-----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, JqoqKG94AWCRZAUKLBAjKiar9j75WUK5Rlr+XxbogsPcx5nEOqWlJa90pGKF9cZq S+NwmgZDDFc7HRkkIyMhHw== 0001047469-99-018725.txt : 19990510 0001047469-99-018725.hdr.sgml : 19990510 ACCESSION NUMBER: 0001047469-99-018725 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GASONICS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000918647 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942159729 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23372 FILM NUMBER: 99613814 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-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________________ to ______________________ Commission file number: 0-23372 ------- GASONICS INTERNATIONAL CORPORATION ---------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-2159729 - ------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2730 Junction Avenue, San Jose, California 95134 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 570-7000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At May 3, 1999, there were 14,396,272 shares of the Registrant's Common Stock, $0.001 par value per share, outstanding. GASONICS INTERNATIONAL CORPORATION FORM 10-Q INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1999 and September 30, 1998 3 Condensed Consolidated Statements of Operations for the three and six month periods ended March 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended March 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Securityholders 25 Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 27 Exhibit Index 28
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GASONICS INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, Sept. 30, 1999 1998 ---------- --------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $12,268 $14,698 Marketable securities 17,864 17,640 Trade accounts receivable, net 16,005 15,026 Inventories 15,605 20,822 Net deferred tax asset 5,697 5,697 Prepaid expenses and other current assets 3,813 7,437 ------- ------- Total current assets 71,252 81,320 Property and equipment, net 12,761 14,810 Deposits and other assets 971 1,086 ------- ------- Total assets $84,984 $97,216 ------- ------- ------- ------- LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Borrowings under credit facility $ 2,513 $ 2,116 Accounts payable 4,026 4,008 Income taxes payable 5,130 4,038 Accrued expenses 9,365 11,423 ------- ------- Total current liabilities 21,034 21,585 ------- ------- Long-term liabilities 134 223 ------- ------- Stockholders' equity: Common stock and additional paid-in capital 38,941 37,675 Retained earnings 24,875 37,733 ------- ------- Total stockholders' equity 63,816 75,408 ------- ------- Total liabilities and stockholders' equity $84,984 $97,216 ------- ------- ------- -------
See accompanying notes. 3 GASONICS INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, --------------------------- --------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net sales $ 13,215 $ 27,616 $ 23,237 $ 60,467 Cost of sales 8,658 14,928 16,528 32,343 -------- -------- -------- -------- Gross margin 4,557 12,688 6,709 28,124 -------- -------- -------- -------- Operating expenses: Costs associated with reduction in force - - 407 - Research & development 5,662 5,367 9,298 10,404 Selling, general & administrative 5,136 7,191 10,439 14,711 -------- -------- -------- -------- Total operating expenses 10,798 12,558 20,144 25,115 -------- -------- -------- -------- Operating income (loss) (6,241) 130 (13,435) 3,009 -------- -------- -------- -------- Other income and expenses, net 263 210 577 336 -------- -------- -------- -------- Income (loss) before provision for income taxes (5,978) 340 (12,858) 3,345 Provision for income taxes - 112 - 1,108 -------- -------- -------- -------- Net income (loss) $ (5,978) $ 228 $(12,858) $ 2,237 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share - Basic $ (0.42) $ 0.02 $ ( 0.90) $ 0.16 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share - Diluted $ (0.42) $ 0.02 $ ( 0.90) $ 0.15 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares 14,325 14,027 14,249 13,972 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common & common equivalent shares 14,325 14,408 14,249 14,456 -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes. 4 GASONICS INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, --------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net cash provided by (used for) operating activities $ (3,312) $ 6,045 -------- -------- Cash flows from investing activities: Purchases of property & equipment (557) (1,817) Increase in marketable securities (224) (3,036) -------- -------- Net cash used for investing activities (781) (4,853) -------- -------- Cash flows from financing activities: Increase (decrease) in borrowings under credit facility 397 (1,593) Proceeds from issuance of common stock 1,266 1,116 -------- -------- Net cash provided by (used for) financing activities 1,663 (477) -------- -------- Net increase (decrease) in cash and cash equivalents (2,430) 715 Cash & cash equivalents at beginning of period 14,698 13,307 -------- -------- Cash & cash equivalents at end of period $ 12,268 $ 14,022 -------- -------- -------- --------
See accompanying notes. 5 GASONICS INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements have been prepared by the Company without audit and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations of the Company for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles. The results of operations for the six months ended March 31, 1999 are not necessarily indicative of the operating results to be expected for the full fiscal year. Such financial statements should be read in conjunction with the information contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1998 and quarterly report on Form 10-Q for the period ending December 31, 1998. 2. INVENTORIES Inventories consist of the following (in thousands):
March 31, September 30, 1999 1998 ----------- ------------- (unaudited) Raw Materials $ 9,318 $ 12,547 Work in Process 2,619 2,254 Finished Goods 3,668 6,021 -------- -------- $ 15,605 $ 20,822 -------- -------- -------- --------
3. NET INCOME (LOSS) PER SHARE Net income (loss) per share data has been computed using the weighted average number of shares of common stock and dilutive common equivalent shares from stock options (using the treasury stock method). Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share." Basic earnings per common share for the three and six months ended March 31, 1999 and 1998 were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share for the three and six months ended March 31, 1999 and 1998, were calculated using the treasury stock method to compute the weighted average common stock outstanding (in thousands, except per share data). 6
- ------------------------------------------------------------------------------------------------------------------ PER SHARE --------- FOR THE THREE MONTHS ENDED MARCH 31, 1999 INCOME SHARES AMOUNT ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------ Net loss $ (5,978) BASIC AND DILUTED LOSS PER SHARE Loss to common stockholders $ (5,978) 14,325 $ ( 0.42) - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ PER SHARE --------- FOR THE THREE MONTHS ENDED MARCH 31, 1998 INCOME SHARES AMOUNT ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------ Net income $ 228 BASIC INCOME PER SHARE Income available to common stockholders $ 228 14,027 $ 0.02 Effect of dilutive securities: Options outstanding to purchase common stock 381 DILUTIVE INCOME PER SHARE Income available to common stockholders $ 228 14,408 $ 0.02 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ PER SHARE --------- FOR THE SIX MONTHS ENDED MARCH 31, 1999 INCOME SHARES AMOUNT ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------ Net loss $ (12,858) BASIC AND DILUTED LOSS PER SHARE Loss to common stockholders $ (12,858) 14,249 $ ( 0.90) - ------------------------------------------------------------------------------------------------------------------
7
- ------------------------------------------------------------------------------------------------------------------ PER SHARE --------- FOR THE SIX MONTHS ENDED MARCH 31, 1998 INCOME SHARES AMOUNT ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------ Net income $2,237 BASIC INCOME PER SHARE Income available to common stockholders $2,237 13,972 $0.16 Effect of dilutive securities: Options outstanding to purchase common stock 484 DILUTIVE INCOME PER SHARE Income available to common stockholders $2,237 14,456 $0.15 - ------------------------------------------------------------------------------------------------------------------
4. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" which is being adopted by the Company in fiscal 1999. SFAS No. 131 requires companies to disclose certain information about operating segments within their business. The Company does not anticipate the adoption of SFAS No. 131 having a material impact on its consolidated financial statements. Interim reporting is not required in the initial year of adoption under SFAS No. 131. 5. COMPREHENSIVE INCOME Effective December 31, 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. For the three and six months ended March 31, 1999 and 1998, there were no material items of other comprehensive income (loss), thus comprehensive income for these periods did not differ materially from net income as reported in the accompanying financial statements. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the exception of historical facts, the following Management's Discussion and Analysis of Financial Condition and Results of Operations may be deemed to contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, future sales, gross margins, product development, operating expense levels, and the sufficiency of financial resources to support future operations, and are subject to the Safe Harbor provisions created by that statute. Such statements are based on current expectations that involve inherent risks and uncertainties, including those discussed below and under the heading "Additional Risk Factors" that could cause actual results to differ materially from those expressed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to any forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to the Condensed Financial Statements presented in the Company's 1998 Annual Report on Form 10-K and quarterly report on Form 10-Q for the period ended December 31, 1998, available upon request, for a more complete understanding of the Company's financial position, business and results of operations. RESULTS OF OPERATIONS NET SALES. The Company's net sales of $13.2 million for the second quarter of fiscal year 1999 ended March 31, 1999 represent a decrease of approximately 52% when compared to net sales for the same quarter in fiscal year 1998 of $27.6 million. For the six month period ending March 31, 1999, net sales decreased approximately 62% to $23.2 million compared to net sales of $60.5 million for the same period last fiscal year. The sales decrease in both periods was due primarily to lower sales of the Company's single chamber and multi-chamber Performance Enhancement Platform ("PEP") products resulting from the general slowdown in the semiconductor industry. In addition, the Company did not sell any units of its Vertical High Pressure ("VHP") product during the first half of fiscal 1999 compared to VHP sales of $6.1 million for the same period of fiscal 1998. Continued delays in receiving new orders and rescheduling or cancellations of previously ordered equipment has materially adversely affected the Company's sales for more than two and a half years. Although the Company had a consecutive quarter improvement in bookings and sales and the semiconductor industry may be showing signs of upward movement, customers are still very cautious and the Company anticipates that delays of new orders and cancellations and rescheduling of existing orders will continue to adversely impact the Company's business, financial condition and results of operations for the foreseeable future. Sales to customers in North America, Europe and Asia Pacific accounted for approximately 57%, 9% and 30% of net sales, respectively, for the six months ended March 31, 1999 compared to 9 approximately 58%, 24% and 18% respectively, for the six months ended March 31, 1998. The Company's percentage of international sales will continue to fluctuate from period to period, but the Company anticipates that international sales will continue to account for a significant portion of net sales in fiscal 1999. The continuing Asian economic slowdown has had an adverse impact on the Company's international net sales in the first half of fiscal 1999 and may have a significant adverse impact on international net sales for the balance of fiscal 1999. The Company currently anticipates that its total net sales for the third quarter of fiscal 1999 will improve compared to the second quarter, but will continue to be below prior comparable period levels due to the continuing financial crisis in Asia and Japan and the apparent continued caution by North American customers that has resulted in reduced spending on capital equipment. GROSS MARGIN. The Company's gross margin as a percentage of net sales for the second quarter and six months ended March 31, 1999 was 35% and 29%, respectively, compared to 46% and 47%, respectively, for the same periods of fiscal 1998. The decrease in gross margin percentage for both periods of fiscal 1999 compared to fiscal 1998 is due to the Company's lower sales and the relatively fixed costs and under-utilization of the Company's field service organization and manufacturing facilities resulting in under-absorbed overhead. The Company's gross margins are affected by a variety of other factors, including the mix and average selling prices of products sold and the costs to manufacture, service and support new product introductions and enhancements. The Company expects that its gross margin will continue to be materially adversely impacted by the general slowdown in the semiconductor industry, the economic troubles currently being experienced by many countries in Asia, including companies in certain of the Company's major markets such as Japan and Korea, changes in product mix and other factors, including inefficiencies associated with new product introductions and sales of lower margin flat panel display systems and competitive pricing pressures. The Company continues to focus on its gross margin improvement programs, including the introduction of new value-added applications, features and options for its the PEP systems, targeted cost reduction programs and controlled spending. The Company currently anticipates that its overall gross margins for the third quarter of fiscal year 1999 will improve from that of the second quarter primarily due to anticipated consecutive quarter sales growth. COSTS ASSOCIATED WITH REDUCTION IN FORCE. In December 1998, the Company reduced its workforce by approximately 5% in response to market conditions and recorded a charge of $407,000 primarily for the costs of severance compensation. RESEARCH AND DEVELOPMENT (R & D) EXPENDITURES. R&D expenses consist primarily of salaries, project materials, consultant fees and other costs associated with the Company's R&D efforts. The Company's R&D expenditures for the second quarter of fiscal 1999 were $5.7 million or 43% of net sales compared to $5.4 million or 19% of net sales for the second quarter of fiscal 1998. For the six month period ended March 31, 1999 and 1998, R&D expenses were $9.3 million or 40% of net sales and $10.4 million or 17% of net sales, respectively. Included in the second quarter and six month expenses for fiscal 1999 is a $1.8 million charge primarily for the accelerated write-off of equipment produced and used in connection with the Company's first generation 300mm product development program. This equipment which consisted primarily of 300mm tools produced for test, demonstration and evaluation has significantly declined in value 10 since the Company has now transitioned to the next generation of 300mm product development. Offsetting this charge was a $1.5 million decrease in spending in the second quarter and a $2.9 million decrease in spending in the first six months of fiscal 1999 primarily from a reprioritization of R&D projects, the cumulative impact of three reductions in force that occurred in the second half of fiscal year 1998 and the first quarter of fiscal 1999 and a reduced work schedule that has continued since the beginning of the third quarter of fiscal year 1998. All of the above actions were part of the Company's cost reduction efforts taken as a result of current business conditions. Additionally, an engineering grant of $250,000 was funded in the first quarter of fiscal 1999 and was credited against certain R&D expenses. The Company continues to focus its R&D efforts on areas where it believes it may be able to gain market share. In particular, the Company has focused its R&D spending on programs to support the expanding number of available applications that target our integrated clean strategy, the development of the 300mm platform, the support of the LCD flat panel business and applications development of the VHP technology. The Company anticipates that R&D spending in absolute dollars for the next several quarters of fiscal 1999 will decrease compared to prior year comparable periods primarily due to the cost reductions noted above. However, expenses may increase slightly from the second quarter of fiscal 1999, before taking into account the $1.8 million write-off, previously mentioned, due to the Company's return to a full work schedule in April 1999. The Company decided to return to a full work schedule based on the improved financial results in the second quarter compared to that of the first quarter this fiscal year and the anticipation that business will continue to improve over the next several quarters. SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses for the second quarter of fiscal 1999 were $5.1 million or 39% of net sales and $10.4 million or 45% of net sales for the six month period of fiscal 1999 compared to $7.2 million or 26% of net sales and $14.7 million or 24% of net sales for the same periods of fiscal 1998, respectively. The increase in SG&A expense as a percentage of net sales is primarily due to lower sales volume. The decrease in absolute dollars primarily results from the cumulative impact of the Company's three reductions in force and the reduced work schedule and lower third party sales commissions on international sales. For approximately the last two years, the Company has built a worldwide direct sales and support organization which has decreased the Company's dependence on third party representatives for these services. Consequently, third party commissions in all but two regions have been eliminated, partially offset by increased expenses related to the hiring of and other expenses associated with building the Company's direct sales and support organizations. The Company currently anticipates that SG&A expenses for the remaining periods of fiscal 1999 will be lower in absolute dollars from the comparable periods of fiscal 1998 as a result of the Company's cost reduction activities. Compared to the second quarter of fiscal year 1999, however, SG&A expenses may increase slightly due to additional costs related to anticipated sales increases and the Company's return to a full work schedule. OTHER INCOME (EXPENSE). Other income and expense primarily consists of interest income and expense, foreign currency translation gains and losses and royalty income. Interest expense of approximately $17,000 for the second quarter and $26,000 for the first six months of fiscal 1999 as compared to $5,000 in the second quarter and $25,000 for the first six months of fiscal 1998 is principally related to borrowings under a short-term credit facility from the Bank of Tokyo-Mitsubishi made to the Company's wholly-owned subsidiary in Japan, GaSonics International 11 Japan K.K. As of March 31, 1999, borrowings under this loan agreement were 294 million yen, which was equivalent to approximately $2.5 million as of that date. Interest income received primarily from the Company's short-term investments was approximately $226,000 for the second quarter and $504,000 for the six month period of fiscal 1999 as compared to $226,000 and $458,000 for the corresponding periods of fiscal 1998. Foreign currency translation losses of approximately $25,000 and $65,000 were incurred in the second quarter and first six months of fiscal 1999, respectively, compared to $19,000 and $128,000 for the same periods last fiscal year, respectively, due to fluctuations in currency exchange rates primarily in Japan, Korea, Taiwan and Singapore. Royalty income in connection with the sale of the Company's industrial plasma cleaning products and services business in July 1997 was approximately $101,000 and $178,000 for the second quarter and first six months of fiscal 1999, respectively, compared to $83,000 and $119,000 for the comparable periods of fiscal 1998. INCOME TAXES. The results for the second quarter and first six months of fiscal 1999 do not include a provision for tax benefits related to the six months ended March 31, 1999 net loss due to the unavailability of tax loss carry-backs. The tax loss and other tax benefits will be carried forward and will be available to offset any future tax liabilities. The Company does not anticipate recording these tax benefits until returning to profitability. LIQUIDITY AND CAPITAL RESOURCES During the first six months of fiscal 1999, cash, cash equivalents and marketable securities decreased by $2.2 million to $30.1 million at March 31, 1999 from $32.3 million at September 30, 1998. Operating activities used $3.3 million of cash for the six month period ended March 31, 1999 compared to $6.0 million of cash provided by operations in the corresponding period of fiscal 1998. Cash used by operating activities in the first six months of fiscal 1999 is due principally to operating losses partly offset by a reduction in inventory and a reduction in deferred tax assets resulting from income tax refunds received during the second quarter of fiscal 1999 for operating loss carry-backs. Investing activities for the first six months of fiscal 1999 used cash of approximately $781,000 resulting from the net purchases of marketable securities of approximately $224,000 and $557,000 on programs in progress for improved operating and information systems and demonstration equipment. For the first six months of fiscal 1998, a total of $4.8 million was used for investing activities consisting of $3.0 million for the net purchase of marketable securities and $1.8 million for the purchase of capital equipment and improved operating and information systems. Financing activities for the first six months of fiscal 1999 provided cash from the issuance of common stock in connection with the Company's employee stock purchase and stock option plans of $1.3 million and $397,000 from borrowings by Gasonics International Japan K.K. under its credit facility with the Bank of Tokyo-Mitsubishi. For the same period of fiscal 1998, $1.1 million was provided from the issuance of common stock under the Company's employee stock purchase and stock option plans and $1.6 million was used to reduce the borrowings by GaSonics International Japan K.K. under its credit facility with the Bank of Tokyo-Mitsubishi. 12 At March 31, 1999, the Company had working capital of $50.2 million compared to $59.7 million at September 30, 1998. Accounts receivable at March 31, 1999 increased by approximately $1.0 million and inventory decreased by approximately $5.2 million from September 30, 1998. The increase in receivables is due primarily to payment delays from certain customers in Europe and Taiwan. The decrease in inventory is primarily the result of decreased purchasing in response to lower sales volume. The Company expects future inventory levels to fluctuate from period to period, and believes that because of the relatively long manufacturing cycle of its products, its investment in inventories will continue to represent a significant portion of working capital. As a result of such investment in inventories, the Company may be subject to an increasing risk of inventory obsolescence, which could materially adversely affect the Company's operating results. The Company's principal sources of liquidity at March 31, 1999, consisted of approximately $12.3 million in cash and cash equivalents, $17.9 million in marketable securities and a $20.0 million unsecured line of credit with Union Bank, the maturity date of which has been extended from March 31, 1999 to June 1, 1999. A commercial letter of credit provision of $500,000 and a foreign exchange contract provision of $1.0 million are also provided under the credit line. This line of credit bears interest at the bank's LIBOR rate plus 1.25% per annum. Available borrowing under the credit line is reduced by the amount of outstanding letters of credit. As of March 31, 1999, except for $69,193 outstanding under the letter of credit provision, there were no borrowings outstanding under this line. The line of credit contains certain covenants, including covenants relating to financial ratios and tangible net worth that must be maintained by the Company. The Company was not in compliance with the line of credit tangible net worth and profitability covenants as of March 31, 1999. However, Union Bank waived the Company's non-compliance with respect to these covenants. There can be no assurance that Union Bank will waive these covenants in the future if the Company fails to achieve profitability which could result in the termination of the credit line. The Company's wholly-owned Japanese subsidiary, GaSonics International Japan K.K., has a credit facility with the Bank of Tokyo-Mitsubishi with an available credit line of 300 million Japanese yen which is equivalent to approximately $2.6 million. This credit facility bears interest at a rate of 1.65% per annum and is secured by a Letter of Guarantee issued by the Company. The expiration date of this credit facility has also been extended from March 31, 1999 to June 1, 1999. As of March 31, 1999, GaSonics International Japan K.K. had borrowed 294 million yen under this credit facility, which was equivalent to approximately $2.5 million as of that date. The Company intends to enter into a new agreement with Union Bank and renew or extend the term of the existing credit facility in Japan with the Bank of Tokyo-Mitsubishi prior to their respective expiration dates. However, there can be no assurance that the Company will be successful in renewing or extending either such facility or that any such renewal or extension will be on reasonable terms. On December 16, 1998, the Company's Board of Directors authorized the Company to repurchase up to 500,000 shares of the Company's Common Stock in the open market at prevailing prices. As of March 31, 1999, no shares had been repurchased. The Company believes anticipated cash flows from operations, funds available under its existing or successor revolving line of credit and separate credit facility and existing cash, cash equivalents and marketable securities will be sufficient to meet the Company's cash requirements 13 during the next twelve months. Beyond the next twelve months, the Company may require additional equity or debt financing to achieve its working capital or capital equipment needs. YEAR 2000 READINESS DISCLOSURE The Company has assembled a task force that is currently in the process of assessing internal software, data management, accounting, manufacturing and operational systems to ensure that they adequately and accurately process or manage day or date information beyond the year 1999. This task force is also working with the Company's significant suppliers of components and sub-assemblies to ensure that the products and systems supplied to the Company, and the products the Company supplies to its customers, are year 2000 compliant. The Company currently expects that this review process will be completed by the end of fiscal 1999 and that all material internal programs and systems will be compliant prior to the beginning of the year 2000. To ensure that the Company's products and systems, and the operating systems incorporated in products sold to its customers, are year 2000 compliant, the Company expects both to replace some software and systems and to upgrade others where appropriate. The Company is in the process of identifying for its customers the corrective action necessary to ensure that its installed products are year 2000 compliant, including compliance of third-party components and sub-assemblies incorporated into the Company's products. The Company has incurred, and will continue to incur throughout fiscal 1999, various expenses in connection with replacement and upgrading its installed base. The Company estimates that the costs directly related to addressing Year 2000 issues will be between two to three million dollars, of which approximately $1.2 million was spent as of March 31, 1999. The Company expects to pass certain of these costs on to its customers. There can be no assurance that the Company's current products do not contain undetected errors or defects associated with year 2000 date functions that may result in material costs to the Company, including repair costs, warranty costs and costs incurred in litigation due to any such defects. Additionally, there can be no assurance that unexpected delays or problems, including the failure to ensure year 2000 compliance by systems and products supplied to the Company by a third party, will not have a material adverse effect on the Company's financial performance, or the competitiveness or customer acceptance of its products. The Company's current understanding of expected costs is subject to change as the Company's review continues and does not include potential costs related to customer claims, or internal software and hardware replaced in the normal course of business where installation otherwise may be accelerated to provide solutions to year 2000 compliance issues. Although the Company is unaware of any material operational issues or costs associated with preparing its internal systems for the year 2000 as of this date, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs, including a material disruption in the Company's operations, caused by undetected errors or defects in the technology used in its internal operating systems, which are composed predominantly of third party software and hardware technology. 14 ADDITIONAL RISK FACTORS SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future. The Company anticipates that factors continuing to affect its future operating results will include the cyclicality of the semiconductor industry and the markets served by the Company's customers, particularly the current prolonged, severe worldwide semiconductor slowdown, the timing and terms of significant orders, patterns of capital spending by customers, the proportion of direct sales and sales through distributors, the proportion of international sales to net sales, changes in pricing by the Company, its competitors, customers or suppliers, market acceptance of new and enhanced versions of the Company's products, inventory obsolescence, accounts receivable write-offs, the mix of products sold, financial systems, procedures and controls, discounts, the timing of new product announcements and releases by the Company or its competitors, delays, cancellations or rescheduling of orders due to customer financial difficulties or otherwise, the Company's ability to produce systems in volume and meet customer requirements, the ability of any customer to finance its purchases of the Company's equipment, changes in overhead absorption levels due to changes in the number of systems manufactured, political and economic instability throughout the world, particularly in the Asia-Pacific region, and lengthy sales cycles. The Company's gross margins have varied and will continue to vary materially based on a variety of factors including sales volume-related impact on field service and support utilization and overhead absorption, the mix and average selling prices of systems sales, the mix of revenues, including service and support revenues, and the costs associated with new product introductions and enhancements and the customization of systems. Furthermore, announcements by the Company or its competitors of new products and technologies could cause customers to defer purchases of the Company's existing systems, which would also materially adversely affect the Company's business, financial condition and results of operations. For example, the Company has experienced and expects to continue to experience decreased sales of its single chamber products due to the introduction of the PEP systems. The Company's gross margin and overall gross margin rate has sharply declined from the level attained in prior years due to under utilization of the field service infrastructure and under absorption of manufacturing overhead resulting from lower sales volume attributed to the current worldwide semiconductor business slowdown, start-up inefficiencies associated with new products, competitive pricing pressures, changes in product mix from fewer higher margin rate and mature single chamber products to lower margin rate dual chamber products, products sold by the Company's liquid crystal display manufacturing equipment (LCD) division in Japan, and other factors. It is anticipated that the slowdown in the semiconductor industry will continue to have a material adverse effect on the Company's future revenues and operating results for the next several quarters. There can be no assurance that the Company will be able to maintain its sales at current levels. LIMITED SYSTEM SALES; BACKLOG The Company derives a substantial portion of its sales from the sale of systems which typically range in price from approximately $150,000 to $850,000 for its photoresist and post-etch residue removal systems and up to approximately $2.0 million or more for many of its other products. As a result, the timing of revenue recognition for even a single transaction has had and could continue to 15 have a material adverse effect on the Company's sales and operating results. The Company's backlog at the beginning of a quarter typically does not include all sales required to achieve the Company's sales objectives for that quarter. Moreover, all customer purchase orders are subject to cancellation or rescheduling by the customer with limited or no penalties and, therefore, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period. The Company has in the past experienced and expects to continue to experience, cancellations and rescheduling of orders. As a result, the Company's net sales and operating results for a quarter depend upon the Company obtaining orders for systems to be shipped in the same quarter that the order is received. The Company's business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment during such period. Furthermore, most of the Company's quarterly net sales have recently been realized near the end of the quarter. A delay in a shipment near the end of a particular quarter due to, for example, an unanticipated shipment rescheduling, cancellations or deferrals by customers, unexpected manufacturing difficulties experienced by the Company, additional customer configuration requirements or supply shortages, may cause net sales in a particular quarter to fall significantly below the Company's expectations and may materially adversely affect the Company's operating results for any such quarter. In addition, significant investments in research and development, capital equipment and customer service and support capability worldwide have resulted in significant fixed costs which the Company has not been and will not be able to reduce rapidly if sales goals for a particular period are not met. Because the Company builds its systems according to forecast, a reduction in customer orders or backlog will lead to excess and possibly inventory obsolescence, increased costs and reduced margins which could materially adversely effect the Company's business, financial condition and results of operations. The impact of these and other factors on the Company's operating results in any future period cannot be forecasted accurately. CYCLICALITY OF SEMICONDUCTOR INDUSTRY The Company's business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that are opening new or expanding existing fabrication facilities, which, in turn, depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry is highly cyclical and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including systems manufactured and marketed by the Company. Beginning in 1996, the worldwide semiconductor industry has experienced a severe cyclical downturn, which has extended through the second quarter of fiscal 1999. During this period, the Company has experienced reduced demand for its products, significant cancellations and delays of new orders and rescheduling of existing orders that have materially adversely affected the Company's financial results and the Company expects such factors will continue to materially adversely affect its future financial results. Accordingly, the Company can give no assurance that it will be able to increase or even maintain its current level of sales. Additionally, the Company anticipates that a significant portion of new orders will depend upon demand from integrated circuit (IC) manufacturers building or expanding large fabrication facilities, and there can be no assurance that such demand will exist in 1999. 16 HIGHLY COMPETITIVE INDUSTRY The semiconductor capital equipment industry is intensely competitive. A substantial investment is required by customers to install and integrate capital equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected a particular vendor's capital equipment, the Company believes that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, it is difficult for the Company to sell to a particular customer for a significant period of time if that customer selects a competitor's capital equipment. The Company currently has only one principal product line and experiences intense competition worldwide from a number of foreign and domestic manufacturers, including Canon, Applied Materials, Inc., Eaton Corporation, Lam Research Corporation, Matrix Semiconductor Systems, Inc., Mattson Technology, Inc., Plasma Systems and MC Electronics, many of which have substantially greater installed bases and greater financial, marketing, personnel, technical and other resources than the Company. One of the Company's competitors, Fusion, was acquired by Eaton Corporation, a very large corporation, further enhancing the resources of one of the Company's competitors. The Company believes that the industry will continue to be subject to increased consolidation which will increase the number of larger more powerful companies in the industry sector in which the Company competes. Certain of the Company's competitors have announced the introduction of, or have introduced or acquired, competitive products that offer enhanced technologies and improvements. Applied Materials and Lam Research have modules on their products which remove photoresist using dry chemical processing and, therefore, compete with the Company's products. The Company expects its competitors to continue to develop enhancements to and future generations of competitive products that may offer improved price or performance features. New product introductions and enhancements by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's systems in addition to intense price competition or otherwise make the Company's systems or technology obsolete or noncompetitive. In addition, by virtue of its reliance on sales of advanced dry chemistry processing equipment, the Company could be at a disadvantage compared to certain competitors that offer more diversified product lines. The Company believes that it will continue to face competition from current and new vendors employing other technologies, such as wet chemistry, traditional dry chemistry and other ashing techniques, as such competitors attempt to extend the capabilities of their existing products. Increased competitive pressure has led and may continue to lead to reduced demand and lower prices for the Company's products, thereby materially adversely affecting the Company's business, financial condition and operating results. There can be no assurance that the Company will be able to compete successfully in the future. Competitors of the Company's LCD division in Japan include Japan-based companies and Japan-based joint ventures such as Applied Komatsu, Koyo Lindbergh and ULVAC. These competitors manufacture alternative technology systems and are well established in Japan and they could, at any time, enter the Company's markets with improved technology or with systems that are directly competitive with those of the Company's LCD division. Late in fiscal 1995, the Company acquired its LCD division in Japan, but to date, this has not enabled the Company to significantly penetrate the photoresist removal market in Japan. As a relatively recent entrant, the Company is at a distinct competitive disadvantage in the Japanese market compared to leading 17 Japanese suppliers, many of which have long-standing collaborative relationships with Japanese semiconductor manufacturers. DEPENDENCE ON KEY CUSTOMERS Historically, the Company has sold a significant proportion of its systems in any particular period to a limited number of customers. Sales to the Company's ten largest customers in fiscal 1996, 1997, 1998 and the first six months of fiscal 1999 accounted for approximately 51%, 66%, 64% and 76% of net sales, respectively. In fiscal 1996, sales to Intel accounted for approximately 11% of total net sales. In fiscal 1997, sales to Samsung and Promos Technologies each accounted for approximately 11% of net sales and Intel accounted for approximately 10% of net sales. Intel and Motorola accounted for approximately 20% and 11%, respectively, of fiscal 1998 net sales. Intel accounted for approximately 16%, Motorola and White Oak Semiconductor each accounted for approximately 12% of net sales for the first six months of fiscal 1999. The Company expects that sales of its products to relatively few large customers will continue to account for a high percentage of net sales in the foreseeable future. None of the Company's customers has entered into a long-term agreement requiring it to purchase the Company's products. Moreover, sales to certain of its customers have decreased as those customers have completed or delayed purchasing requirements for new or expanded fabrication facilities. Although the composition of the group comprising the Company's largest customers has varied from year to year, the loss of a significant customer or any reduction in orders from any significant customer, including reductions due to company departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing ICs, has materially adversely affected and could in the future materially adversely affect the Company's business, financial condition and results of operations. The Company's ability to increase or maintain current sales levels in the future will depend in part upon its ability to obtain orders from new customers as well as the financial condition and success of its customers and the general economy, of which there can be no assurance. EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH Since 1993, the Company has significantly increased the scale of its operations to support sales levels and despite recent layoffs has generally expanded its operations to address critical infrastructure requirements, including the hiring of additional personnel, commencement of independent operations in the United Kingdom, Ireland, France, Italy, Korea, Japan, Singapore, Taiwan and Israel and significant investments in research and development to support product development. In addition, in 1998, the Company hired a new President and Chief Executive Officer. The Company's expansion has resulted in significantly higher operating expenses and until there is a sustained upturn in the semiconductor industry resulting in an increased demand for equipment, it is anticipated that the Company's future operating results will continue to be materially adversely affected through at least the next several quarters. However, cost reduction efforts implemented during the last half of fiscal 1998 and the first quarter of fiscal 1999 have considerably reduced the Company's operating expenses and, hence, the sales volume level needed to breakeven. 18 The past growth in the Company's sales and expansion in the scope of its operations has placed a considerable strain on its management, financial and other resources and has required the Company to initiate an extensive reevaluation of its operating and financial systems, procedures and controls. The Company implemented new management information, manufacturing and cost accounting systems during the second quarter of fiscal 1997 and continues to upgrade and implement new management systems, particularly in the area of inventory control, to better enable it to manage its business. There can be no assurance, however, that any existing or new systems, procedures or controls will be adequate to support the Company's operations or that its new systems will be implemented in a cost-effective and timely manner. RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The semiconductor manufacturing industry is subject to rapid technological change and new product introductions and enhancements. The Company's ability to be competitive will depend in large part upon its ability to develop new and enhanced systems and to introduce these systems at competitive prices and in a timely and cost effective manner to enable customers to integrate the systems into their operations either prior to or upon commencement of volume product manufacturing. In addition, new product introductions or enhancements by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products. Increased competitive pressure has led to intensified price-based competition resulting in lower prices and margins, which has and could continue to materially adversely affect the Company's business, financial condition and results of operations. Any success of the Company in developing, introducing and selling new and enhanced systems depends upon a variety of factors including product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing and product performance in the field. In particular, the Company's future performance will depend in part upon the successful commercialization of its VHP, LPCVD systems and 300mm systems. There can be no assurance that any such product will achieve significant revenues, if any, or enhance the Company's profitability. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for the type of ICs under development by leading IC manufacturers and the equipment required to produce such ICs. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products and any failure could have a material adverse effect on the Company's business, financial condition and results of operations. Because of the large number of components in, and the complexity of, the Company's systems, significant delays can occur between a system's initial introduction and the commencement of volume production. As is typical in the semiconductor capital equipment market, the Company has experienced delays from time to time in the introduction of, and certain technical, quality and manufacturing difficulties with, certain of its systems and enhancements and may continue to experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. The Company's inability to complete the development or meet the technical specifications of any of its new systems or enhancements or to manufacture and ship these systems or enhancements in volume and in a timely manner would materially 19 adversely affect the Company's business, financial condition and results of operations as well as its customer relationships. In addition, the Company may incur substantial unanticipated costs to ensure the functionality and reliability of its future product introductions early in the product's life cycle. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, the Company may experience decreased sales, loss of customers, increased costs, delays in collecting accounts receivable and additional service and warranty expenses, any of which could materially adversely affect the Company's business, financial condition and results of operations. LENGTHY SALES CYCLE Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity through the expansion of existing fabrication facilities or the opening of new facilities, which typically involves a significant capital commitment. The Company often experiences delays in finalizing system sales following initial system qualification while the customer evaluates and receives approvals for the purchase of the Company's systems and completes a new or expanded facility. Due to these and other factors, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort which may not ultimately lead to actual sales. The Company believes that the length of the sales cycle will continue to increase as certain of its customers centralize purchasing decisions into one decision making entity and continue to be cautious in their purchase decisions due to the current severe downturn in the semiconductor market, which is expected to intensify the evaluation process and require additional sales and marketing expenditures by the Company. Lengthy sales cycles subject the Company to a number of significant risks, including obsolescence and fluctuations and non-predictability of operating results, over which the Company has little or no control. RISKS ASSOCIATED WITH THE JAPANESE MARKET The Company believes that increased penetration of the Asia Pacific market, particularly Japan, will be essential to its future financial performance. To date, however, the Company has sold relatively few systems to Japanese semiconductor manufacturers. Sales in Japan accounted for approximately 9% of the Company's total net sales in both fiscal 1996 and fiscal 1997, 4% of total net sales in fiscal 1998 and 10% of total net sales for the first six months of fiscal 1999. To date, for its photoresist business, the Company has not fully developed a customer service and support capability in Japan and remains at a disadvantage in selling, servicing and supporting such products in Japan. The Japanese semiconductor market (including fabrication plants operated outside of Japan by Japanese semiconductor manufacturers) represents a substantial percentage of the worldwide semiconductor manufacturing capacity, and has been difficult for non-Japanese companies to penetrate. Furthermore, the licensing of products and process technologies by Japanese semiconductor manufacturers to non-Japanese semiconductor manufacturers has resulted in recommendations to use certain semiconductor capital equipment manufactured by Japanese companies. Late in fiscal 1995, the Company acquired its LCD division in Japan, but to date, this has not enabled the Company to significantly penetrate the photoresist removal market in Japan. As a relatively recent entrant, the Company is at a distinct competitive disadvantage in the Japanese market compared to leading Japanese suppliers, many of which have long-standing collaborative relationships with Japanese semiconductor manufacturers. 20 In addition, since 1992, Japanese semiconductor manufacturers have substantially reduced their levels of capital spending on new fabrication facilities and equipment, particularly over the past two years due to the overall downturn in the Japanese economy and the severe downturn in the worldwide semiconductor market, thereby, further increasing competitive pressures in the Japanese market. Although the Company is investing significant resources and has established a direct presence in Japan which has and will significantly increase operating expenses, there can be no assurance that the Company will be able to achieve significant sales to the Japanese semiconductor market, which failure could materially adversely affect the Company's business, financial condition and results of operations. INTERNATIONAL SALES International sales accounted for 54%, 55%, 45% and 43% of net sales in fiscal years 1996, 1997, 1998 and the first six months of fiscal 1999, respectively. The Company has established independent operations in the United Kingdom, Ireland, France, Italy, Korea, Japan, Singapore, Taiwan and Israel. The Company anticipates that international sales will continue to account for a significant portion of net sales. International sales are subject to certain risks, including unexpected changes in regulatory requirements, difficulty in satisfying existing regulatory requirements, exchange rates, foreign currency fluctuations, tariffs and other barriers, political and economic instability, potentially adverse tax consequences, natural disasters, outbreaks of hostilities, difficulties in accounts receivable collection, extended payment terms, difficulties in managing distributors or representatives and difficulties in staffing and managing foreign subsidiary and branch operations. The Company is also subject to the risks associated with the imposition of legislation and import and export regulations. The Company cannot predict whether tariffs, quotas, duties, taxes or other charges or restrictions will be implemented by the United States, Japan or any other country upon the importation or exportation of the Company's products in the future. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. INTELLECTUAL PROPERTY RIGHTS Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, it believes that its financial performance will depend more upon the innovation, technological expertise and marketing abilities of its employees than upon such protection. There can be no assurance that any of the Company's pending patent applications will be issued or that foreign intellectual property laws will protect the Company's intellectual property rights. There can be no assurance that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or, if patents are issued to the Company, design around the patents issued to the Company. As is typical in the semiconductor industry, the Company occasionally receives notices from third parties alleging infringement claims. Although there are currently no pending claims or lawsuits against the Company regarding any possible infringement claims, there can be no assurance that infringement claims against them by third parties or claims for indemnification by the Company's 21 customers resulting from infringement claims will not be asserted in the future against the Company or that such assertions, if proven to have merit, will not materially adversely affect the Company's business, financial condition and results of operations. If any such claims are asserted against the Company, the Company may seek to obtain a license under the third party's intellectual property rights if available on reasonable terms or at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims or enforce its proprietary rights. Such challenges could be extremely expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of operations. SOLE OR LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS; COMPLEXITY IN MANUFACTURING PROCESS Certain components, subassemblies and services necessary for the manufacture of the Company's systems are obtained from a sole supplier or a limited group of suppliers. Specifically, the Company relies on three companies for supply of the robotics, two other companies for microwave power supplies, two companies for platens, one company for magnetrons and one company for microwave applicators used in its products. The Company's LCD division in Japan is heavily dependent on one key supplier for quartz and ceramic fabrication used in its LPCVD systems. The Company is exploring alternative sources or technology to provide back up for critical materials when the primary suppliers are unable to deliver. In addition, the Company has been establishing longer term contracts with these suppliers to mitigate the potential risks of inadequate supply of required components and control over pricing and timely delivery of components and subassemblies. However, the Company is relying increasingly on outside vendors to manufacture certain components and subassemblies. The Company's reliance on sole or a limited group of suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components and subassemblies. Because the manufacture of certain of these components and subassemblies is an extremely complex process and requires long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur in the future. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture such components internally could significantly delay the Company's ability to ship its products, which could damage relationships with current and prospective customers and could have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE ACQUISITIONS In the future, the Company may pursue acquisitions of additional product lines, technologies or businesses. Future acquisitions by the Company may result in potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the 22 acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. From time to time, the Company has engaged in preliminary discussions with third parties concerning potential acquisitions of product lines, technologies and businesses; however, there are currently no agreements with respect to any such acquisition. In the event that such an acquisition does occur, there can be no assurance as to the effect thereof on the Company's business, financial condition or results of operations. DEPENDENCE ON KEY PERSONNEL The Company's financial performance will depend in significant part upon the continued contributions of its officers and key personnel, many of whom would be difficult to replace. The loss of any key person could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company's future operating results depend in part upon its ability to attract and retain other qualified management, engineering, financial and accounting, technical, marketing and sales and support personnel for its operations. Competition for such personnel is intense, particularity in the San Francisco Bay Area, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract or retain such persons could materially adversely affect the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATIONS The Company is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on the Company, suspension of production, alteration of its manufacturing process or cessation of operations. Such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject the Company to significant liabilities and could result in a material adverse effect on the Company's business, financial condition and results of operations. EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS As of March 31, 1999, the Company's officers, directors and members of their families who may be deemed affiliates of such persons beneficially owned approximately 22% of the Company's outstanding shares of Common Stock. Accordingly, these stockholders will be able to significantly influence the election of the Company's directors and the outcome of corporate actions requiring stockholder approval, such as mergers and acquisitions, regardless of how other stockholders of the Company may vote. Such a high level of ownership by such persons or entities may have a significant effect in delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of other holders of Common Stock. Certain provisions 23 of the Company's Certificate of Incorporation, 1994 Stock Option/Stock Issuance Plan, Bylaws and Delaware law may also discourage certain transactions involving a change in control of the Company. In addition to the foregoing, the ability of the Company's Board of Directors to issue preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a change in control of the Company. VOLATILITY OF STOCK PRICE The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's operating results, sales of the Company's Common Stock into the market place, failure to meet or changes in analysts' expectations, general conditions in the semiconductor industry or the worldwide economy, natural disasters, outbreaks of hostilities, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in patents or other intellectual property rights and developments in the Company's relationships with its customers and suppliers could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock market in general, and the market for shares of small capitalization stocks such as the Company's, in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. Moreover, in recent years the stocks of many companies in the semiconductor capital equipment business, including the stock of the Company, have declined substantially due to the worldwide semiconductor downturn. There can be no assurance that the market price of the Company's Common Stock will not continue to experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. The following proposals were voted upon by the Company's stockholders at the Annual Meeting of Stockholders held on March 4, 1999. 1. The following six directors nominated to serve until the next Annual Meeting or until their successors are elected and qualified, were elected by the stockholders.
VOTES BROKER VOTES FOR WITHHELD ABSTENTIONS NON-VOTES Dave Toole 11,907,508 292,860 - - F. Joseph Van Poppelen 11,955,625 244,743 - - Kenneth M. Thompson 11,951,967 248,401 - - Monte M. Toole 11,939,539 260,829 - - Kenneth Schroeder 11,955,718 244,650 - - Asuri Raghavan 11,948,364 252,004 - -
2. An amendment to the Company's 1994 Stock Option/Stock Issuance Plan (the "Option Plan") to increase the maximum number of shares of Common Stock authorized for issuance over the term of the Option Plan from 3,100,000 shares to 3,500,000 shares was not approved with 12,200,368 shares of the Company's voting securities voted on the matter, of which 5,629,282 were voted for the proposal, 6,546,093 were voted against, 24,993 were abstained from voting and there were no broker non-votes. 25 3. A proposal to ratify the appointment of Arthur Andersen LLP as independent auditors of the Company for the fiscal year ending September 30, 1999, was approved with 12,200,368 shares of the Company's voting securities were voted on the matter, of which 12,164,277 were voted for the proposal, 18,504 were voted against, 17,587 were abstained from voting and there were no broker non-votes. ITEM 5. OTHER INFORMATION. Effective April 2, 1999, Terry R. Gibson resigned as Vice President, Finance and Chief Financial Officer. The Company is in the process of finding a replacement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1999. 26 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GASONICS INTERNATIONAL CORPORATION (Registrant) /s/ Asuri Raghavan ---------------------------------- Date: May 6, 1999 By: Asuri Raghavan President/CEO (on behalf of the Registrant and as principal financial and accounting officer of the Registrant) /s/ John E. Arnold ---------------------------------- Controller (as Chief Accounting Officer) 27 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY NUMBERED PAGE 27 Financial Data Schedule
28 EX-27 2 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS SEP-30-1999 JAN-01-1999 MAR-31-1999 12,268 17,864 16,785 780 15,605 71,252 25,406 12,645 84,984 21,034 0 0 0 605 63,211 84,984 23,237 23,237 16,528 16,528 0 30 26 (12,858) 0 (12,858) 0 0 0 (12,858) (.90) (.90)
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