials than traditional wet chemistries. PEP integrated processing is typically used after a poly or oxide etch step. Most metal etchers have a photoresist module incorporated in their platforms designed to passivate the wafer and prevent corrosion. In this process, photoresist is also removed, leaving behind residues. The PEP3510A has proven effective at removing some of these residues with the addition of low concentrations of Fluorine gases. In addition, a modular clean chamber configured on the PEP becomes a PEP3510C (Clean) tool. This chamber is specifically designed to accommodate large concentrations of Fluorine gas which is sometimes needed for removing more difficult residues which form after metal and oxide etch. The clean chamber optimizes the process chamber with a single process, greatly improving wafer results, and has been qualified for production at several fabs for this process. It has also shown capability for post oxide etch residue removal. The next step for the Company will be the introduction of the PEP3600, a dual chamber PEP which will further optimize process wafer flow in the fab. The product is planned to launch in 1998. ISOTROPIC ETCHING. Isotropic etching removes materials from a wafer both horizontally and vertically at uniform rates. With isotropic etching, advanced IC manufacturers can consistently and uniformly remove materials in a more controlled environment, generally resulting in a lower cost than traditional wet chemical processing. In fiscal 1995, the Company completed the development of its high selectivity isotropic etch system, the Strata, for the removal of silicon dioxide, silicon nitride and polysilicon from the wafer. The Strata features the Company's downstream microwave technology. HIGH PRESSURE FURNACE SYSTEMS Over the past 18 years, the Company has marketed a horizontal high pressure furnace system, the HiPOx, and has sold over 150 of such systems to over 30 semiconductor manufacturers worldwide. In fiscal 1995, the Company completed development of its vertical high pressure furnace system, the VHP. The VHP system is intended to provide process simplification by eliminating a mask step and reducing the time the wafer is exposed to elevated temperatures, thereby permitting smaller geometries and increasing yields in the manufacture of advanced ICs. As geometries continue to shrink, more customers are exploring the 5 compatability of the VHP for ultra thin gate materials as a driver process for 0.18 micron devices. In these thin gate application, the VHP offers superior nitrogen incorporation into the oxide to improve barrier and strength characteristics. The VHP also addresses industry requirements for a vertical furnace design with reduced footprint and small dual batch sizes of approximately 50 waters. LOW-PRESSURE CHEMICAL VAPOR DEPOSITION SYSTEMS In August 1995, the Company acquired its liquid crystal display ("LCD") division in Japan (formerly called Tekisco, Ltd.), one of Japan's leading manufacturers of low-pressure chemical vapor deposition systems used for flat panel display manufacturing. Established in 1990, LCD began shipments of its proprietary LPCVD systems for polysilicon-on-glass applications for flat panel displays in 1991. LPCVD systems have been sold to a number of leading Japanese and Korean flat panel display manufacturers. The Company believes that the acquisition of LCD has expanded its market presence in Japan. The Company believes that the equipment needs of flat panel or liquid crystal manufacturers and semiconductor manufacturers are similar and appear to be converging as the wafers used in IC manufacturing continue to increase in size. SPARE PARTS, SERVICE AND SUPPORT GaSonics also provides a series of products, including spare parts, retrofits and upgrade kits as well as service, training and support for its growing installed based. Revenue from these sources accounted for approximately 20%, 21% and 20% of the Company's net sales in fiscal 1995, 1996 and 1997, respectively. As both the industry's technology and the Company's systems have become more complex, the Company believes that its customers will increasingly rely on its expertise for service and support. Since the installed base of the Company's equipment has increased and is expected to continue to increase, the Company believes that service and support revenue may also increase in 1998. CUSTOMERS The Company sells its products to leading IC manufacturers and flat panel display manufacturers located throughout the United States, Europe and the Asia/Pacific. Sales to Intel accounted for approximately 20% and 11% of net sales in fiscal 1995 and 1996, respectively. In fiscal 1997, Samsung and Promos Technologies each accounted for approximately 11% of net sales and Intel accounted for approximately 10% of net sales. The Company expects that sales of its products to relatively few customers, particularly Intel, Motorola, Samsung, Siemens and Lucent Technologies will continue to account for a high percentage of its 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 the Company's 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 by any significant customer, including reductions due to customer departures from traditional buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing integrated circuits, could materially adversely affect the Company's business, financial condition and results of operations. SALES, SERVICE AND CUSTOMER SUPPORT The Company believes its sales, service, applications and customer support organizations are critical to its success in establishing and maintaining long-term customer relationships and provide the Company with a competitive advantage in the process equipment market. These relationships are of paramount importance in the semiconductor capital equipment market, as the Company believes that once a semiconductor manufacturer has selected a particular supplier's capital equipment, that manufacturer generally relies upon that equipment for delivering a technology solution against specific device processing 6 requirements and frequently will attempt to consolidate its other capital equipment requirements with the same supplier. The Company's sales, service and applications and customer support organizations develop close working relationships with customers in order to identify their current and future semiconductor equipment requirements and to assist customers in overcoming their technology challenges as they move to fabricating increasingly more complex devices. As a result, the Company believes it is positioned to continue its success in the development, marketing and servicing of products which provide advanced semiconductor manufacturers enabling technology solutions. The Company markets, sells and services its products domestically and internationally primarily through its marketing and direct sales and customer support organization including service, applications and process development engineering and logistics personnel. Since the end of fiscal 1993, the Company has established subsidiaries in the U.K., Ireland, France, Israel, Korea and Japan, and branch offices in Italy, Singapore and Taiwan and has staffed these subsidiaries and branches with sales, service, technical support, applications engineering and logistics personnel. During 1997, the Company reduced its dependence on third party representatives to two representatives to sell and service its products in Germany and China. The Company has eight United States sales and service centers located in Austin, Texas; Dallas, Texas; Rockaway, New Jersey; Aloha, Oregon; Mesa, Arizona; Hopewell, New York; Fishkill, New York; and its corporate headquarters in San Jose, California. The Company's field service, technical support and applications engineering personnel based throughout the United States, Europe and Asia, directly support domestic and international equipment installations and commissioning, process development, training, spare parts logistics, warranty service and post-warranty contract service. The Company's field service engineers include dedicated site-specific engineers contracted by certain customers, such as Intel, Motorola, Lucent Technologies and Texas Instruments. The Company generally offers standard warranty terms for two years on parts and labor on equipment sales. The Company also offers service contracts to its customers for continued maintenance of systems that are not covered by warranty. In support of its numerous field support centers located throughout the world, the Company also maintains a headquarters-based customer satisfaction organization. This organization includes advanced technical/product support, a central response center, technical publications, product training, global field resource planning and spare parts logistics and planning. This organization, working in concert with the Company's field sales, service, applications and customer support centers, link customers with the Company's most advanced technical problem solving expertise, with an overall goal of providing quality products and services which meet customer's expectations. In support of the Company's goal, it is preparing to be in compliance with ISO-9001, which requires a strict system of standards used primarily in Europe to measure the Company's ability to achieve certain quality milestones. The Company has increased and continues to increase its sales, service, applications and customer support presence in Asia. The Company intends to continue investing significant resources to further penetrate the Asia market. The Company's goal is to develop knowledgeable local sales, service, applications and customer support resources throughout the region to increase communication between the Company and Asian semiconductor manufacturers, reduce response times for sales and support inquiries, and co-develop next generation processes. In August 1995, the Company acquired its LCD division in Japan from Kishimoto Sangyo Co. Ltd. of Tokyo, Japan. The LCD division is a manufacturer of LPCVD equipment used for the manufacture of flat panel displays ("FPD's"). FPDs are important components of portable computing and telecommunications devices. FPD or liquid crystal display manufacturing utilizes very similar processes to IC processing. Approximately 90% of the advanced FPDs produced worldwide are manufactured in Japan. This acquisition was intended to enable GaSonics to continue to penetrate this market and to further establish the credibility of GaSonics as a supplier in Japan. 7 Subsequent to 1997 fiscal year end, the Company announced that is has established a direct presence in Japan for sales, maintenance and service of the Company's photoresist and residue removal business to better serve its Japanese customers. As a result, the Company will transition out of its relationship with Seki Technotron, which has served as the Company's exclusive distributor, providing sales and field support in Japan since 1995. BACKLOG The Company schedules production of its systems based upon backlog, informal customer commitments and general economic forecasts for its targeted markets. The backlog includes only those customer orders for systems for which the Company has accepted purchase order numbers and assigned shipment dates within twelve months as well as orders for spare parts and service and support of systems. The Company's backlog for its systems, spare parts and service and support was approximately $32.4 million and $32.8 million at the end of fiscal years 1996 and 1997, respectively. Historically, the Company's backlog has fluctuated significantly primarily as a result of the cyclical nature of construction and equipping of new IC fabrication facilities. The equipment requirements of new fabrication facilities cannot be determined with accuracy, and therefore the Company's backlog at any certain date is not indicative of future growth. In addition, the Company's backlog at any particular date is not necessarily representative of actual sales for any succeeding period. Orders are often received and shipped in the same quarter, system delivery schedules can change and have changed, cancellations and rescheduled system orders can occur and have occurred, all orders are subject to cancellation, deferral or rescheduling by the customer with limited or no penalties, and there are potential delays, and there have been delays, in system shipments. The Company has in the past experienced, and will likely continue to experience, cancellations, deferrals and rescheduling of product orders MANUFACTURING The Company's manufacturing strategy is to produce high quality, cost-effective, and reliable systems and assemblies to support on-going and growing requirements for more environmental friendly semiconductor processing equipment. In order to provide the best added value to the customers and to preserve standards in performance, the Company is placing emphasis on in-house system integration and test activities that require proprietary core technology or specialized knowledge and outsourcing routine fabrication and assembly to subcontractors. The performance of subcontractors is monitored through a supply management program to ensure that they comply with quality and on-time expectations. In addition, as part of a continuous quality improvement process, the Company has embarked on a IS9002 certification program for its Plasma products manufacturing facility. The Company's principal manufacturing activities include assembly and test work and are conducted at the Company's facility in San Jose, California and in Atsugi City, Japan for the LPCVD business. Assembly includes subassembly and final assembly. Test includes module test and final system test. The system products are integrated and tested in Class 100 to 1000 clean rooms to customers' acceptance criteria prior to shipment. In addition, Class 10 clean rooms simulating a fab environment are available to provide equipment performance demos to customers. 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, 8 hazardous or toxic substances could subject the Company to significant liabilities. To ensure that manufacturing and engineering activities are conducted with heightened awareness on safety and compliance to regulations regarding the use of toxic or other hazardous substances, training programs are conducted on a year round basis for existing and new employees. To measure and improve customer satisfaction with the Company's products and service, metrics are developed and measured on a weekly or monthly basis, such as response time, quality, installation discrepancies, on-time, backorders, employee flexibility, and productivity. In addition, the Company has established a Customer Response Center ("CRC") to enhance the response time in providing customers parts and systems support . The CRC has direct access to Manufacturing, Engineering, and other resources to meet urgent and routine requests. RESEARCH AND DEVELOPMENT The markets for semiconductor manufacturing equipment, including the markets that utilize the Company's equipment, are characterized by rapid technological development and product innovation. The Company intends to continue to commit substantial resources to research and development in both dry chemistry processing, high pressure thermal processing and LPCVD for the flat panel display market. In order to maintain its long-term relationships with existing customers, the Company commits substantial resources to the continuous improvement of existing products and developing new products and technology. Customers with large installed bases increasingly require their suppliers to improve existing products in order to avoid the long qualifying evaluations required with new equipment, which can be costly and risky. The Company's research and development for product improvement includes in-house validation tests of major hardware changes as well as detailed process characterization in the Company's clean rooms. Historically, the Company has devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to these efforts. For fiscal 1995, 1996 and 1997, total research and development expenditures were approximately $12.3 million, $18.0 million and $17.4 million, respectively, and represent approximately 12%, 14% and 14% of the Company's net sales, respectively. COMPETITION 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 capital equipment, the manufacturer often relies 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, the Company expects to experience difficulty in selling to a particular customer for a significant period of time if that customer initially selects a competitor's capital equipment. The Company currently has only one principal product line and experiences intense competition worldwide from a number of leading 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, technical and other resources than the Company. Certain of the Company's competitors have announced the introduction of, or have introduced, competitive products that offer other technologies and improvements. For example, Applied Materials and Lam Research have introduced modules to their products which remove photoresist using dry chemistry processing and thereby 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 9 sales or loss of market acceptance of the Company's systems; intense price competition or other factors that could make the Company's systems or technology obsolete or noncompetitive. The Company believes that the industry will continue to be subject to consolidation which will increase the number of larger more powerful companies in the industry sector in which the Company competes. The Company also believes competition will continue from current and new suppliers employing other technologies, such as wet chemistry, traditional dry chemistry and other techniques. This increased competitive pressure could lead to reduced demand and lower prices for the Company's products, thereby materially adversely affecting the Company's operating results. The principal competitive elements in dry chemistry processing for photoresist and residue removal and etching are technological innovation, total cost of ownership of the systems, including yield, price, product performance and throughput capability, quality, and reliability, and customer service and support. Although the Company believes that it competes favorably in these areas, competitive product introductions could cause a decline in sales or loss of market acceptance of the Company's existing products. 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 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. In addition, 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. LCD's competitors in the LPCVD market include Japan-based companies and Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh and ULVAC. These competitors manufacture alternative technology systems and they could, at any time, enter the Company's markets with improved technology or with systems that are directly competitive with those of LCD. INTELLECTUAL PROPERTY RIGHTS The Company owns 17 United States patents which expire between 1998 and 2017 and has 5 U.S. patents pending. In addition, the Company has 15 foreign patents which expire between 1998 and 2011 and has applied for 2 additional foreign patents. Certain of these patents were acquired by the Company from Branson International Plasma Corporation ("IPC"). One additional U.S. patent application has been assigned to the Company in connection with the acquisition of LCD. The Company seeks patents when appropriate on inventions resulting from its ongoing research and development and manufacturing activities. The Company also has 7 trademarks and has an additional 2 trademarks pending. Nevertheless, the Company looks primarily for its success from innovation, technological expertise and marketing abilities of its employees rather than from patent, trademark, copyright and other intellectual property rights protection. 10 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 resulting from infringement claims in the future will not be asserted 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. 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. EMPLOYEES At September 30, 1997, the Company had approximately 487 full-time employees. The Company believes its future success will depend in large part on its ability to attract and retain highly skilled and motivated employees. None of the employees of the Company is covered by a collective bargaining agreement. The Company considers its relationships with its employees to be good. ADDITIONAL RISK FACTORS SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future. The Company anticipates that factors continuing to affect its future operating results will include the cyclicality of the semiconductor industry and the markets served by the Company's customers, the timing of significant orders, patterns of capital spending by customers, the proportion of direct sales and sales through distributors, the proportion of international sales to net sales, changes in pricing by the Company, its competitors, customers or suppliers, market acceptance of new and enhanced versions of the Company's products, inventory obsolescence, accounts receivable writeoffs, the mix of products sold, financial systems, procedures and controls, discounts, the timing of new product announcements and releases by the Company or its competitors, delays, cancellations or rescheduling of orders due to customer financial difficulties or otherwise, the Company's ability to produce systems in volume and meet customer requirements, the ability of any customer to finance its purchases of the Company's equipment, changes in overhead absorption levels due to changes in the number of systems manufactured, political and economic instability and lengthy sales cycles. Gross margins have varied and will continue to vary materially based on a variety of factors including the mix and average selling prices of systems sales, the mix of revenues, including service and support revenues, and the costs associated with new product introductions and enhancements and the customization of systems. Furthermore, announcements by the Company or its competitors of new products and technologies could cause customers to defer purchases of the Company's existing systems, which would also materially adversely affect the Company's business, financial condition and results of operations. The Company's gross margin and overall gross 11 margin rate has sharply declined from the level attained in prior years, in part, due to start-up inefficiencies associated with new products, competitive pricing pressures, changes in product mix from fewer higher margin rate and mature single chamber products to lower margin rate dual chamber products, products sold by the Company's LCD division in Japan, and other factors. Additionally, sales and earnings for the last half of fiscal 1996 and throughout fiscal 1997 were materially adversely impacted by the current semiconductor business slowdown and, although the Company has and is continuing to attempt to manage its expenses to partially offset the loss of income from the decline in revenue, it is anticipated that this slowdown in the industry will continue into next fiscal year and will continue to have a material adverse effect on the Company's future revenues and operating results. See "Expansion of Operations; Management of Growth" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." LIMITED SYSTEM SALES; BACKLOG The Company derives a substantial portion of its sales from the sale of a relatively small number of systems which typically range in purchase price from approximately $150,000 to $700,000 for its photoresist removal systems and up to approximately $2.0 million or more for its other products. As a result, the timing of recognition of revenue for a single transaction could continue to have a material adverse effect on the Company's sales and operating results. The Company's backlog at the beginning of a quarter typically does not include all sales required to achieve the Company's sales objectives for that quarter. Moreover, all customer purchase orders are subject to cancellation or rescheduling by the customer with limited or no penalties and, therefore, backlog at any particular date is not necessarily representative of actual sales for any succeeding period. The Company's net sales and operating results for a quarter may depend upon the Company obtaining orders for systems to be shipped in the same quarter that the order is received. The Company's business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment during such period. Furthermore, most of the Company's quarterly net sales have recently been realized near the end of the quarter. A delay in a shipment near the end of a particular quarter, due, for example, to an unanticipated shipment rescheduling, to cancellations or deferrals by customers, to unexpected manufacturing difficulties experienced by the Company or to supply shortages, may cause and has caused net sales in a particular quarter to fall significantly below the Company's expectations and materially adversely affect the Company's operating results for such quarter. In addition, significant investments in research and development, capital equipment and customer service and support capability worldwide have resulted in significant fixed costs which the Company has not been able to reduce rapidly as sales goals for a particular period have not been met. Because the Company builds its systems according to forecast, a reduction in customer orders or backlog could present further difficulties regarding the Company's ability to plan production and inventory levels, which could materially adversely impact operating results. The impact of these and other factors on the Company's operating results in any future period cannot be forecasted accurately.See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CYCLICALITY OF SEMICONDUCTOR INDUSTRY The Company's business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which, in turn, depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry is highly cyclical and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including systems manufactured and marketed by the Company. The semiconductor industry has experienced significant growth in recent years which has resulted in significant growth in the capital equipment industry. However, beginning in 1996, the semiconductor industry began experiencing a cyclical downturn. The Company has experienced significant delays of new orders and reschedulings of existing orders that 12 have materially adversely affected the Company's results of operations for the last two quarters of fiscal 1996 and all of fiscal 1997 financial results and may materially adversely affect future financial results. Accordingly, the Company can give no assurance that it will be able to achieve or maintain its current level of sales. Additionally, the Company anticipates that a significant portion of new orders depend upon demand from IC manufacturers building or expanding large fabrication facilities, and there can be no assurance that such demand will exist. See "Business--Industry Background." HIGHLY COMPETITIVE INDUSTRY The semiconductor capital equipment industry is intensely competitive. A substantial investment is required by customers to install and integrate capital equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected a particular vendor's capital equipment, the Company believes that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, the Company expects to experience difficulty in selling to a particular customer for a significant period of time if that customer selects a competitor's capital equipment. The Company currently has only one principal product line and experiences intense competition worldwide from a number of foreign and domestic manufacturers, including Canon, Applied Materials, Inc., Eaton Corporation, Lam Research Corporation, Matrix Semiconductor Systems, Inc., Mattson Technology, Inc., Plasma Systems and MC Electronics, many of which have substantially greater installed bases and greater financial, marketing, technical and other resources than the Company. One of the Company's competitors, Fusion was recently acquired by Eaton Corporation, a very large corporation. The Company believes that the industry will continue to be subject to consolidation which will increase the number of larger more powerful companies in the industry sector in which the Company competes. Certain of the Company's competitors have announced the introduction of, or have introduced or acquired, competitive products that offer other technologies and improvements. Applied Materials and Lam Research have introduced and currently sell modules to their products which remove photoresist using dry chemical processing and, therefore, compete with the Company's products. The Company expects its competitors to continue to develop enhancements to and future generations of competitive products that may offer improved price or performance features. New product introductions and enhancements by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's systems in addition to intense price competition or otherwise make the Company's systems or technology obsolete or noncompetitive. In addition, by virtue of its reliance on sales of advanced dry chemistry processing equipment, the Company could be at a disadvantage compared to certain competitors that offer more diversified product lines. The Company believes that it will continue to face competition from current and new vendors employing other technologies, such as wet chemistry, traditional dry chemistry and other ashing techniques, as such competitors attempt to extend the capabilities of their existing products. Increased competitive pressure has led to reduced demand and lower prices for the Company's products, thereby materially adversely affecting the Company's operating results. There can be no assurance that the Company will be able to compete successfully in the future. See "Business--Competition." Competitors of the Company's LCD division in Japan include Japan-based companies and Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh and ULVAC. These competitors manufacture alternative technology systems and they could, at any time, enter the Company's markets with improved technology or with systems that are directly competitive with those of the Company's LCD division. DEPENDENCE ON KEY CUSTOMERS Historically, the Company has sold a significant proportion of its systems in any particular period to a limited number of customers. Sales to the Company's ten largest customers in fiscal 1995, 1996 and 1997 accounted for approximately 68%, 51% and 66% of net sales, respectively. Sales to Intel accounted for 13 approximately 20% and 11% of net sales in fiscal 1995 and 1996, respectively. In fiscal 1997, Samsung and Promos Technologies each accounted for approximately 11% of net sales and Intel accounted for approximately 10% of net sales. The Company expects that sales of its products to relatively few customers will continue to account for a high percentage of net sales in the foreseeable future. None of the Company's customers has entered into a long-term agreement requiring it to purchase the Company's products. Moreover, sales to certain of its customers have decreased as those customers have completed or delayed purchasing requirements for new or expanded fabrication facilities. Although the composition of the group comprising the Company's largest customers has varied from year to year, the loss of a significant customer or any reduction in orders from any significant customer, including reductions from recent buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing ICs, could materially adversely affect the Company's business, financial condition and results of operations. The Company's ability to increase or maintain current sales levels in the future will depend in part upon its ability to obtain orders from new customers as well as the financial condition and success of its customers and the general economy, of which there can be no assurance. See "Business--Customers." EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH The Company has undergone a period of rapid growth. From 1993 though mid 1996, the Company had significantly increased the scale of its operations to support increased sales levels and has expanded its operations to address critical infrastructure requirements, including the hiring of additional personnel, commencement of independent operations in the United Kingdom, Ireland, France, Italy, Korea, Japan, Singapore, Taiwan and Israel and significant investments in research and development to support product development. The Company's expansion has resulted in significantly higher operating expenses and due to the recent slowdown in new orders, it is anticipated that the Company's future operating results will be materially adversely affected though at least 1998. The past growth in the Company's sales and expansion in the scope of its operations has placed a considerable strain on its management, financial and other resources and has required the Company to initiate an extensive reevaluation of its operating and financial systems, procedures and controls. The Company implemented new management information, manufacturing and cost accounting systems during the second quarter of fiscal 1997. There can be no assurance, however, that any existing or new systems, procedures or controls will be adequate to support the Company's operations or that its new systems will be implemented in a cost-effective and timely manner. RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The semiconductor manufacturing industry is subject to rapid technological change and new product introductions and enhancements. The Company's ability to be competitive will depend in part upon its ability to develop new and enhanced systems and to introduce these systems at competitive prices and in a timely and cost effective manner to enable customers to integrate the systems into their operations either prior to or upon commencement of volume product manufacturing. In addition, new product introductions or enhancements by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products. Increased competitive pressure has led to intensified price-based competition resulting in lower prices and margins, which has and could continue to materially adversely affect the Company's business, financial condition and results of operations. Any success of the Company in developing, introducing and selling new and enhanced systems depends upon a variety of factors including product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing and product performance in the field. In particular, the Company's future performance will depend in part upon the successful commercialization of the VHP, LPCVD systems and the Millennia 300mm systems. There can be no assurance that any such product will achieve any significant revenues or contribute to any 14 profitability of the Company. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for the type of ICs under development by leading IC manufacturers and the equipment required to produce such ICs. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products. Because of the large number of components in, and the complexity of, the Company's systems, significant delays can occur between a system's initial introduction and the commencement of volume production. As is typical in the semiconductor capital equipment market, the Company has been experiencing delays from time to time in the introduction of, and certain technical and manufacturing difficulties with, certain of its systems and enhancements and may continue to experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. The Company's inability to complete the development or meet the technical specifications of any of its new systems or enhancements or to manufacture and ship these systems or enhancements in volume and in a timely manner would materially adversely affect the Company's business, financial condition and results of operations as well as its customer relationships. In addition, the Company may incur substantial unanticipated costs to ensure the functionality and reliability of its future product introductions early in the product's life cycle. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in collecting accounts receivable and additional service and warranty expenses may result, which events could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Research and Development." LENGTHY SALES CYCLE Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity through the expansion of existing fabrication facilities or the opening of new facilities, which typically involves a significant capital commitment. The Company often experiences delays in finalizing system sales following initial system qualification while the customer evaluates and receives approvals for the purchase of the Company's systems and completes a new or expanded facility. Due to these and other factors, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort. The Company believes that the length of the sales cycle will continue to increase as certain of its customers centralize purchasing decisions into one decision making entity, which is expected to intensify the evaluation process and require additional sales and marketing expenditures by the Company. RISKS ASSOCIATED WITH THE JAPANESE MARKET The Company believes that increased penetration of the Asia Pacific market, particularly Japan, will be essential to its future financial performance. The Company has sold a relatively few number of systems to Japanese semiconductor manufacturers. Sales in Japan accounted for approximately 2% of the Company's total net sales in fiscal 1995 and 9% of total net sales in both fiscal 1996 and fiscal 1997. To date, for its photoresist business, the Company has not fully developed a customer service and support capability in Japan and remains at a disadvantage in selling, servicing and supporting such products in Japan. The Japanese semiconductor market (including fabrication plants operated outside of Japan by Japanese semiconductor manufacturers) represents a substantial percentage of the worldwide semiconductor manufacturing capacity, and has been difficult for non-Japanese companies to penetrate. Furthermore, the licensing of products and process technologies by Japanese semiconductor manufacturers to non-Japanese semiconductor manufacturers could result in a recommendation to use certain semiconductor capital equipment manufactured by Japanese companies. Late in fiscal 1995, the Company acquired its LCD division in Japan, but there can be no assurance that this company will enable the Company to penetrate the photoresist removal market in Japan. In addressing this market, the Company is at a distinct competitive disadvantage compared to leading Japanese suppliers, many of which have long-standing collaborative relationships with Japanese semiconductor manufacturers. In addition, since 1992, Japanese 15 semiconductor manufacturers have substantially reduced their levels of capital spending on new fabrication facilities and equipment, thereby increasing competitive pressures in the Japanese market. Although the Company is investing significant resources and has established a direct presence in Japan which has significantly increased operating expenses, there can be no assurance that the Company will be able to achieve significant sales to the Japanese semiconductor market. See "Business--Sales, Service and Customer Support." INTERNATIONAL SALES International sales accounted for 40%, 54% and 55% of net sales in fiscal years 1995, 1996 and 1997, respectively. The Company has established independent operations in the United Kingdom, France, Italy, Korea, Japan, Singapore, Taiwan and during the third quarter of fiscal 1997, established subsidiaries in Israel and Ireland. 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. See "Business--Sales, Service and Customer Support." INTELLECTUAL PROPERTY RIGHTS Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that its financial performance will depend more upon the innovation, technological expertise and marketing abilities of its employees than upon such protection. There can be no assurance that any of the Company's pending patent applications will be issued or that foreign intellectual property laws will protect the Company's intellectual property rights. There can be no assurance that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company. As is typical in the semiconductor industry, the Company occasionally receives notices from third parties alleging infringement claims. Although there are currently no pending material claims or lawsuits against the Company regarding any possible infringement claims, there can be no assurance that infringement claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future or that such assertions, if proven to have merit, will not materially adversely affect the Company's business, financial condition and results of operations. If any such claims are asserted against the Company, the Company may seek to obtain a license under the third party's intellectual property rights if available on reasonable terms or at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims or enforce its proprietary rights. Such challenges could be extremely expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Intellectual Property Rights." 16 SOLE OR LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS; COMPLEXITY IN MANUFACTURING PROCESS Certain components, subassemblies and services necessary for the manufacture of the Company's systems are obtained from a sole supplier or a limited group of suppliers. Specifically, the Company relies on three companies for supply of the robotics used in its products, two other companies for microwave power supplies, and one company for microwave applicators used in all of its ashing systems. The Company's LCD division in Japan is heavily dependent on one key supplier for quartz and ceramic fabrication and is seeking alternative sources. The Company is exploring alternative sources or technology. In addition, the Company has been establishing longer term contracts with these suppliers to mitigate the potential risks of inadequate supply of required components and control over pricing and timely delivery of components and subassemblies. However, the Company is relying increasingly on outside vendors to manufacture certain components and subassemblies. The Company's reliance on sole or a limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components and subassemblies. Because the manufacture of certain of these components and subassemblies is an extremely complex process and requires long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur in the future. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative suppliers or to manufacture such components internally could delay the Company's ability to ship its products, which could damage relationships with current and prospective customers and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Manufacturing." FUTURE ACQUISITIONS In August 1995, the Company acquired its liquid crystal display division in Japan (formerly called Tekisco). In the future, the Company may pursue acquisitions of additional product lines, technologies or businesses. Future acquisitions by the Company may result in potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. From time to time, the Company has engaged in preliminary discussions with third parties concerning potential acquisitions of product lines, technologies and businesses; however, there are currently no agreements with respect to any acquisition. In the event that such an acquisition does occur, there can be no assurance as to the effect thereof on the Company's business, financial condition or operating results. DEPENDENCE ON KEY PERSONNEL The Company's financial performance will depend in significant part upon the continued contributions of its officers and key personnel, many of whom would be difficult to replace. No employee has an employment or noncompetition agreement with the Company. The loss of any key person could have a material adverse effect on the business, financial condition and results of operations of the Company. During the last twelve months, a number of senior management personnel have left the Company to pursue other opportunities. Although the Company has replaced most of these senior management personnel, there can be no assurance that these individuals will successfully integrate into the Company's senior management team. In addition, 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, 17 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. See "Business--Employees" and "Executive Officers of the Registrant." 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. See "Business-- Manufacturing." CONCENTRATION OF OWNERSHIP; EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS As of September 30, 1997, the Company's officers, directors and members of their families that may be deemed affiliates of such persons owned approximately 21.8% of the Company's outstanding shares of Common Stock. Accordingly, these stockholders will be able to significantly influence the election of the Company's directors and the outcome of corporate actions requiring stockholder approval, such as mergers and acquisitions, regardless of how other stockholders of the Company may vote. Such a high level of ownership by such persons or entities may have a significant effect in delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of other holders of Common Stock. Certain provisions of the Company's Certificate of Incorporation, 1994 Stock Option/ Stock Issuance Plan, Bylaws and Delaware law may also discourage certain transactions involving a change in control of the Company. In addition to the foregoing, the ability of the Company's Board of Directors to issue preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a change in control of the Company. VOLATILITY OF STOCK PRICE The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's operating results, sales of the Company's Common Stock into the market place, failure to meet or changes in analysts' expectations, natural disasters, outbreaks of hostilities, general conditions in the semiconductor industry or the worldwide economy, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in patents or other intellectual property rights and developments in the Company's relationships with its customers and suppliers could cause the price of the Company's common stock to fluctuate, perhaps substantially. In addition, in recent years the stock market in general, and the market for shares of small capitalization stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's common stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. 18 ITEM 2. PROPERTIES The Company maintains its headquarters in San Jose, California in three leased facilities, aggregating approximately 148,500 square feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research and development. The three buildings have separate leases with two of the leases expiring on December 31, 1999 and the third lease expiring on August 31, 1998. The Company also leases seven sales and support offices in the United States in Austin, Texas; Dallas, Texas; Rockaway, New Jersey; Aloha, Oregon; Mesa, Arizona; Hopewell, New York; and Fishkill, New York under leases with terms of one to three years. Additionally, the Company leases sales and support offices in Korea, Japan, Scotland, Singapore and Taiwan and Israel. Lease terms vary from two to ten years. The Company also leases two facilities totaling approximately 34,000 square feet in Japan which is dedicated to the Company's LCD division. One of the facilities totaling approximately 20,000 square feet is used for administration, marketing and sales, customer service and support, manufacturing and research and development. The lease on this facility expires September 30, 2000. The other facility totaling approximately 14,000 square feet was acquired in December 1995 to expand production capability. The lease on this facility expires December 31, 1998. The Company believes that its existing facilities will adequately meet its anticipated requirements for the next twelve months and that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the Company's fiscal fourth quarter ended September 30, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION - ----------------------- --- --------------------------------------------------------------- Monte M. Toole......... 66 Chairman of the Board Dave Toole............. 42 Chief Executive Officer, President and Director Avner Shelem........... 44 Vice President, General Manager, Engineering and Operations Terry Gibson........... 44 Vice President, Finance and Chief Financial Officer Bill Alexander......... 41 Vice President, Worldwide Sales and Field Operations
MONTE M. TOOLE founded the Company in March 1971 and has served as Chairman of the Board since the Company's inception and as Chief Executive Officer from inception to December 31, 1994. Between March 1971 and May 1993, Mr. Toole also served as President of the Company. Prior to founding the Company, Mr. Toole was a representative of semiconductor equipment manufacturers at Monte Toole and Associates, Inc., a manager at Fairchild Semiconductor and a systems analyst at IBM. From October 1991 to June 1993, Mr. Toole served on the Board of Directors of Integrated Process Equipment Corporation, a semiconductor equipment company. DAVE TOOLE became the Company's President in May 1993 and the Companys' Chief Executive Officer on December 31, 1994. In addition, Mr. Toole served as the Company's Chief Operating Officer from 19 May 1993 to December 1994. Prior to that time, Mr. Toole served as the Company's Vice President, Sales and Marketing from October 1986 to April 1989 and has served as a Director since April 1979. Mr. Toole also served as the Company's Vice President and General Manager from April 1989 to May 1991 and as Vice President, Commercial Operations from May 1991 to May 1993. Mr. Toole has held various other positions in purchasing, manufacturing, marketing and sales since joining the Company in 1979. Prior to 1979, Mr. Toole was employed by Advanced Micro Devices, a semiconductor manufacturer. AVNER SHELEM joined the Company as Vice President, Research, Development and Engineering in March 1994 and was promoted to Vice President, General Manager, Engineering and Operations in September 1996. Between December 1992 and March 1994, Mr. Shelem was a partner at Intertech Management Group, a management consulting firm. From September 1990 to December 1992, Mr. Shelem served as Chief Operating Officer of AG Associates, a manufacturer of rapid thermal processing equipment. From January 1983 to September 1990, Mr. Shelem held various positions at Intel Corporation, including Material and General Site Services Manager, Lithography Manager, Diffusion Manager and Industrial Engineering Manager. TERRY GIBSON became the Company's Vice President, Finance and Chief Financial Officer in May 1996. Before joining GaSonics, Mr. Gibson had been employed by Lam Research Corporation since 1991 where he served as Vice President, Corporate Controller. From 1990 to 1991, Mr. Gibson was the Corporate Controller at Silicon Valley Group and from 1989 to 1990 served as Corporate Controller of Flextronics, Inc. From 1983 to 1989, Mr. Gibson held various financial management positions at National Semiconductor and prior to that began his career with the independent public accounting firm of Deloitte, Haskins and Sells. BILL ALEXANDER joined the Company as Vice President, Worldwide Sales and Field Operations in August 1997. Prior to joining GaSonics, Mr. Alexander was employed by Tencor Corporation (now KLA-Tencor Corporation) from November 1996 to August 1997 where he served as Vice President of Asia-Pacific Operations. From 1993 to 1996 he first served as Director of Asia Operations and later as Vice President of International Operations with Watkins-Johnson Company and from 1990 to 1993 held senior sales and marketing positions at Lam Research Corporation. From 1981 to 1990, Mr. Alexander held various management positions with Watkins-Johnson Company, Innovus Corporation, VLSI Technology and FMC Corporation. The executive officers serve at the discretion of the Board of Directors, until their successors are appointed. No family relationships exist among the officers and directors, except Monte Toole and Dave Toole are father and son. 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference from page 22 of the Company's 1997 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference from page 22 of the Company's 1997 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference from pages 23-27 of the Company's 1997 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Public Accountants and consolidated financial statements required by this Item are incorporated by reference from pages 28-43 of the Company's 1997 Annual Report to Stockholders. 21 PART III Certain information required by Part III is omitted from this Report in that the Registrant intends to file with the Commission a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held March 6, 1998 ( the "Proxy Statement") and the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this Item is incorporated by reference from the section captioned "Election of Directors" in the Proxy Statement. The information required by this item relating to the Company's executive officers is included under the caption "Executive Officers of the Registrant" in Part I of this Report on Form 10-K. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the section captioned "Compliance with Section 16(a) of the Exchange Act" in the proxy statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Proxy Statement under the caption "Executive Compensation and Related Information". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Proxy Statement under the caption "Election of Directors" and "Ownership of Securities". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Proxy Statement under the caption "Certain Transactions". 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report on Form 10-K: (1) Financial Statements The following consolidated financial statements of GaSonics International Corporation are set forth in the Company's 1997 Annual Report to the Stockholders and are incorporated by reference hereto in Item 8:
ANNUAL REPORT PAGE NUMBER --------------- Consolidated Balance Sheets--September 30, 1997 and 1996............. 28 Consolidated Statements of Operations--Years Ended September 30, 1997, 1996 and 1995................................................ 29 Consolidated Statements of Stockholders' Equity--Years Ended September 30, 1997, 1996 and 1995.................................. 30 Consolidated Statements of Cash Flows--Years Ended September 30, 1997, 1996 and 1995................................................ 31 Notes to Consolidated Financial Statements........................... 32-42 Report of Independent Public Accountants............................. 43
(2) Financial Statement Schedules The following consolidated financial statement schedule is included herein:
PAGE NUMBER --------------- Report of Independent Public Accountants on Schedule................. 27 Schedule II--Valuation and Qualifying Accounts....................... 28
Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. (3) Exhibits The following exhibits are referenced or included in this report:
EXHIBIT DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 2.1(1) Form of Agreement and Plan of Merger between Gasonics International Corporation, a California corporation, and the Registrant 2.2(1) Stock Purchase Agreement dated February 28, 1991 between Emerson Electric Company and the Registrant 2.3(5) Asset Purchase Agreement dated as of July 30, 1995 among the Registrant, GaSonics International Japan, K.K., Tekisco, Inc. and Kishimoto Sangyo Co. Ltd. 2.4(5) Stock Purchase Agreement dated as of July 30, 1995 between the Registrant and Kishimoto Sangyo Co. Ltd. 2.5(5) Commission Agreement dated as of July 30, 1995 between the Registrant and Kishimoto Sangyo Co. Ltd. 3.1(1) Certificate of Incorporation of the Registrant 3.2(1) Bylaws of the Registrant 3.3(10) Amended and Restated Bylaws of the Registrant
23
EXHIBIT DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 4.1(1) Form of Common Stock Certificate 10.1(1) Form of Indemnification Agreement between the Company and each of its officers and directors 10.2(11) 1994 Stock Option/Stock Issuance Plan and forms of agreements thereunder, as amended and restated effective December 17, 1996 10.3(11) 1994 Employee Stock Purchase Plan, as amended and restated effective December 17, 1996 10.4(1) Form of Light Industrial Lease between Teachers Insurance and Annuity Association of America and the Registrant for office space at 2730 Junction Avenue, San Jose, California 10.5(1) Secured Promissory Note dated February 28, 1991 in the principal amount of $4,500,000 issued by the Registrant and Branson International Plasma Corporation in favor of Emerson Electric Company 10.6(1) Promissory Note dated November 10, 1993 in the principal amount of $359,375 issued by the Registrant in favor of Robert Champagne 10.7(1) Continuing Guaranty dated November 10, 1993 in the principal amount of $359,375 issued by the Registrant in favor of Robert Champagne 10.8(1) Promissory Note dated November 10, 1993 in the principal amount of $339,999.60 issued by Dave Toole in favor of the Registrant 10.9(1) Demand Note dated November 30, 1993 in the principal amount of $62,500 issued by Dave Toole in favor of the Registrant 10.10(1) Sale of Shares Pursuant to Redemption Agreement dated November 10, 1993 between Robert Champagne and the Registrant 10.11(1) Non-Compete Agreement dated as of November 10, 1993 and Addendum to Non-Compete Agreement dated as of November 18, 1993 between Robert Champagne and the Registrant 10.12(1) Credit Agreement dated August 6, 1993 between Union Bank, International Plasma Corporation and the Registrant 10.13(2) Business Loan Agreement dated April 28, 1994 between Registrant and Union Bank and related Promissory Note 10.14(3) Lease Agreement dated November 14, 1994 between Registrant and Realtech Properties I, L.P. 10.15(4) Loan Agreement dated April 19, 1995 between Registrant and Union Bank, a California banking corporation 10.16(4) Lease Agreement dated June 5, 1995 between Registrant and Orchard Investment Company 10.17(6) Underwriting Agreement dated March 21, 1994 by and among the Registrant, the underwriters named therein and the selling stockholders named therein 10.18(7) Underwriting Agreement dated March 9, 1995 by and among the Registrant, the underwriters named therein and the selling stockholders named therein 10.19(8) Continuing Guarantee Agreement dated July 31, 1995, executed by the Registrant in favor of the Bank of Tokyo, Ltd. 10.20(9) Loan Agreement dated March 4, 1996 between Registrant and Union Bank 10.21(11) Loan Agreement dated March 4, 1997 between Registrant and Union Bank
24
EXHIBIT DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.22(12) Loan Agreement dated May 1, 1997 between Registrant and Bank of Tokyo-Mitsubishi 13 Annual Report to Stockholders for the year ended September 30, 1997 Such Annual Report, except for those portions that are expressly incorporated herein by reference, is furnished for the information of the Securities and Exchange Commission and is not to be deemed as filed as a part of this Form 10-K 16.1(1) Letter from Ernst & Young dated March 8, 1994 regarding the change in the Certifying Accountant of the Registrant 21.1 List of Subsidiaries of the Registrant 23.1 Consent of Independent Public Accountants 24.1 Power of Attorney (Included on signature page) 27 Financial Data Schedule
- ------------------------ (1) Incorporated by reference to identically numbered exhibits included in Registrant's Registration Statement on Form S-1 (File No. 33-74872) declared effective with the Securities and Exchange Commission on March 21, 1994. (2) Incorporated by reference to identically numbered exhibit included in Registrant's Report on Form 10-Q for the quarter ended June 30, 1994. (3) Incorporated by reference to an exhibit in Registrant's Report on Form 10-Q for the quarter ended December 31, 1994. (4) Incorporated by reference to exhibits included in Registrant's Report on Form 10-Q for the quarter ended June 30, 1995. (5) Incorporated by reference to exhibits filed with Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 24, 1995. (6) Incorporated by reference to an exhibit in Registrant's Registration Statement on Form S-1 (File No.33-74872) declared effective with the Securities and Exchange Commission on March 21, 1994. (7) Incorporated by reference to an exhibit in Registrant's Registration Statement on Form S-1 (File No.33-89636) declared effective with the Securities and Exchange Commission on March 9, 1995. (8) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995. (9) Incorporated by reference to an exhibit included in Registrant's Report on Form 10-Q for the quarter ended March 31, 1996. (10) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996 (11) Incorporated by reference to an exhibit included in Registrant's Report on Form 10-Q for the quarter ended March 31, 1997 (12) Incorporated by reference to an exhibit included in Registrant's Report on Form 10-Q for the quarter ended June 30, 1997 (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter ended September 30, 1997. (c) Exhibits. See list of exhibits under (a) (3) above. (d) Financial Statement Schedules. See list of schedules under (a) (2) above. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 22, 1997 GASONICS INTERNATIONAL CORPORATION By: /s/ DAVE TOOLE ----------------------------------------- Dave Toole PRESIDENT & CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Monte M. Toole and David J. Toole, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to the Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated below: SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ MONTE M. TOOLE - ------------------------------ Chairman of the Board of December 22, 1997 Monte M. Toole Directors Chief Executive Officer, /s/ DAVE TOOLE President and Director - ------------------------------ (Principal Executive December 22, 1997 Dave Toole Officer) Vice President, Finance /s/ TERRY R. GIBSON and Chief Financial - ------------------------------ Officer (Principal December 22, 1997 Terry R. Gibson Financial and Accounting Officer) /s/ KENNETH L. SCHROEDER - ------------------------------ Director December 22, 1997 Kenneth L. Schroeder /s/ F. JOSEPH VAN POPPELEN - ------------------------------ Director December 22, 1997 F. Joseph Van Poppelen 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To GaSonics International Corporation: We have audited in accordance with generally accepted auditing standards, the financial statements included in GaSonics International Corporation's Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 27, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index under item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP San Jose, California October 27, 1997 27 SCHEDULE II GASONICS INTERNATIONAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING OF COSTS AND OTHER AT END DESCRIPTIONS PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - --------------------------------------------------- ------------- ----------- ----------- ----------- ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Years Ended September 30,: 1995............................................. $ 288 $ 179 $ -- $ 98 $ 369 1996............................................. $ 369 $ 240 $ 2 $ -- $ 611 1997............................................. $ 611 $ 4,637 $ 2,645 $ 7,173 $ 720 INVENTORY RESERVES Years Ended September 30,: 1995............................................. $ 1,201 $ 1,212 $ -- $ 851 $ 1,562 1996............................................. $ 1,562 $ 2,266 $ -- $ 1,593 $ 2,235 1997............................................. $ 2,235 $ 1,725 $ -- $ 1,138 $ 2,822
28 EX-13 2 EXHIBIT 13 GASONICS GaSonics International Corporation 1997 Annual Report [Contains black box covering page. Page is otherwise blank] GaSonics International is the world leader in Integrated Clean-TM- solutions: an expanding and increasingly critical phase of semiconductor manufacturing. 1 Geometries are shrinking. [Graphic of arrow head] As device geometries shrink below .25-MICRON-, the danger increases that unwanted materials can adversely affect semiconductor performance and production yield. 2 Wafers are getting larger. [Graphic of man w/blue circle] Expanding wafer sizes dramatically increase the number of finished semiconductor devices that can be damaged by interlayer residues. 3 And the number of layers is increasing. [Graphic of woman and colored circles] As material layers increase, the number and kind of potentially damaging residues and unwanted materials increase as well. 4 Removing unwanted materials from the etched wafer is a more challenging and fragmented process than ever. GaSonics cuts through the complexity with advanced process technology and integrated solutions. 5 GaSonics International helps semiconductor manufacturers achieve fundamental goals: higher yield, higher throughput, reduced environmental impact and lower cost per wafer. 6 The fundamental benefits of Integrated Clean. [Graphic of man with circle] c - Cost y - Yield t - Throughput e - Environmental Impact 7 Clean technologies are proliferating. [Graphic of woman and numbered boxes] Manufacturing processes between etch and deposition are proliferating as existing processes fragment and new ones emerge. GaSonics International is meeting emerging challenges with innovative clean technologies. 8 Readying Tomorrow's Technologies GaSonics International has been part of the semiconductor industry's growth and evolution since the beginning. The Company's products have been used to manufacture each new generation of the industry's cutting edge products, including every generation of advanced microprocessors. Today we continue to lead our served market with advanced technology, superior engineering and world-class service and support. GaSonics International is a dominant player in the world market for photoresist removal equipment, used in the process step immediately following the etching of semiconductor wafers. From this leadership position GaSonics recognizes the challenges ahead. Processes for cleaning wafer surfaces, including photoresist removal, are becoming segmented as manufacturers introduce new materials. New cleaning processes must be developed to remove tougher residues from smaller areas. And all the process steps between etch and deposition must be managed more effectively to improve production yields and reduce the cost per wafer. GaSonics International is now developing advanced process technologies to address these manufacturing challenges. With our long-term customer relationships, proven R&D expertise and established market position, GaSonics International continues to provide technology leadership in one of the world's most important industries. 9 Integrating Clean Solutions Between Etch and Deposition Higher performance. Smaller size. Lower cost. To maintain the relentless pace of Moore's Law, semi-conductor manufacturers must continually increase their productivity. GaSonics International offers a key solution set with the introduction of Integrated Clean-TM-. With this initiative, we are extending our advanced photoresist removal technology and integrating it with new process technologies, to address more of our customers' needs for material removal between etch and deposition. Until recently, wafer cleaning processes were physically separate, employed multiple user interfaces, and fought each other for space in crowded, expensive wafer fabrication facilities. Then GaSonics created the PEP-TM- platform, the industry's first Integrated Clean solution for wafer manufacturing. The PEP system gives customers higher throughput, improved time to market, flexibility to mix and match different cleaning technologies in a single machine, and a graphical user interface that remains stable as new technologies are brought to the PEP platform. Customers responded immediately to these important productivity benefits, making the PEP system the fastest-ramping new product in the Company's history. The PEP system also benefits GaSonics, because it reduces product development time for new 200 mm manufacturing solutions that fit into the PEP platform. We are already applying our Integrated Clean philosophy to 300 mm wafers, expected to be an industry standard at the turn of the century. The result: the Millennia-TM- platform, designed to allow semiconductor manufacturers to operate even more productively in the new millennium. 10 GaSonics International integrates clean technologies. [Graphic of woman dancing by numbered boxes] GaSonics International leads the industry with Integrated Clean solutions that flexibly combine multiple process technologies into compact, high-performance platforms that enable high-throughput manufacturing of future generations of semiconductors. 11 GaSonics meets its customers' needs, worldwide. [Graphic of man w/flag] GaSonics International operates locally in the world's important semiconductor manufacturing countries, and continues to build a world-class international infrastructure. 12 Delivering Integrated Clean Solutions to a Global Market GaSonics International complements its platform and technology leadership with an expanding international infrastructure that delivers the Company's solutions to customers around the world. Our international organization includes sales and service offices in strategic locations in Europe, Japan, Korea, Singapore, Taiwan and North America. GaSonics International provides committed customer service both globally and locally. For example, our Strategic Spares Network is designed to deliver spare parts to any customer manufacturing site in the world in a matter of hours, not days. At the same time, GaSonics engineering personnel can be found at customer sites throughout the world, working day by day to implement, maintain and enhance the Company's solutions. When VLSI Research Inc. asked 37,000 semiconductor manufacturing managers throughout the world to identify the suppliers that served them best last year, GaSonics International once again won the prestigious VLSI 10 BEST Award in its industry segment. This award recognizes the quality of the Company's technology, the reliability of its products, and the organization that delivers them. 13 To Our Stakeholders [Graphic of flag] Fiscal 1997 was a productive year for GaSonics International despite the semiconductor industry's downturn. We have long been the technology leader in photoresist removal, the semiconductor manufacturing process step following etch, and during fiscal 1997 we began extending our capabilities further along the process spectrum that connects etch to deposition. Our ability to integrate fragmented, complex process between etch and deposition is a significant benefit to our customers, which include most of the major microprocessor, DRAM and logic manufacturers around the world. As these companies approach the .18-MICRON- 300 mm era early in the next millennium, they are looking to us for technology leadership, productivity improvements and responsive global support. We're delivering all three, with our directional downstream technology, our development of integrated process platforms, and our world-class international infrastructure. All three of these strategic advantages contributed to the strong market acceptance of our integrated PEP platform, which in fiscal 1997 became the fastest-ramping new product in the Company's history. In fact, the PEP system contributed 60% of total revenues in the fourth fiscal quarter, just one year after volume shipments began. The PEP system gives us a stable, common platform that accelerates our introduction of new technologies and capabilities. This in turn helps us enter new markets and increase productivity for our customers. We have already announced our next breakthrough platform, the Millennia system, which will integrate etch-to-deposition process steps in 300 mm manufacturing. 14 For the year, revenues were $121.3 million, the second-highest total in the Company's history behind the $127.0 million in revenues posted in fiscal 1996. Fiscal year earnings were $5.2 million, or $0.36 per share, excluding a provision for an uncollectible account receivable and a gain on sale of stock of a third party. Net income, excluding the items mentioned previously, grew quarter over quarter throughout the year, and we continued to achieve excellent balance in our revenue mix, both geographically and between the logic and memory markets. We broadened our international market leadership by penetrating important new accounts, most notably in Taiwan, one of Asia's strongest and most stable regional markets, where we took the lead position for photoresist removal systems. We also kept up the pace of product development, to expand our opportunities as the overall semiconductor manufacturing equipment market shows signs of improvement. Integrated Clean Solutions Between Etch and Deposition For our customers, integrated platforms enable higher manufacturing throughput, more effective use of limited space in fabrication facilities, and faster incorporation of new technology. Our PEP system delivers all these benefits for the fabrication of 200 mm wafers, and it is qualified for manufacturing processes down to .18-MICRON-. During fiscal 1997 we increased PEP throughput by 20% and added significant enhancements, including support for Standard Machine Interface (SMIF), as well as advanced automation techniques which improve factory utilization. Our Millennia platform, introduced in the fourth fiscal quarter, is designed to distinguish us even more clearly as the Integrated Clean leader. The Millennia combines four different process stations sharing the same downstream microwave source and the same easy-to-use software interface. It's designed for the industry's highest-throughput 300 mm wafer manufacturing at and below .25-MICRON-. We anticipate that I300I, a semiconductor manufacturing consortium that includes more than a dozen of our customers, will qualify the Millennia platform for .25-MICRON- applications in 1998. With common platforms, we now can mix and match process technologies to provide Integrated Clean solutions between etch and deposition. One of the defining features of GaSonics platforms is the reduction of toxic chemical processing in Integrated Clean solutions. This in turn reduces the environmental impact of semiconductor manufacturing and lowers the cost of doing business for our customers. I believe all GaSonics International stakeholders should be proud of this aspect of our work. Cleaner manufacturing is certainly good for our customers, and it's vital to the health of our planet. Readying Tomorrow's Technologies The coming generations of semiconductors are challenging manufacturers at a fundamental level. Smaller device geometries, larger wafers, and more layers per wafer all put downward pressure on yield -- which translates directly to reduced profitability. GaSonics is delivering the advanced process technologies manufacturers need to achieve high yields in a complex, changing technological domain. I have already mentioned our historic core competency in photoresist removal, an area where our down-stream microwave technology gives us an important edge over competitors employing less advanced plasma-based technologies. We provide our customers higher throughput and higher yields with photoresist removal, and we will continue to extend our mastery of this complex, fundamental process technology. 15 Many of the PEP systems we sold in fiscal 1997 included a chamber for post-etch residue removal, a process technology we anticipated would grow in importance as semiconductor manufacturing technology evolves below .35-MICRON-. The higher density plasmas and more complex chemistries used in advanced etching require more effective cleaning before the subsequent deposition of a new wafer layer, and residue removal will continue to grow in importance as customers move through .25-MICRON- to .18-MICRON-. We expect that PEP revenues related to residue removal will continue to grow as a percentage of sales in fiscal 1998. We're also preparing a set of emerging process technologies that we believe will become critical at .18-MICRON- -- an inflection point for new manufacturing materials and processes. One of the future challenges we are already addressing in the laboratory is the increasing depth of the extremely small holes, known as vias, in device interconnect layers. New process technologies will be required to clear vias of residues that impact yield and performance, and we are progressing well with several new techniques that address this need. I expect also that new manufacturing materials and processes will create opportunities for us to provide additional solutions for mask removal and preparation before deposition. During fiscal 1997, we established an advanced interconnect development group to focus on these and other market opportunities as they evolve. Strengthening our International Infrastructure One of GaSonics International's greatest strengths lies in our existing relationships with customers around the world. Our platform and technology roadmaps are designed to meet our customers' existing and future needs; continued development of our international infrastructure enables us to meet those needs locally, on a global basis. Our long-term strategy has always been to enter new geographic markets with distribution relationships and then to shift to direct operations when we are established in the region. In fiscal 1997, we reached that transition point in Korea, Singapore and Taiwan. In Japan, our successful liquid-crystal display (LCD) manufacturing equipment division is poised to take over Japanese sales and drive marketing of our semiconductor manufacturing systems as well; I expect this transition to be complete early in calendar 1998. The one exception to our direct distribution strategy continues to be Teltec GmbH, our German distributor of 26 years, which consistently delivers outstanding performance. At the heart of GaSonics International's infrastructure is our R&D organization, which drives our platform and technology efforts. We plan to grow our R&D investment in absolute dollars over the next few years, and to aggressively recruit the engineering talent we will need to extend our existing technology leadership. Our outstanding R&D organization is well complemented by a worldwide service and support team that during the year helped GaSonics International earn two of our industry's highest awards. For the second straight year we received the VLSI Research Inc. 10 BEST Award in our industry category. In addition, National Semiconductor Corporation presented us with its first-ever Gold Award in its Quest for Gold supplier quality program. I should point out that both awards acknowledge the quality of our service and support on an international basis. We were also pleased to receive recognition for the PEP 3510A, chosen by the editors of SEMICONDUCTOR INTERNATIONAL magazine as one of the year's best products. Congratulations to everyone who helped us earn these awards. 16 Looking Ahead In fiscal 1998, we will aggressively drive the technology, platform and business execution roadmaps described earlier in this letter. I have stressed throughout the previous few years the importance of establishing sound and efficient business processes throughout the Company. In combination with strong management these processes help us stay focused on doing exactly what we have to do under whatever market conditions apply. In the coming year, we intend to focus on four key initiatives: extending our global leadership in the photoresist removal market; qualifying our integrated Millennia platform; developing new, next-generation Integrated Clean technologies; and converting to 100% direct operations in Japan. I believe that in fiscal 1998, the market outlook should become clearer for our LCD systems and our innovative, vertical high-pressure (VHP) system. One potential opportunity lies in low thermal budget applications in the manufacture of high speed logic devices. Another opportunity for VHP lies in the manufacture of oxynitride transistor gates in .18-MICRON- semiconductors. This would constitute an entirely new market for the Company, but it's one I'm confident we have the technology to tackle effectively. Also in fiscal 1998, we anticipate continued revenue and earnings growth for our LCD business in Japan, based on the number of customers that have designed our systems into upcoming production processes. Turning to the semiconductor market as a whole, we see the expansion in production capacity for logic devices that began in calendar 1997 continuing in 1998. We believe that the DRAM market will follow a year later. Based on our long experience with the cyclical semiconductor manufacturing market, we took our financial and organizational medicine early in the down cycle. Now we're ready, willing, and able to accelerate our growth and reap the rewards of our product and infrastructure investments. I want to thank all our customers, employees, vendors and stockholders for their support and contributions during this period, and I look forward to reporting to you on our progress in the coming year. Sincerely, /s/ DAVE TOOLE DAVE TOOLE President and Chief Executive Officer [Graphic of man in suit] 17 GaSonics International is positioned to outpace market growth. [Graphic of man running in suit next to a clock] As semiconductor manufacturing capacity once again increases, GaSonics International is ready to leverage its strong customer relationships and technology leadership. 18 With its platform / process technologies and business systems in place, GaSonics International continues to lead the market for Integrated Clean solutions between etch and deposition. 19 Financial Statements [Graphic of man in sitting on stool below an equation] 20 Selected Financial Data 22 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Consolidated Balance Sheets 28 Consolidated Statements of Operations 29 Consolidated Statements of Stockholders' Equity 30 Consolidated Statements of Cash Flows 31 Notes to the Consolidated Financial Statements 32 Report of Independent Public Accountants 43 21 Selected Financial Data
- ------------------------------------------------------------------------------------------------------------------------------- Years ended September 30, ------------------------------------------------------------------------- (in thousands, except per share amounts) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Operations: Net sales $121,256 $127,043 $102,047 $66,590 $41,882 Gross margin 53,964 62,626 57,930 37,865 21,509 Operating income 2,780 12,370 19,942 14,450 5,777 Net income(1)(2) 3,007 8,930 16,126 9,890 3,512 Net income per share(1)(2) $ 0.21 $ 0.65 $ 1.21 $ 0.87 $ 0.34 Balance Sheet: Cash, cash equivalents and marketable securities $ 24,884 $ 25,909 $ 36,599 $21,230 $ 1,217 Working capital 62,971 59,224 55,130 32,129 9,467 Total assets 104,382 96,430 85,367 43,682 20,083 Long-term debt, less current portion -- -- -- -- 1,807 Stockholders' equity $ 79,193 $ 72,689 $ 63,188 $33,370 $ 8,418 - ------------------------------------------------------------------------------------------------------------------------------- Quarterly 1997 Unaudited (in thousands, except per share data) 1st 2nd 3rd 4th - ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 29,686 $ 29,592 $30,126 $31,852 Gross margin 12,662 13,187 13,574 14,541 Operating income (loss) 1,374 1,735 (2,574) 2,245 Net income (loss)(1) 929 1,281 (764) 1,561 Net income (loss) per share(1) $ 0.07 $ 0.09 $ (0.06) $ 0.11 Price range per share $6.88-$12.63 $10.25-$19.62 $8.13-$15.63 $12.63-$23.06 - ------------------------------------------------------------------------------------------------------------------------------- Quarterly 1996 Unaudited (in thousands, except per share data) 1st 2nd 3rd 4th - ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 33,782 $ 36,997 $29,058 $27,206 Gross margin 18,505 19,973 13,182 10,966 Operating income (loss) 6,418 6,225 859 (1,132) Net income (loss)(2) 4,354 4,270 774 (468) Net income (loss) per share(2) $ 0.32 $ 0.32 $ 0.06 $ (0.03) Price range per share $10.25-$24.50 $8.75-$13.88 $9.25-$15.13 $6.63-$11.00 - -------------------------------------------------------------------------------------------------------------------------------
(1) Net income for the third quarter and year ended September 30, 1997 includes a $2.9 million or $0.20 per share after tax write-off of an uncollectible account receivable due from a customer in Thailand (See Note 2 to the Consolidated Financial Statements) and also includes a non-operating after tax gain of approximately $790,000 or $0.05 per share realized from the sale of stock from a third party (see Note 8 of Notes to the Consolidated Financial Statements). (2) Net income for the third quarter and year ended September 30, 1996 includes a non-operating after tax gain of approximately $93,000 or $0.01 per share realized from the sale of stock from a third party (see Note 8 of Notes to the Consolidated Financial Statements). STOCK AND DIVIDEND INFORMATION. The Company has one class of stock outstanding, its Common Stock, which has a par value of $.001 per share. The Company's Common Stock is traded on The Nasdaq National Market under the symbol "GSNX." The price range per share is the highest and lowest closing prices as reported by The Nasdaq National Market. In October 1995, the Company declared a three-for-two stock split in the form of a 50% stock dividend paid on November 20, 1995. All share and per share amounts have been restated to give effect to the stock split. The Company has not paid cash dividends on its Common Stock since inception, and its Board of Directors presently plans to reinvest the Company's earnings in its business. Accordingly, it is anticipated that no cash dividends will be paid to holders of Common Stock in the foreseeable future. Additionally, certain financial covenants set forth in the Company's bank line of credit limit the Company's ability to pay cash dividends. On September 30, 1997, the Company had approximately 150 stockholders of record and approximately 3,219 beneficial stockholders. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations With the exception of historical facts, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, future sales, gross margins, the anticipated increase in inventories and operating expenses and the sufficiency of financial resources to support operations, and are subject to the Safe Harbor provisions created by that statute. Such statements are based on current expectations that involve inherent risks and uncertainties, including those discussed below and under the heading "Additional Risk Factors" in the Company's 1997 Annual Report on Form 10-K and in the last paragraph of this Overview, 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. Overview The Company 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 fluctuate significantly in the future. The Company anticipates that factors continuing to affect its future operating results will include the cyclicality of the semiconductor industry and the markets served by the Company's customers, the timing of significant orders, patterns of capital spending by customers, the relative proportions 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, the mix of products sold, financial systems, procedures and controls, discounts, the timing of new product announcements and releases by the Company or its competitors, delays, cancellations or rescheduling of orders due to customer financial difficulties or otherwise, the Company's ability to produce systems in volume and meet customer requirements, the ability of any customer to finance its purchases of the Company's equipment, changes in overhead absorption levels due to changes in the number of systems manufactured, political and economic instability and lengthy sales cycles. Gross margins have varied and will continue to vary materially based on a variety of factors including the mix and average selling prices of systems sales, the mix of revenues, including service and support revenues, and costs associated with new product introductions and enhancements and the customization of systems. Furthermore, announcements by the Company or its competitors of new products and technologies could cause customers to defer purchases of the Company's existing systems, which would also materially adversely affect the Company's business, financial condition and results of operations. The Company has expended significant resources with respect to the development, and ramp up of production and commercial shipments of four products introduced in fiscal 1995, the Strata, the VHP, the PEP and the 2106 LPCVD. Gross margins in fiscal 1996 and 1997 decreased from the level attained in fiscal 1995, in part, due to startup inefficiencies associated with these introductions and sales, competitive pricing pressures, changes in product mix, from higher margin single chamber systems to lower margin dual chamber systems and an increase in lower margin products sold by the Company's LCD division in Japan, and other factors. In addition, sales and earnings for the last half of fiscal 1996 and for fiscal 1997 were materially adversely impacted by the current semiconductor business slowdown. While the Company has and is continuing to manage its expenses to partially offset this loss of income from the decline in revenue and gross margins, it is anticipated that this slowdown in the industry will continue into next fiscal year and will continue to have a material adverse affect on the Company's future revenues and operating results. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth consolidated statements of operations data of the Company expressed as a percentage of net sales for the periods indicated:
Years ended September 30, ------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 55.5 50.7 43.2 - ------------------------------------------------------------------------------- Gross margin 44.5 49.3 56.8 - ------------------------------------------------------------------------------- Operating expenses: Non-recurring charges -- -- .6 Provision for uncollectible account (Note 2) 3.7 -- -- Research and development 14.4 14.2 12.1 Selling, general and administrative 24.1 25.4 24.6 - ------------------------------------------------------------------------------- Total operating expenses 42.2 39.6 37.3 - ------------------------------------------------------------------------------- Operating income 2.3 9.7 19.5 Other income (expense): Interest expense (.1) -- -- Interest and other income .6 1.0 1.1 Gain on sale of investment 1.0 .1 4.6 - ------------------------------------------------------------------------------- Income before provision for income taxes 3.8 10.8 25.2 Provision for income taxes 1.3 3.8 9.4 - ------------------------------------------------------------------------------- Net income 2.5% 7.0% 15.8% - -------------------------------------------------------------------------------
NET SALES. Net sales consist of revenues from system sales, spare part and upgrade sales and maintenance. Net sales increased 24.5% from $102.0 million in fiscal 1995 to $127.0 million in fiscal 1996, and decreased 4.5% to $121.3 million in fiscal 1997. During these periods, demand for the Company's photoresist removal systems, specifically the Company's new PEP dual chamber platform systems, increased as the Company's customers equipped new or expanded facilities, resulting in certain instances, in multiple system purchases by major customers, including new customers. The slight decline in revenue in fiscal 1997 was due primarily to the general slowdown in incoming orders experienced by the capital equipment industry since March 1996. This slowdown was first evident in a slowdown of equipment purchases by major North American IC manufacturers in the spring of 1996 and eventually spread to nearly all types of IC manufacturers in nearly all geographic regions. As a result of the semiconductor business slowdown, the Company experienced significant delays of new orders and rescheduling of existing orders which materially adversely affected sales for the last half of fiscal 1996 and all of fiscal 1997. Sales of single chamber ash/strip products were significantly adversely impacted by the business slowdown, partially offset by a significant increase in sales of PEP dual chamber systems. Approximately 50% of the Company's fiscal 1997 revenues were from PEP products, including both the photoresist removal and the post etch residue removal systems, as compared to less than 10% in fiscal 1996. International sales, which are predominantly to customers based in Europe and Asia Pacific, accounted for approximately 40%, 54% and 55% of total net sales in fiscal 1995, 1996 and 1997, respectively. The Company continued to invest significant resources in international markets, particularly in Japan, Korea, Singapore, Taiwan, France, Italy, Ireland, Israel and the United Kingdom during fiscal 1997 in an attempt to increase its global market 24 Management's Discussion and Analysis of Financial Condition and Results of Operations share. The Company's growth in international revenues in fiscal 1996 and 1997 as compared to fiscal 1995 is due in part to the investments made in establishing a direct sales and service presence in Korea, Singapore, and Taiwan and increased sales of PEP systems. The Company's percentage of international sales may 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 1998. However, current Asian economic conditions may have a significant adverse impact on international revenues in fiscal 1998. GROSS MARGIN. The Company's gross margin as a percentage of net sales was 56.8% in fiscal 1995, 49.3% in fiscal 1996 and 44.5% in fiscal 1997. The decrease in gross margin for fiscal years 1996 and 1997 was attributable to several factors, including significantly lower sales volume of the Company's more mature, higher margin single chamber systems, underutilization of the manufacturing and field service and support operations due to the semi-conductor industry slowdown and increased revenues from lower margin new products including PEP systems and flat panel display equipment. The Company's flat panel display equipment has significantly lower gross margins than its photoresist removal systems. The Company's gross margin as a percentage of net sales has been 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 inefficiencies associated with new product introductions, sales of lower margin PEP and flat panel display systems, competitive pricing pressures, the general slowdown in the semiconductor industry, the economic troubles currently being experienced by many Asian countries, including some of the Company's major markets such as Japan, Korea and Taiwan, changes in product mix and other factors including those referred to above. The Company, however, will continue to focus on its gross margin improvement programs, including the introduction of new value-added applications, features and options on the PEP systems, targeted cost reduction programs and controlled spending. NON-RECURRING CHARGES. In the fourth quarter of fiscal 1995, the Company recorded a non-recurring charge of $575,000 for the write-off of in-process research and development associated with certain products acquired as part of the Company's acquisition of Tekisco, Ltd. ("Tekisco") as they had not achieved technological feasibility and, in management's opinion, had no probable alternative future use (see Note 4 of Notes to the Consolidated Financial Statements). PROVISION FOR UNCOLLECTIBLE ACCOUNT. In the third quarter of fiscal 1997, the Company recorded an expense of $4.5 million related to the write-off of an uncollectible account receivable (see Note 2 of Notes to the Consolidated Financial Statements). RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries, project materials, consultant fees and other costs associated with the Company's research and development efforts. Research and development expenses as a percentage of net sales increased from 12.1% in fiscal 1995 to 14.2% in fiscal 1996 and to 14.4% in fiscal 1997. In absolute dollars, research and development expenses increased from $12.3 million in fiscal 1995 to $18.0 million in fiscal 1996 and decreased to $17.4 million in fiscal 1997. The absolute dollar increase in fiscal year 1996 is primarily attributable to the hiring of additional personnel to support ongoing and new product development. The Company has maintained its research and development spending near pre-slowdown levels to continue critical programs, particularly the launch of the PEP platform and the support of the expanding number of available applications, development of the post etch residue removal applications, the development of the Millenia 300mm platform, the support of the LCD flat panel business and applications development of the VHP technology. The Company anticipates that research and development expenses will increase in absolute dollars in fiscal 1998 due, in part, to the anticipated significant continued investment in new product development. 25 Management's Discussion and Analysis of Financial Condition and Results of Operations SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased from $25.1 million in fiscal 1995 to $32.3 million in fiscal 1996 and decreased to $29.3 million in fiscal 1997. As a percentage of net sales, selling, general and administrative expenses increased from 24.6% in fiscal 1995 to 25.4% in fiscal 1996 and decreased to 24.1% in fiscal 1997. Specifically, expenses increased in fiscal 1996 for employee and third-party commissions and overall employee compensation relating to the hiring of new personnel, principally in marketing and sales to support the expansion of operations in Europe and Asia Pacific. The decrease in selling, general and administrative expenses from fiscal 1996 to fiscal 1997 was principally due to lower third party commissions which are payable on a significant portion of the international sales and, to a lesser extent, to the reduction in headcount that occurred in the fourth quarter of fiscal 1996. Third party commissions can fluctuate significantly depending on the mix of domestic versus foreign sales in any period. The Company has built and is continuing to build a worldwide direct sales and support organization which is decreasing the Company's dependence on third party representatives for these services. Consequently, third party commissions in some regions have been eliminated or reduced. Although the Company has taken steps to manage its spending due to the uncertainties of the current business climate, it anticipates that the current level of selling, general, and administrative spending will increase in absolute dollars in fiscal 1998. OTHER INCOME (EXPENSE). Other income and expense consists primarily of interest expense, interest income and gain on sale of stock of a third party. Interest and other income increased from fiscal 1995 to fiscal 1996 primarily due to interest income resulting from increased investments in marketable securities that resulted from the investment of proceeds received from the sale of Common Stock in the Company's secondary offering in March 1995. The increase in interest and other income from fiscal 1996 to fiscal 1997 was primarily due to the gain from the sale of stock of a third party offset in part by the decrease in interest income resulting from a significant use of cash during the first three quarters and increased interest expense pertaining to the borrowings by GaSonics International Japan K.K. under the credit facility. Net income for fiscal 1995, fiscal 1996 and fiscal 1997 was favorably impacted by sales of a portion of the shares held by the Company in a corporation, which shares were received in exchange for technology and certain services rendered in fiscal 1990. The Company realized pretax gains in fiscal years 1995, 1996 and 1997 of approximately $4,700,000, $143,000 and $1,215,000, respectively, from these sales (see Note 8 of Notes to the Consolidated Financial Statements). PROVISION FOR INCOME TAXES. The Company's effective tax rate was 37.3% in fiscal 1995 and 35.0% in fiscal years 1996 and 1997. The decrease in the tax rate for fiscal years 1996 and 1997 from fiscal 1995 resulted primarily from the benefit derived from the Company's foreign sales corporation due to the increase in international sales during fiscal 1996 and 1997 as compared to fiscal 1995, as well as from benefits derived from research and development credits and from tax exempt income from certain marketable securities. In the past, the Company has derived significant benefits from research and development tax credits, and, to the extent such credits may be unavailable to the Company in the future, the Company's effective tax rate could increase. Liquidity and Capital Resources During fiscal 1997, cash, cash equivalents and marketable securities decreased by $1.0 million to $24.9 million at September 30, 1997 from $25.9 million at September 30, 1996. Operations provided cash of approximately $6.4 million and $1.9 million in fiscal 1995 and 1997, respectively, and used cash of approximately $5.6 million in fiscal 1996. Investing activities utilized cash of approximately $7.4 million, $5.7 million and $5.9 million in fiscal 1995, 1996 and 1997, respectively, for the acquisition of property and equipment including $2.4 million for the acquisition of Tekisco in 1995. Capital spending in fiscal years 1996 and 1997 included approximately $2.0 million 26 Management's Discussion and Analysis of Financial Condition and Results of Operations and $2.8 million, respectively, for the purchase and installation of a new management information system. Investing activities used cash of approximately $18.5 million in fiscal 1995 for the purchase of marketable securities and provided cash in fiscal 1996 and fiscal 1997 of approximately $13.4 million and $1.7 million, respectively. In fiscal 1995, financing activities provided $14.0 million principally related to the sale of Common Stock in the Company's secondary public offering in March 1995 and in connection with an employee stock purchase plan, and borrowings of $2.9 million in connection with the Company's acquisition of Tekisco, partially offset by repurchases of Common Stock from an existing stockholder. Financing activities in fiscal 1996 and 1997 provided cash of $2.1 million and $3.9 million, respectively, primarily from the sale of stock under the Company's employee stock purchase program. In fiscal 1997, financing activities also included the repayment of a loan by the Company's subsidiary, GaSonics International Japan K.K., to the Bank of Tokyo-Mitsubishi in the amount of $2.5 million and the acquisition of a new credit facility with the same bank. At September 30, 1997 borrowings under this agreement totaled $2.0 million (see Notes 5 and 6 of Notes to the Consolidated Financial Statements). At September 30, 1997, the Company had working capital of approximately $63.0 million. Accounts receivable increased to $28.3 million from $23.0 million at the end of fiscal 1996 primarily due to increased sales in the fourth quarter of fiscal 1997 compared to fiscal 1996 and longer credit terms related to receivables in Japan. Inventories remained relatively flat increasing from $26.8 million at the end of fiscal 1996 to $27.1 million at the end of fiscal 1997. 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 accounts receivable inventories, the Company may be subject to an increasing risk of inventory obsolescence and accounts receivable write-offs, which could materially adversely affect the Company's operating results. At September 30, 1997, the Company's principal sources of liquidity consisted of approximately $13.3 million of cash and cash equivalents, $11.6 million in marketable securities, and $20.0 million available under the Company's unsecured working capital line of credit with Union Bank which was entered into on March 4, 1997. A commercial letter of credit provision of $500,000 and a foreign exchange contract provision of $1.0 million is also provided under the line of credit. Available borrowing under the credit line is reduced by the amount of outstanding letters of credit. 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 September 30, 1997, except for $69,193 outstanding under the letter of credit provision, there were no borrowings under this line, and management believes the Company was in compliance with its bank covenants. The line of credit bears interest at the lower of 1.5% above the bank's adjusted Libor-rate or at the bank's reference rate (8.5% at September 30, 1997) and expires in February 1998 (see Note 5 of Notes to the Consolidated Financial Statements). On May 1, 1997 the Company's wholly-owned Japanese subsidiary, GaSonics International Japan K.K., entered into a 300 million Japanese yen credit facility with the Bank of Tokyo-Mitsubishi against a promissory note which is secured by a letter of guarantee issued by the Company. The credit facility bears interest at 1.65% and expires in February 1998 (see Note 5 of Notes to the Consolidated Financial Statements). As of September 30, 1997, GaSonics International Japan K.K. had borrowed approximately 244 million Japanese yen (equivalent to approximately $2.0 million in U.S. dollars) under this credit facility. The Company believes that anticipated cash flows from operations, funds available under its existing revolving line of credit, funds available under the 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 address 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. 27 Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------- September 30, ------------------------- (in thousands, except share data) 1997 1996 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 13,307 $11,774 Marketable securities 11,577 14,135 Trade accounts receivable, net of allowance for doubtful accounts of $720 in 1997 and $611 in 1996 28,315 23,032 Inventories 27,075 26,817 Net deferred tax asset 4,868 3,451 Prepaid expenses and other current assets 2,617 3,204 - ---------------------------------------------------------------------------------------------- Total current assets 87,759 82,413 - ---------------------------------------------------------------------------------------------- Property and equipment: Furniture and fixtures 758 741 Machinery and equipment 16,602 10,807 Leasehold improvements 4,090 3,762 - ---------------------------------------------------------------------------------------------- 21,450 15,310 Less -- accumulated depreciation and amortization (6,509) (3,735) - ---------------------------------------------------------------------------------------------- Net property and equipment 14,941 11,575 - ---------------------------------------------------------------------------------------------- Deposits and other assets 1,682 2,442 - ---------------------------------------------------------------------------------------------- Total assets $104,382 $96,430 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Note payable $ -- $ 2,455 Borrowings under credit facility 2,036 -- Accounts payable 6,812 7,318 Income taxes payable 3,054 1,100 Other accrued liabilities 12,886 12,316 - ---------------------------------------------------------------------------------------------- Total current liabilities 24,788 23,189 - ---------------------------------------------------------------------------------------------- Long-term liabilities: Deferred rent 401 552 Commitments (Note 9) Stockholder's equity: Preferred stock, $0.001 par value: Authorized shares -- 2,000,000 -- -- Common stock, $0.001 par value: Authorized shares -- 20,000,000 Outstanding shares -- 13,916,101 and 13,472,276 14 13 Additional paid-in capital 35,833 31,400 Subscription receivable (100) -- Unrealized gain on investments -- 902 Note receivable from stockholder -- (65) Retained earnings 43,446 40,439 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 79,193 72,689 - ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $104,382 $96,430 - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 28 Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------- Years ended September 30, ------------------------------------------- (in thousands, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Net sales $121,256 $127,043 $102,047 Cost of sales 67,292 64,417 44,117 - ------------------------------------------------------------------------------------------------- Gross margin 53,964 62,626 57,930 - ------------------------------------------------------------------------------------------------- Operating expenses: Non-recurring charges -- -- 575 Provision for uncollectible account (Note 2) 4,517 -- -- Research and development 17,410 18,006 12,346 Selling, general and administrative 29,257 32,250 25,067 - ------------------------------------------------------------------------------------------------- Total operating expenses 51,184 50,256 37,988 - ------------------------------------------------------------------------------------------------- Operating income 2,780 12,370 19,942 Other income (expense): Interest expense (91) (64) (10) Interest and other income, net 722 1,289 1,095 Gain on sale of investment 1,215 143 4,700 - ------------------------------------------------------------------------------------------------- Income before provision for income taxes 4,626 13,738 25,727 Provision for income taxes 1,619 4,808 9,601 - ------------------------------------------------------------------------------------------------- Net income $ 3,007 $ 8,930 $ 16,126 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Net income per share $ 0.21 $ 0.65 $ 1.21 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Weighted average common and common equivalent shares 14,482 13,644 13,285 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 29 Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------------- Unrealized Note Common Stock Additional Gain on Receivable Total --------------- Paid-in Subscription Marketable From Retained Stockholders' (in thousands, except share data) Shares Amount Capital Receivable Securities Stockholder Earnings Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1994 12,142,095 $12 $15,991 -- -- $(265) $17,632 $33,370 Issuance of common stock from secondary offering 1,110,000 1 12,494 -- -- -- -- 12,495 Issuance of common stock under employee stock purchase plan 100,529 -- 754 -- -- -- -- 754 Issuance of common stock under stock option plan 26,917 -- 219 -- -- -- -- 219 Forgiveness of note receivable from stockholder -- -- -- -- -- 100 -- 100 Unrealized gain on marketable securities -- -- -- -- 2,376 -- -- 2,376 Repurchase of common stock (150,000) -- (3) -- -- -- (2,249) (2,252) Net income -- -- -- -- -- -- 16,126 16,126 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1995 13,229,541 13 29,455 -- 2,376 (165) 31,509 63,188 Issuance of common stock under employee stock purchase plan 197,510 -- 1,708 -- -- -- -- 1,708 Issuance of common stock under stock option plan 45,225 -- 237 -- -- -- -- 237 Forgiveness of note receivable from stockholder -- -- -- -- -- 100 -- 100 Change in unrealized gain on marketable securities -- -- -- -- (1,474) -- -- (1,474) Net income -- -- -- -- -- -- 8,930 8,930 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1996 13,472,276 13 31,400 -- 902 (65) 40,439 72,689 Issuance of common stock under employee stock purchase plan 138,325 -- 1,348 -- -- -- -- 1,348 Issuance of common stock under stock option plan 305,500 1 3,085 (100) -- -- -- 2,986 Forgiveness of note receivable from stockholder -- -- -- -- -- 65 -- 65 Change in unrealized gain on marketable securities -- -- -- -- (902) -- -- (902) Net income -- -- -- -- -- -- 3,007 3,007 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 13,916,101 $14 $35,833 $(100) -- -- $43,446 $79,193 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 30 Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------- Years ended September 30, ---------------------------------- (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,007 $ 8,930 $ 16,126 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 2,773 2,901 770 Provision for doubtful accounts 4,637 242 179 Forgiveness of note receivable from stockholder 65 100 100 Write-off of in-process research and development -- -- 575 Gift of stock to employees -- -- 111 Changes in assets and liabilities: Accounts receivable, net (12,564) (6,300) (7,586) Inventories 2,387 (7,694) (10,275) Prepaids and other current assets (830) (3,479) (1,581) Deposits and other assets 554 (1,697) (123) Accounts payable (505) (26) 3,796 Income taxes payable 1,954 (293) 1,077 Accrued liabilities 570 2,260 3,242 Deferred Rent (151) (69) (43) Note payable -- (439) -- - ------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 1,897 (5,564) 6,368 - ------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of marketable securities (25,636) (55,097) (90,499) Proceeds from sales of marketable securities 27,292 68,492 71,970 Purchases of property and equipment (5,935) (6,979) (4,965) Proceeds from sales of property and equipment -- 1,254 -- Payment for purchase of Tekisco, net of cash acquired -- -- (2,409) - ------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities (4,279) 7,670 (25,903) - ------------------------------------------------------------------------------------------- Cash flows from financing ativities: Proceeds from note payable to bank -- -- 2,894 Payments of note payable to bank (2,455) -- -- Proceeds from borrowings under credit facility 2,036 -- -- Proceeds from issuance of common stock 4,334 2,073 13,357 Repurchase of common stock from stockholder -- -- (2,252) - ------------------------------------------------------------------------------------------- Net cash provided by financing activities 3,915 2,073 13,999 - ------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,533 4,179 (5,536) Cash and cash equivalents at beginning of period 11,774 7,595 13,131 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 13,307 $ 11,774 $ 7,595 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 31 Notes to the Consolidated Financial Statements September 30, 1997 1. Organization and Operations of the Company GaSonics International Corporation (the "Company") is a developer and supplier of products and services used in the fabrication of advanced integrated circuits ("semiconductors" or "ICs") and flat panel displays ("FPDs"). The Company markets its products in the United States, Europe, and the Asia Pacific region primarily to large semiconductor and liquid crystal manufacturing concerns. The Company is subject to a number of risks including, but not limited to, volatility in the semiconductor markets and the related demand for semiconductor equipment and the risk of inventory obsolescence resulting from new product developments by competitors. In October 1995, the Company declared a three-for-two stock split in the form of a 50% stock dividend paid on November 20, 1995. All common and common equivalent shares and per share amounts in the accompanying consolidated financial statements have been restated to give effect to the stock split. 2. Summary of Significant Accounting Policies PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and branches after elimination of intercompany accounts and transactions. USE OF ESTIMATES. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. FISCAL YEAR. The Company maintains a fifty-two/fifty-three week fiscal year cycle ending on the Saturday closest to September 30. Fiscal 1997, fiscal 1996 and fiscal 1995 contain fifty-two weeks. For external reporting purposes, the Company indicates its fiscal period as ending on September 30. CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash paid for interest, including amounts paid under capital lease obligations, and domestic and foreign income taxes was as follows (in thousands): - ----------------------------------------------------------- Years ended September 30, ------------------------------- 1997 1996 1995 - ----------------------------------------------------------- Interest $ 94 $ 41 $ 10 Income taxes $625 $6,188 $8,732 - ----------------------------------------------------------- The Company had one significant noncash transaction for the year ended September 30, 1997, related to the Submicron Technologies PLC (see Concentration of Credit Risk below) write-off of their uncollectible account. Noncash activity included a before tax bad debt of $4.5 million. INVESTMENTS IN MARKETABLE SECURITIES. Pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company's investments are classified as available-for-sale and are stated at fair value. The Company's investments in debt securities mature at various dates through July 1999. The fair value of available-for-sale securities was determined based on quoted market prices at the reporting date for the instruments. 32 Notes to the Consolidated Financial Statements, September 30, 1997 The components of available-for-sale securities by major security type as of September 30, 1997 and 1996 are as follows (in thousands):
- ------------------------------------------------------------------------------------------------ Aggregate Gross Amortized Fair Unrealized Cost Value Holding Gains - ------------------------------------------------------------------------------------------------ Fiscal 1997 Debt securities issued by states of the United States and political subdivisions of the states $15,750 $15,750 $ -- - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Fiscal 1996 Corporate debt securities $ 2,050 $ 2,050 $ -- Debt securities issued by states of the United States and political subdivisions of the states 11,183 11,183 -- Equity securities -- 902 902 - ------------------------------------------------------------------------------------------------ $13,233 $14,135 $902 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
Proceeds from sales of available-for-sale securities, excluding the Company's equity securities which are discussed in Note 8, were approximately $27.3 million, $68.5 million and $72.0 million in fiscal 1997, 1996 and 1995, respectively. Gross realized gains on those sales were approximately $3,000, $22,000 and $12,000 in fiscal 1997, 1996 and 1995, respectively. The Company used specific identification as the cost basis in computing realized gains. The net unrealized holding gain on available-for-sale securities has been included as a separate component of stockholders' equity. REVENUE RECOGNITION AND PRODUCT WARRANTY. Revenues from the Company's products are generally recognized upon shipment. The Company provides for the estimated costs of installation and warranty at the time revenue is recognized. Maintenance and service revenues account for less than 10% of net sales and are recognized as the related work is performed. MAJOR CUSTOMERS. One customer accounted for 10%, 11% and 20% of net sales for each of fiscal years 1997, 1996 and 1995, respectively. Two other customers accounted for 11% of net sales in fiscal 1997. SOFTWARE DEVELOPMENT COSTS. SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires the capitalization of certain computer software development costs incurred after technological feasibility is established. Amounts qualifying for capitalization under the statement are immaterial and have not been capitalized to date. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing costs. Inventory is valued at currently adjusted standards which approximate actual costs on a first-in, first-out basis. The Company provides inventory reserves for excess, obsolete, damaged or lost inventory. The process of estimating required inventory reserves is judgmental and is based on a number of factors which require input and discussion among various members of management. Such factors include changes in customer demand, changes in technology and other economic factors. Inventories consisted of the following (in thousands): September 30, ---------------------- 1997 1996 - ------------------------------------------------------------ Raw materials $13,919 $12,985 Work-in-process 6,809 7,648 Finished goods 6,347 6,184 - ------------------------------------------------------------ $27,075 $26,817 - ------------------------------------------------------------ - ------------------------------------------------------------ 33 Notes to the Consolidated Financial Statements, September 30, 1997 PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are generally depreciated over the estimated useful lives of the assets (four to seven years) using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful lives of the assets or the remaining lease term. Assets acquired under capital leases are recorded at the present value of the related lease obligations and amortized on a straight-line basis over the related lease term. OTHER ACCRUED LIABILITIES. Other accrued liabilities included the following (in thousands): September 30, -------------------- 1997 1996 - ------------------------------------------------- - ------------------------------------------------- Warranty $ 3,232 $ 2,916 Sales commissions 2,804 2,526 Employee compensation 3,236 2,514 Accrued purchase price -- 1,261 Other 3,614 3,099 - ------------------------------------------------- $12,886 $12,316 - ------------------------------------------------- - ------------------------------------------------- NET INCOME PER SHARE. Net income per share data has been computed using the weighted average number of shares of common stock and dilutive common equivalent shares from stock options computed using the treasury stock method. FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's foreign subsidiaries is the U.S. dollar. Accordingly, foreign translation and exchange gains and losses, which have not been material, are reflected in the accompanying consolidated statements of operations. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one financial institution evaluated as highly creditworthy. Concentration of credit risk with respect to trade receivables exists because the Company's revenues are derived primarily from the sale of photoresist removal equipment to companies in the semiconductor industry. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. A write-off of accounts receivable was recorded in the third quarter of fiscal 1997 for the uncollectible account receivable due from SubMicron Technologies PLC in Thailand. The Company recorded a $4.5 million pre-tax charge to cover the unpaid balance on accounts receivable, less the value of the recovered equipment, which the Company anticipates reselling in the future. RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to the current year presentation. EFFECT ON RECENT ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" which requires disclosure of basic and diluted earnings per share and is effective for periods ending subsequent to December 15, 1997. The pro forma effect of adoption of SFAS No. 128 would be as follows: - ---------------------------------------------------------------------------- Years ended September 30, ----------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Reported net income per share $0.21 $0.65 $1.21 Basic net income per share (pro forma) $0.22 $0.67 $1.26 Diluted net income per share (pro forma) $0.21 $0.65 $1.21 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 34 Notes to the Consolidated Financial Statements, September 30, 1997 In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structures," which will be adopted by the Company in fiscal 1998. SFAS No. 129 requires companies to disclose certain information about their capital structure. The Company does not anticipate that SFAS No. 129 will have a material impact on its consolidated financial statement disclosures. In June 1997, The Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" both of which will be adopted by the Company in fiscal 1998. SFAS No. 130 requires companies to disclose certain information regarding the nature and amounts of comprehensive income included in the financial statements. SFAS No. 131 requires companies to disclose certain information about operating segments within their business. The Company does not anticipate that SFAS No. 130, or SFAS No. 131, will have a material impact on its consolidated financial statement disclosures. 3. Geographic Area Data The Company's operations by geographical area for the three years ended September 30, 1997 were as follows:
United Other States Japan Foreign Eliminations Consolidated - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- 1997 Net sales: Domestic $ 54,899 $7,829 $ 3,280 $ -- $ 66,008 Exports Europe 16,998 -- -- -- 16,998 Exports Asia/Pacific 35,557 -- -- -- 35,557 Exports Japan 2,693 -- -- -- 2,693 Intercompany 1,916 1,155 7,046 (10,117) -- - --------------------------------------------------------------------------------------------------------- Total revenues $112,063 $8,984 $10,326 $(10,117) $121,256 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Operating income $ 67 $1,729 $ 967 $ 17 $ 2,780 Identifiable assets $ 95,003 $8,273 $ 2,302 $ (1,196) $104,382 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- 1996 Net sales: Domestic $ 58,967 $7,904 $ 1,791 $ -- $ 68,662 Exports Europe 23,788 -- -- -- 23,788 Exports Asia/Pacific 30,554 -- -- -- 30,554 Exports Japan 4,039 -- -- -- 4,039 Intercompany 1,212 1,496 4,744 (7,452) -- - --------------------------------------------------------------------------------------------------------- Total revenues $118,560 $9,400 $ 6,535 $ (7,452) $127,043 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Operating income (loss) $ 12,037 $ (505) $ 835 $ 3 $ 12,370 Identifiable assets $ 86,458 $9,250 $ 1,935 $ (1,213) $ 96,430 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- 1995 Net sales: Domestic $ 60,845 $ 8 $ 201 $ -- $ 61,054 Export Europe 19,885 -- -- -- 19,885 Export Asia/Pacific 18,832 -- -- -- 18,832 Exports Japan 2,276 -- -- -- 2,276 Intercompany -- -- 965 (965) -- - --------------------------------------------------------------------------------------------------------- Total revenues $101,838 $ 8 $ 1,166 $ (965) $102,047 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Operating income (loss) $ 20,334 $ (539) $ 147 $ -- $ 19,942 Identifiable assets $ 80,876 $4,040 $ 451 $ -- $ 85,367 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
35 Notes to the Consolidated Financial Statements, September 30, 1997 The Company's operations are structured to achieve consolidated objectives. As a result, significant interdependencies and overlaps exist among the Company's operating units. Accordingly, the revenue, operating income (loss) and identifiable assets shown for each geographic area may not be indicative of the amounts that would have been reported if the operating units were independent of one another. Intercompany sales between areas are accounted for based on established intercompany sales prices. Operating income (loss) is revenue less related costs and direct and allocated operating expenses, excluding interest and, for all areas except the United States, the unallocated portion of corporate expenses. United States operating income is net of corporate engineering and development and administrative expenses. Corporate assets include assets maintained for general purposes, principally cash equivalents and marketable securities. 4. Acquisition of Tekisco In August 1995, the Company purchased the net assets, intellectual property and all of the outstanding stock of Tekisco, Ltd., a Japanese-based supplier of low-pressure chemical vapor deposition systems for flat panel display manufacturing, which is now known as its Liquid Crystal Display ("LCD") division, for cash of approximately $2.4 million and contingent consideration of approximately $2.0 million. The contingent consideration was based on specified future events, including the attainment of certain sales levels and the provision of marketing and sales services to be provided by Kishimoto Sangyo Co. Ltd, the company from which Tekisco was acquired. In fiscal 1996, the Company determined that such contingencies were met or were likely to be met and recorded the full $2.0 million of the contingent consideration as goodwill. The related liability, net of amounts paid in fiscal 1996, was accrued at September 30, 1996. In February 1996, the LCD division was merged with the Company's wholly-owned subsidiary, GaSonics International Japan, K.K. The acquisition was accounted for as a purchase, and the results of Tekisco from the date of acquisition forward have been recorded in the Company's consolidated financial statements. In connection with the acquisition, net intangibles of $3.1 million were acquired, including the $2.0 million contingent consideration recorded in fiscal 1996, of which $575,000 is reflected as a one time charge to operations for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. The one time charge is reflected in the Company's consolidated statement of operations as a non-recurring charge within operating expenses in fiscal 1995. The remaining intangibles, net of accumulated amortization of approximately $815,000 and the write-off of in-process research and development of $575,000, are included in Deposits and other assets in the accompanying consolidated balance sheet and are being amortized over the useful life of five years. Amortization expense related to the amortization of the goodwill was $436,000, $210,000 and $0 for the years ended September 30, 1997, 1996 and 1995, respectively, and is included in the accompanying Consolidated Statements of Operations. The purchase price, including the amounts payable under the commission agreement, was allocated to the fair market value of net assets acquired as follows (in thousands): - ------------------------------------------------------------------------------ Accounts receivable $ 57 Inventory 176 Prepaid expenses 46 Property and equipment, net 1,875 Other assets 49 Intangibles, including in-process research and development 3,107 Accounts payable and accrued liabilities (901) - ------------------------------------------------------------------------------ Net assets acquired $4,409 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 36 Notes to the Consolidated Financial Statements, September 30, 1997 The following unaudited pro forma information shows the results of operations for the twelve months ended September 30, 1995 as if the acquisition had occurred at the beginning of the period. The results are not necessarily indicative of what would have occurred had the acquisition actually been made at the beginning of the respective period presented or of future operations of the combined companies. The pro forma results for 1995 combine the Company's results for the twelve-month period ended September 30, 1995 with the results of Tekisco, for the same period through the date of acquisition. The following unaudited pro forma results include the straight-line amortization of intangibles over a period of five years.
- ---------------------------------------------------------------------------------------- Year ended (in thousands, except per share data) September 30, 1995 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Revenue $104,628 Net income $ 15,286 Net income per share $ 1.15 Weighted average common and common equivalent shares outstanding 13,285 - ----------------------------------------------------------------------------------------
5. Line of Credit Agreement and Credit Facility The Company has an unsecured $20,000,000 revolving line of credit agreement (the "Agreement") with a bank which expires on February 27, 1998. There were no borrowings outstanding under the Agreement as of September 30, 1997. Borrowings bear interest at the lower of 1.5% above the bank's adjusted Libor-rate or at the bank's reference rate (8.5% at September 30, 1997). The line of credit agreement contains provisions that limit the ability of the Company to pay cash dividends and require the maintenance of specified levels of tangible net worth and certain financial ratios. Management believes the Company was in compliance with the financial covenants of the Agreement as of September 30, 1997. Under the Agreement, the Company has a provision for foreign exchange contracts of up to $1.0 million, and may also request standby letters of credit not to exceed $500,000. As of September 30, 1997, there were letters of credit outstanding in the amount of $69,163. In May 1997, the Company's wholly-owned subsidiary in Japan, GaSonics International Japan, K.K. entered into an agreement with the Bank of Tokyo-Mitsubishi to secure a credit facility to provide operating capital to fund operations. The credit facility provides for borrowings up to a maximum of 300 million Japanese yen (equivalent to approximately $2.5 million in U.S. dollars), and is secured by a letter of guarantee issued by the Company. The outstanding balance bears interest at 1.625% per annum and is due and payable on demand. This credit facility expires on February 27, 1998. At September 30, 1997, borrowings under this credit facility agreement were approximately $2.0 million. The Company intends to enter into a new agreement or extend the term of the existing credit facility prior to the due date; however, there can be assurance that such financing will be available when required or, will be on reasonable terms. 6. Note Payable In August 1995, the Company's wholly-owned subsidiary in Japan, GaSonics International Japan K.K. borrowed 270 million Japanese yen (equivalent to approximately $2.5 million in U.S. dollars as of September 30, 1996) to the Bank of Tokyo against a promissory note which was secured by a letter of guarantee issued by the Company. The loan carried an interest rate of 1.625% per annum and was due and payable on January 31, 1997. The primary purpose of the loan was to fund the purchase of Tekisco (see Note 4 -- Acquisition of Tekisco). In April 1997, the Company repaid the outstanding balance on the note. 37 Notes to the Consolidated Financial Statements, September 30, 1997 7. Income Taxes The Company accounts for income taxes pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to accounting for income taxes. The provision (credit) for income taxes consisted of the following (in thousands): - ------------------------------------------------------------------------------ Years ended September 30, -------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Current Federal $1,509 $4,528 $ 8,464 State 223 518 1,628 - ------------------------------------------------------------------------------ Total current 1,732 5,046 10,092 - ------------------------------------------------------------------------------ Deferred Federal (98) (211) (437) State (15) (27) (54) - ------------------------------------------------------------------------------ Total deferred (113) (238) (491) - ------------------------------------------------------------------------------ Provision for income taxes $1,619 $4,808 $ 9,601 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ The provision (benefit) for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35.0% in fiscal years 1997, 1996 and 1995, as follows: - ------------------------------------------------------------------------------ Years ended September 30, -------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Statutory Federal tax rate 35.0% 35.0% 35.0% State income taxes, net 3.6 4.0 4.8 Foreign operations 1.7 (1.8) (1.3) Research and development credit (5.5) (2.7) (2.2) Tax exempt income (4.6) (2.0) (1.2) Other 4.8 2.5 2.2 - ------------------------------------------------------------------------------ Provision for income taxes 35.0% 35.0% 37.3% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ The major components of the net deferred tax asset are as follows (in thousands): September 30, ----------------------- 1997 1996 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Inventory reserves $2,833 $2,176 Accrued warranty 1,230 1,085 Deferred rent 155 207 Accrued vacation 327 256 Other temporary differences 825 533 - ----------------------------------------------------------------------------- Deferred tax asset 5,370 4,257 Deferred tax liabilities (502) (806) - ----------------------------------------------------------------------------- Total net deferred tax asset $4,868 $3,451 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- 38 Notes to the Consolidated Financial Statements, September 30, 1997 8. Investment in IPEC During fiscal 1990, the Company and Integrated Process Equipment Corporation (IPEC) entered into an agreement in which the Company received 294,600 shares of IPEC Class A common stock in exchange for certain services and technology. In fiscal 1997, 1996, and 1995, the Company sold 54,673, 5,000, and 136,927 shares of IPEC common stock, respectively, and realized pretax gains of $1,215,000, $143,000, and $4,700,000, respectively, which are reported in Other income (expense) in the accompanying Consolidated Statements of Operations. As of September 30, 1997, the Company holds no shares of IPEC common stock. 9. Commitments The Company leases its facilities and certain machinery and equipment under operating lease agreements that expire at various dates through June 2005. Minimum commitments under the non-cancelable leases as of September 30, 1997 were as follows (in thousands): - ------------------------------------------------- Fiscal Year 1998 $1,615 1999 1,198 2000 403 2001 30 2002 30 Thereafter 90 - ------------------------------------------------- $3,366 - ------------------------------------------------- - ------------------------------------------------- Rent expense was approximately $2,113,000, $2,017,000 and $1,190,000 for the years ended September 30, 1997, 1996 and 1995, respectively. The Company's lease agreement for one of its facilities provides for the deferral of three months cash rental payments in fiscal 1990 and subsequent scheduled rent increases. Rent expense under this agreement is being recognized on a straight-line basis over the term of the lease. The difference between the amounts paid and the amounts expensed is classified as deferred rent in the accompanying Consolidated Balance Sheets. No new capital lease obligations were incurred in fiscal 1997 or 1996. 10. Incentive Stock Option Plans and Stock Purchase Plan In November 1993, the Company's President and Chief Executive Officer (the "President") exercised options to purchase an aggregate of 566,665 shares of common stock at $0.60 per share, with a 5% interest bearing promissory note payable to the Company in the amount of $340,000. In January 1994, the Board of Directors authorized a special bonus program for the President, pursuant to which $100,000 of the principal of the promissory note would be forgiven upon his completion of each calendar year of service to the Company from January 1, 1994 through January 1, 1997. Accordingly, the promissory note has been amortized to compensation expense in the amounts of $65,000 for fiscal 1997 and $100,000 in fiscal years 1996 and 1995, respectively. The promissory note was fully amortized at September 30, 1997. 1994 STOCK OPTION/STOCK ISSUANCE PLAN. In fiscal 1994, the Board adopted, and the stockholders subsequently approved, the 1994 Stock Option/Stock Issuance Plan (the "1994 Stock Option Plan") and authorized a total of 1,450,000 shares for issuance under the Plan. The 1994 Stock Option Plan replaces the Company's 1985 Stock Option Plan and the Company's 1988 Stock Option Plan which have both been terminated. During fiscal years 1997 and 1996, the Company's Board of Directors authorized, and the stockholders subsequently approved, an additional 500,000 and 750,000 shares, respectively, for issuance under the Plan. 39 Notes to the Consolidated Financial Statements, September 30, 1997 The 1994 Stock Option Plan is divided into three separate components: i) the Discretionary Option Grant Program under which key employees (including officers) and consultants may, at the discretion of the Plan Administrator, be granted options to purchase shares of common stock at an exercise price not less than 85% of the fair market value of such shares on the grant date, ii) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to the nonemployee Board members to purchase shares of common stock at an exercise price equal to 100% of the fair market value of the option shares on the grant date, and iii) the Stock Issuance Program under which key employees (including officers) and consultants may be issued shares of common stock directly, either through the purchase of such shares at a price not less than 85% of their fair market value at the time of issuance or as a bonus tied to the performance of services or the Company's attainment of financial objectives. In no event may the aggregate number of shares of common stock for which any individual participating in the 1994 Plan may be granted stock options and direct stock issuances exceed 825,000 shares over the term of the Plan. Options granted under the Discretionary and Automatic Option Grant Programs have a maximum term of ten years and generally vest over periods of one to five years from the date of grant, at the discretion of the Plan Administrator. For 1995 there were 8,917 shares issued under the 1994 Stock Option Plan. There were no stock issuances in fiscal years 1997 and 1996. In August 1996, holders of the Company's options were given the opportunity to exchange previously granted stock options for new common stock options. Option holders, excluding non-employee directors of the Company, who held an outstanding stock option with an exercise price in excess of $7.25 per share were granted a new option with an exercise price of $7.25 per share, the market price of the common stock on that date, in exchange for his or her higher-priced option. Each optionee was given the choice of accepting the new option with a new four year vesting schedule and having the higher-priced option canceled or rejecting the new option and retaining the higher-priced option with its original vesting schedule. Under the terms of the new options, one-quarter of the shares vest one year from the date of grant and the remaining shares vest in 36 monthly installments. Options to purchase 416,725 shares were so exchanged. Option and stock issuance activity under the 1994 Stock Option Plan was as follows:
- -------------------------------------------------------------------------------------------------- Options Outstanding -------------------------------------------------------- Weighted Shares Average Available Number of Price Exercise For Grant Shares per Share Price - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Balance at September 30, 1994 664,150 769,500 $ 7.17- $ 9.67 $ 7.92 Stock issuances (8,917) -- -- -- Granted (344,925) 344,925 10.67- 19.33 16.00 Exercised -- (18,000) 7.20- 8.67 7.81 Canceled 40,675 (40,675) 7.20- 16.33 9.02 - -------------------------------------------------------------------------------------------------- Balance at September 30, 1995 350,983 1,055,750 7.17- 19.33 10.52 Additional options authorized 750,000 -- -- -- Granted (1,002,325) 1,002,325 7.25- 20.00 8.63 Exercised -- (45,225) 9.13- 14.38 7.55 Canceled 505,580 (505,580) 7.20- 20.00 13.43 - -------------------------------------------------------------------------------------------------- Balance at September 30, 1996 604,238 1,507,270 7.20- 20.00 8.37 Additional options authorized 500,000 -- -- -- Granted (653,850) 653,850 6.88- 23.00 9.82 Exercised -- (305,500) 7.17- 13.25 8.04 Canceled 349,559 (349,559) 7.20- 19.33 10.83 - -------------------------------------------------------------------------------------------------- Balance at September 30, 1997 799,947 1,506,061 $ 6.88- $23.00 $ 8.50 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
40 Notes to the Consolidated Financial Statements, September 30, 1997 As of September 30, 1997, options to purchase 291,383 are vested and exercisable. The following table summarizes the options outstanding under the 1994 Stock Option Plan as of September 30, 1997:
- -------------------------------------------------------------------------------------------------------------- Options Outstanding Exercisable Options ---------------------------------------------------------------------------------- Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average As of Contractual Exercise As of Exercise Range of Exercise Prices 09/30/97 Life Price 9/30/97 Price - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- $6.88- $ 7.20 236,130 6.73 $ 7.17 89,692 $ 7.20 7.25 595,292 8.87 7.25 132,655 7.25 7.88- 8.67 127,676 8.03 8.44 29,576 8.67 8.88 352,450 9.60 8.88 -- -- 9.17- 23.00 194,513 8.59 13.31 39,460 10.34 $6.88- $23.00 1,506,061 8.60 $ 8.50 291,383 $ 7.80 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
1994 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1994 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on January 27, 1994 and approved by the stockholders in March 1994. The Purchase Plan is designed to allow eligible employees of the Company to purchase shares of common stock, at semiannual intervals, through their periodic payroll deductions under the Purchase Plan. The Company had initially reserved 300,000 shares of Common Stock for issuance under the Purchase Plan. The Company's Board of Directors authorized, and the stockholders subsequently approved, an additional 400,000 shares of Common Stock under the Purchase Plan in each of fiscal years 1997 and 1996. Participants in the Purchase Plan may purchase shares at 85% of the lower of i) the fair market value of the common stock on the participant's entry date into the offering period or ii) the fair market value on the semi-annual purchase date. The Purchase Plan will in all events terminate on December 31, 2003. Of the 1,100,000 shares reserved for the 1994 Employee Stock Purchase Plan, 464,630 shares were purchased as of September 30, 1997. STOCK BASED COMPENSATION EXPENSE. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies who elect not to adopt the new method of accounting. The Company adopted SFAS No. 123 in fiscal 1997, and in accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option and stock purchase plans. 41 Notes to the Consolidated Financial Statements, September 30, 1997 The Company's stock plans, as described above, are accounted for under APB Opinion No. 25, under which no compensation cost has been recognized. Because the FASB Statement No. 123 method of accounting has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Had compensation cost for these plans been determined consistent with Statement No. 123, the Company's consolidated net income and earnings per share would have been reduced to the following pro forma amounts: - ----------------------------------------------------------------------------- (in thousands, except per share data) 1997 1996 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Net income -- as reported $3,007 $8,930 Net income -- pro forma $1,325 $7,615 Earnings per share -- as reported $ 0.21 $ 0.65 Earnings per share -- pro forma $ 0.09 $ 0.56 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: - ----------------------------------------------------------------------------- 1997 1996 ----------------------------- Dividend yield 0.0% 0.0% Expected life of options from vest date 0.9 years 0.9 years Expected stock volatility 84.8% 84.8% Risk-free interest rates 5.6%-6.8% 5.4%-6.6% - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- The weighted average fair value of option grants using the Black-Scholes option pricing model was $5.91 and $5.07 for the fiscal years ended September 30, 1997 and 1996, respectively. 42 Report of Independent Public Accountants TO GASONICS INTERNATIONAL CORPORATION: We have audited the accompanying consolidated balance sheets of GaSonics International Corporation (a Delaware Corporation) and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GaSonics International Corporation and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP San Jose, California October 27, 1997 43 Corporate Information BOARD OF DIRECTORS Monte M. Toole Chairman, GaSonics International Dave Toole President and Chief Executive Officer, GaSonics International Kenneth L. Schroeder President, KLA-Tencor F. Joseph Van Poppelen The Van Poppelen Company EXECUTIVE OFFICERS Dave Toole President and Chief Executive Officer Terry R. Gibson Vice President, Finance, and Chief Financial Officer Avner Shelem Vice President, General Manager, Engineering and Operations Bill Alexander Vice President, World Wide Sales and Field Operations CORPORATE HEADQUARTERS GaSonics International Corporation 2540 Junction Avenue San Jose, CA 95134-1909 Telephone: 408-570-7000 Web: http://www.gasonics.com THE ANNUAL MEETING The Annual Meeting of stockholders will be held on March 6, 1998 at Techmart, 5201 Great America Parkway, Santa Clara, California. Those unable to attend the Annual Meeting are invited to address questions and comments to Terry R. Gibson at the Company's Corporate Headquarters. FORM 10-K Stockholders who wish to receive, without charge, a copy of the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission may do so by writing to the Financial Relations Board, 180 Montgomery Street, Suite 940, San Francisco, California, 94104. STOCK MARKET INFORMATION GaSonics International Common Stock is traded on The Nasdaq National Market System under the symbol GSNX. The following table gives trading ranges for the Company's Common Stock during fiscal 1997: QUARTER STOCK TRADING RANGE, FISCAL 1997 - ------------------------------------------- First $ 6.88 - $12.63 Second $10.25 - $19.62 Third $ 8.13 - $15.63 Fourth $12.63 - $23.06 TRANSFER AGENT & REGISTRAR U.S. Stock Transfer Corporation 1745 Gardena Avenue Glendale, CA 91204-2991 Telephone: 818-502-1404 INVESTOR RELATIONS COUNSEL The Financial Relations Board 180 Montgomery Street, Suite 940 San Francisco, CA 94104 Telephone: 415-986-1591 INDEPENDENT AUDITORS Arthur Andersen LLP River Park Tower 333 West San Carlos Street, Suite 1500 San Jose, CA 95110-2710 LEGAL COUNSEL Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 GaSonics-Registered Trademark- is a registered trademark of GaSonics International Corporation All other trademarks are the property of their respective owners. - -C-1998 GaSonics International Corporation. All rights reserved. 44 [Page contains black box, otherwise blank] 45 [GASONICS INTERNATIONAL LOGO] GaSonics International Corporation 2540 Junction Avenue San Jose, CA 95134-1909 Telephone: 408. 570.7000 Web: http://www.gasonics.com 46 GaSonics International Corporation 1997 Annual Report 47 EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 List of Subsidiaries of the Registrant GaSonics World Trade, Inc. GaSonics International Europe Limited GaSonics International Japan, Kabushiki Kaisha GaSonics International Korea Corporation GaSonics International France Societe a Responsabilite Limitee GaSonics International Israel Limited GaSonics International Ireland Limited 30 EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included (or incorporated by reference) in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-76698, 33-79134, 33-89634 and 333-27539 on Form S-8. /S/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP San Jose, California December 19, 1997 31 EX-27 5 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 28 AND 29 IN EXHIBIT 13 OF THE COMPANY'S FORM 10-K FOR THE YEAR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 13,307 11,577 29,035 720 27,075 87,759 21,450 6,509 104,382 24,788 0 0 0 605 78,588 104,382 121,256 121,256 67,292 67,292 0 4,637 91 4,626 1,619 3,007 0 0 0 3,007 0.21 0.21
-----END PRIVACY-ENHANCED MESSAGE-----