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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
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OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-17139
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GENUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of
incorporation or organization) 94-2790804
(I.R.S. Employer Identification Number)
1139 Karlstad Drive, Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 747-7120
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par
value
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 this 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 upon the closing sale price of the common stock on March 24,
2000 in the over-the-counter market as reported by the Nasdaq National Market,
was approximately $216,535,975. Shares of common stock held by each officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded 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 March 24, 2000, Registrant had 18,745,364 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-K Report: Proxy Statement for Registrant's 2000 Annual Meeting of
Shareholders - Items 10, 11, 12 and 13.
PART I
ITEM 1.
OVERVIEW
We are a leading supplier of advanced manufacturing systems for the
worldwide semiconductor industry. Semiconductor manufacturers use our leading
edge thin film deposition equipment and process technology to produce integrated
circuits, commonly called chips, that are incorporated into a variety of
products, including personal computers, communications equipment and consumer
electronics. We pioneered the development of chemical vapor deposition tungsten
silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, we are leading the commercialization of atomic
layer deposition, also known as ALD technology. This technology is designed to
enable a wide spectrum of thin film applications such as aluminum oxide,
tungsten nitride and other advanced dielectric and conducting metal barrier
materials for advanced integrated circuit manufacturing.
We also continue to develop enabling thin film technology that addresses
the scaling challenges facing the semiconductor industry relating to gate,
capacitor and interconnect materials. These challenges have been labeled as "red
zones" by the International Technology Roadmap for Semiconductors because there
are no known solutions that allow for further reduction in feature sizes and
improved performance. Our innovative thin film technology solutions are designed
to enable chip manufacturers to simplify and advance their integrated circuit
production processes and lower their total cost of manufacturing per chip, known
as cost of ownership.
We provide a production proven platform that is used for both the
development and production of new thin films in integrated circuit
manufacturing. This platform is based on common architecture and a high
percentage of common parts that is designed to provide manufacturers with high
reliability and low cost of ownership across a wide range of thin film
deposition applications. The modular design of our system permits manufacturers
to add capacity and service their manufacturing systems easily. In addition to
the modular platform architecture, our systems operate on a standardized
software that is designed to support a wide range of thin film deposition
processes. Furthermore, our patented process chamber design incorporated into
our flagship LYNX product family can be configured for chemical vapor
deposition, or CVD, plasma enhanced CVD, metal organic CVD and ALD with minimal
changes to the chamber design.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Our current customers include semiconductor
manufacturers such as Infineon Technologies, Micron Technology, Inc. and Samsung
Electronics Company, Ltd.
INDUSTRY BACKGROUND
The manufacture of a chip requires a number of complex steps and processes.
Most integrated circuits are built on a base of silicon, called a wafer, and
consist of two main structures. The lower structure is made up of components,
typically transistors or capacitors, and the upper structure consists of the
circuitry that connects the components. Building an integrated circuit requires
the deposition of a series of film layers, which may be conductors, dielectrics,
which are insulators, or semiconductors. The overall growth of the semiconductor
industry and the increasing complexity of integrated circuits have led to
increasing demand for advanced semiconductor equipment.
INDUSTRY DRIVERS: LOWERING THE COST PER FUNCTION AND INCREASING PERFORMANCE
The growth of computer markets and the emergence and growth of new markets
such as wireless communications and digital consumer electronics have
contributed to recent growth in the semiconductor industry. This increase also
has been fueled by the semiconductor industry's ability to supply increasingly
complex, higher performance integrated circuits, while continuing to reduce
cost. The more complex integrated circuits and the accompanying reductions in
feature size require more advanced and expensive wafer fabrication equipment and
increase the average cost of advanced wafer fabrication facilities.
Technological advances in semiconductor manufacturing equipment have
historically enabled integrated circuit manufacturers to lower cost per function
and improve performance dramatically by:
- - reducing feature size of integrated circuits and the introduction of new
materials with vertical scaled dimensions;
- - increasing the wafer size;
- - increasing manufacturing yields; and
- - improving the utilization of wafer fabrication equipment.
Reducing feature sizes and adding new enabling thin films. Smaller feature
sizes allow more circuits to fit on one wafer. These reductions have contributed
significantly to reducing the manufacturing cost per chip. The semiconductor
industry is driven by performance (mainly the increased speed for logic and
memory signals) and increased chip density (mainly the increased density of
memory and logic capacity). In addition to the continued reduction in feature
sizes, there is a paradigm shift for the use of new materials to improve
performance of integrated circuits. New materials are required for gate,
capacitor and interconnect application segments within the semiconductor
manufacturing process. The adoption of new types of thin film conducting and
insulating materials will accelerate the trend toward higher levels of
semiconductor performance and integration while maintaining historic trend of
reduction of cost per function.
Larger wafer sizes. By increasing the wafer size, integrated circuit
manufacturers can produce more circuits per wafer, thus reducing the overall
manufacturing costs per chip. Leading edge wafer fabrication lines are currently
using 200 millimeter wafers, up from the 100 millimeter wafers used ten to
fifteen years ago. Currently, some integrated circuit makers are commencing
pilot production lines using 300 millimeter wafers. We believe that many more
manufacturers will add 300 millimeter production capabilities within the next
two to five years.
Higher manufacturing yields. In the last fifteen years, manufacturing
yields, or the percentage of good integrated circuits per wafer, have increased
substantially, while the time to reach maximum yield levels during a production
lifecycle has decreased significantly. As the complexity of chips increases,
manufacturers must continually reduce defect density to obtain higher yields.
Improved equipment utilization and introducing new equipment architectures.
The utilization of semiconductor manufacturing lines has improved in the last
ten years. Manufacturing lines now operate continuously. In addition, new
architectures of production equipment are being explored that allow for higher
throughputs, better reliability, high quality, and low overall cost-of-ownership
as measured by the total cost to process each wafer through the equipment.
While these production techniques are important for reducing the cost per
function of chips, we believe that the most beneficial production solution is
likely to combine feature size reduction and the use of new thin film materials.
RED ZONE CHALLENGES FACING THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is driven by the need for higher performance and
greater chip density as measured by an increasing number of functions on the
chip. The semiconductor industry has historically been able to double the number
of transistors on a given space of silicon every 18 to 24 months by reducing
feature sizes. However, as the industry approaches feature size dimensions of
0.15 micron and below, the industry will face significant challenges and
roadblocks pertaining to improving device performance and feature size
reduction. These challenges have been labeled "red zones" by the International
Technology Roadmap for Semiconductors because there are no known solutions to
allow for further reduction in feature sizes and improved performance. It is
estimated that semiconductor manufacturers need approximately two to four years
to research, develop and commercially produce a new type of chip. Accordingly,
we expect semiconductor manufacturers to begin their research and development
activities as well as capital purchases to support those activities at least two
years before producing a new chip.
As part of its strategy to solve the challenges posed by the red zones, the
semiconductor industry is moving towards the use of ultra-thin dielectrics with
high insulating capabilities for gate dielectrics and capacitors as well as
ultra-thin metal barriers for copper-based interconnect processes. Emerging thin
films with high dielectric capabilities for gate and capacitor applications
include metal oxides such as aluminum oxide. In these ultra-thin dielectric film
applications, the thickness and quality must be highly controlled while the
films need to be deposited in a high-volume, cost-effective manner. Ultra-thin
metal nitride barrier films, such as those made of tungsten nitride, must be
developed to support copper-based interconnect schemes. Reduction of feature
size requires innovations in new types of thin film deposition technologies and
equipment to deposit new films.
THE GENUS SOLUTION
We are an innovative supplier to semiconductor manufacturers and are
focused on developing enabling thin film technology to solve the challenges
posed by the red zones. Our patented multi-purpose process chamber serves as the
foundation for all of our current products. Our products are designed to deliver
high throughput, low cost of ownership and quick time to market, enhancing the
ability of manufacturers to achieve productivity gains. We support our
innovative thin film deposition systems with a focused level of customer
service.
INNOVATIVE THIN FILM SOLUTIONS
Our systems and processes are designed to provide innovative thin film
solutions that address technical and manufacturing problems of the semiconductor
industry. We provide our customers with advanced systems and processes for
depositing thin films such as CVD tungsten silicide, tungsten nitride, copper
barrier seed films and ALD dielectrics such as aluminum oxide. These innovative
thin films solve certain key device and interconnect problems faced by
semiconductor manufacturers as they scale their device geometries below 0.15
micron.
VERSATILE PRODUCTION PLATFORM
Our Lynx series of systems is based on a common outsourced, reliable
wafer-handling robotic platform. The Lynx systems are designed to be flexible
and can be configured for multiple deposition processes, such as CVD, plasma
enhanced CVD, metal organic CVD and ALD. Our Lynx systems offer the following
advantages:
- - a production-proven platform which allows for easier and faster migration
from research and development to production;
- - a platform based upon a large number of standardized parts used across our
systems to enhance reliability; and
- - a modular design that allows for simplified service.
In addition, all of our systems are designed with a graphical user
interface that automates tasks and allows for comprehensive viewing of the
real-time status of the systems. Our software supports our customers' process
development needs with the ability to run a different set of processes for each
wafer.
LOW COST OF OWNERSHIP
The Lynx series offers low cost of ownership by focusing on wafer handling
platform reliability, high throughput deposition processes, advanced software
architecture and a proprietary, production-proven process chamber design. For
example, in production mode of tungsten silicide films the Lynx2 system has
proven itself reliable with consistent 90-95% availability. Based on customer
feedback, we estimate that the mean time between failure of our system is
typically between 300 to 450 hours. We are committed to achieving these same
levels of performance with our new thin film products.
CUSTOMER SUPPORT
We believe we deliver superior customer support and service to enhance our
long-term customer relationships. We maintain an international customer support
infrastructure with fully staffed customer support facilities in Japan, Korea
and the United States. We provide training for two customer engineers with all
of our equipment installations as well as 24 hours a day, seven days a week
product support. We offer warranties consisting of a two-year parts warranty and
a one-year labor warranty that provides a dedicated technician on site. We are
currently developing a system to allow our customers to procure parts online.
MARKETS AND APPLICATIONS
In 1999 we expanded our product line to include new thin film applications
that allow us to reach broader markets than previously addressed by our
products. Prior to such expansion, our products only addressed the silicide
metal thin film market, estimated to be approximately $250 million as of the end
of 1999. Currently, our products serve silicide metal gate, barrier metal and
dielectric materials. According to VLSI Research, the aggregate market for these
three thin film applications is expected to grow at a 26% compound annual growth
rate from approximately $800 million in 1999 to approximately $2 billion in
2003. By focusing on broader thin film markets, we believe we are able to reduce
our dependence on the volatile commodity dynamic random access memory, or DRAM,
market and benefit from other high-growth and high value-added semiconductor
markets such as microprocessors and advanced logic chips. We believe we are well
positioned to take a leadership role in providing thin film solutions to this
fast-growing market that targets red zone challenges.
We focus on the following three thin film market segments:
SILICIDE AND METAL CVD GATE FILMS
CVD tungsten silicide is used to reduce the electrical resistance of the
gate material in a transistor device structure. Our tungsten silicide gate thin
films are used in DRAM integrated circuit production. In the future, we expect
the tungsten gate material to migrate from tungsten silicide to the low
resistance tungsten gate films, such as RInG that we have developed.
BARRIER METAL INTERCONNECT THIN FILMS
We are currently commercializing new thin film CVD barrier metal films such
as tungsten nitride. CVD tungsten nitride has better film characteristics and
can more uniformly cover device structures than conventional physical vapor
deposition barrier thin films such as titanium nitride. We expect our CVD
tungsten nitride barrier thin films to have applications in multi-layer copper
interconnect processes.
GATE AND CAPACITOR DIELECTRIC THIN FILMS
Alternative new gate and capacitor dielectric thin films such as aluminum
oxide provide better dielectric characteristics than conventional silicon oxide
dielectrics. We intend to use our advanced ALD and CVD process expertise to
target these emerging dielectric applications.
PRODUCTS AND TECHNOLOGY
We have developed our product strategy around the Lynx system concept. The
Lynx system integrates platform and process modules with our standardized
operating software. The Lynx system refers specifically to the vacuum robotic
wafer handler and its wafer controlling software. The Lynx process modules are
generically appropriate for CVD, plasma enhanced CVD, metal organic CVD and ALD
technologies.
All of our current thin film systems are built on a common platform and
marketed in the context of the Lynx series. Each Lynx product includes wafer
handling robotics, dual loadlocks, control electronics and system software. The
Lynx system can be used for the deposition of advanced dielectrics and copper
ultra-thin barrier seed. The Lynx product line addresses both 200 and 300
millimeter wafer sizes and is designed for the deposition of the following thin
film applications:
- - tungsten silicide-monosilane
- - tungsten silicide-dichlorosilane
- - tungsten nitride (plasma enhanced CVD, RInG)
- - tungsten nitride (CVD, Ca'ts)
- - copper barrier seed (CBS)
- - aluminum oxide
- - advanced metal oxides (under development)
- - copper ultra-thin barrier seed (under development)
LYNX SERIES
LYNX2. The LYNX2 system is currently used in production by manufacturers of
advanced DRAM devices of 0.35 to 0.18 micron. LYNX2 systems support over 120
process modules in high volume production. Production availability for the LYNX2
system runs from 90-95%. LYNX2 platforms are also used for customer development
and pilot manufacturing for more advanced semiconductor applications below 0.18
micron. The LYNX2 features a wafer handling platform that is compatible with the
Modular Equipment Standards Committee. This platform uses a centrally located,
dual-end effector robot for high throughput operation. The system is controlled
by a graphical user interface that provides the operator with real-time
information such as recipe, set points, hardware status and service features.
The modular design of the LYNX2 allows the addition of up to four process
modules, which can be run serially or in parallel. The LYNX2 process module
design also offers a multi-zone resistive heater for more uniform wafer heating,
two-zone showerheads for improved film composition uniformity and a
state-of-the-art gas delivery system that minimizes chamber-to-chamber variance.
In the case of ALD, fast gas switching has been developed for high productivity
ALD.
LYNX3. We introduced the LYNX3 in January 1999 as our first 300 millimeter
low pressure CVD process module in a beta system. The LYNX3 process module is
based on a newly developed and patented process chamber concept that results in
exceptional uniformity. The LYNX3 is designed to run all films currently
supported by the LYNX2, as well as all films currently in development. The LYNX3
system will support up to five process modules, which can be run serially or in
parallel. We are currently developing an advanced version of the LYNX3, which is
designed to be a "bridge tool", capable of running either 200 or 300 millimeter
wafers.
The range of thin films that can be deposited using the LYNX product family
include:
- - Tungsten Silicide. In addition to our mainstream production silane-based
tungsten silicide film, we offer dichlorosilane LRS silicide, a low resistivity,
low stress CVD tungsten silicide. DRAM manufacturers can use LRS tungsten
silicide for increased yields and faster device speeds.
- - RInG. We introduced the industry's first plasma enhanced CVD tungsten
nitride barrier film in 1997, Rapid Integrated Gate or RInG. The application is
for tungsten gates with a built-in tungsten nitride barrier that can be rapidly
integrated for gates using rapid thermal annealing processes. Tungsten nitride
acts as a superior barrier even when deposited to a thickness of 100 angstroms.
This film also has the potential for broadening our customer base by bringing
our thin film products into the application specific integrated circuit and
logic market, through local interconnect applications. We believe RInG to be a
superior barrier for copper diffusion relative to titanium nitride and can be
used as an adhesion layer for blanket tungsten.
- - Ca'ts. In November 1998, we introduced a CVD tungsten nitride film,
Capacitor Electrodes or Ca'ts. This film may offer significant advantages in the
production of next generation DRAM devices. Tungsten nitride enables
gigabit-scale DRAM device production by serving as a barrier electrode for
tantalum oxide capacitors. Tungsten nitride, when used as an electrode material,
results in lower leakage for tantalum oxide capacitors compared to other
electrode materials, such as titanium nitride. Our CVD technique to deposit
tungsten nitride uniformly and conformally coats the intricate structures that
are present in advanced DRAM capacitors. We believe that Ca'ts gives us the
advantage of controlling particles and repeatability to levels consistent with
our customers' near-term production requirements.
- - CBS. In November 1998, we introduced the first all CVD-based integrated
approach for copper barrier seed, or CBS, for advanced metallization. CBS
enables efficient scaling of copper metallization to the 0.10 micron generation
and beyond, and is based on a well-established low temperature, highly conformal
plasma enhanced CVD tungsten nitride barrier film.
- - ALD Dielectrics. In July 1999, we announced the availability of ALD
aluminum oxide. ALD has many possible applications in the semiconductor market
including as a high dielectric constant oxide for either capacitors or for gate
dielectrics, as an etch stop for advanced structures, or for hard mask
applications. We intend to make available other advanced ALD dielectrics during
2000. We believe that our ALD aluminum oxide technology will find near-term
opportunities in the DRAM capacitor application. Other ALD dielectrics will find
longer-term applications in both capacitor and gate dielectric structures.
Genus 8700 Series and 6000 Series. While we no longer actively sell these
thin film products, we continue to sell spare parts and provide service for the
installed base worldwide.
CUSTOMER SUPPORT
We believe that our customer support organization is critical to
establishing and maintaining the long-term customer relationships that often are
the basis upon which semiconductor manufacturers select their equipment vendor.
Our customer support organization is headquartered in Sunnyvale, California with
additional employees located in Japan and South Korea. Our support personnel are
available on a 24-hour a day, seven days a week basis with a maximum one hour
response time. All support personnel have technical backgrounds, with process,
mechanical and electronics training, and are supported by our engineering and
applications personnel. Support personnel install systems, perform warranty and
out-of-warranty service and provide sales support.
We offer a 12 month labor warranty and a 24 month parts warranty. Our labor
warranty includes having on-site dedicated support technician during the labor
warranty period. We also offer training to our customers at our headquarters.
SALES AND MARKETING
We sell and support our systems through direct sales and customer support
organizations in the United States, South Korea and Japan and through six
independent sales representatives and distributors in the United States, Europe
and Asia. We distribute spare parts from depots in Sunnyvale, California,
Austin, Texas, The Netherlands and South Korea.
CUSTOMERS
Our current customers include Infineon, Micron and Samsung. We rely on a
limited number of customers for a substantial portion of our net sales. For
example, Samsung Electronics and Micron Technology accounted for 84% and 11% of
our net sales in 1999, respectively. In 1998, Samsung Electronics, Advanced
Micro Devices and Micron Technology accounted for 28%, 15% and 12% of our net
sales, respectively. In 1998, Samsung Electronics accounted for 68% of our thin
film net sales.
BACKLOG
We schedule production of our systems based on both backlog and regular
sales forecasts. We include in backlog only those systems for which we have
accepted purchase orders and assigned shipment dates within the next 12 months.
All orders are subject to cancellation or delay by the customer with limited or
no penalty. Our backlog was approximately $14 million as of December 31, 1999
and approximately $0.3 million as of December 31, 1998. In addition, we received
a new ALD technology system purchase order from Infineon Technologies in
February 2000 which is not included in the 1999 backlog. The year-to-year
fluctuation is due primarily to the cyclical nature of the semiconductor
industry. Our backlog at any particular date is not necessarily representative
of actual sales to be expected for any succeeding period, and our actual sales
for the year may not meet or exceed the backlog represented. Because of possible
changes in delivery schedules and cancellations of orders, our backlog at any
particular date is not necessarily representative of actual sales for any
succeeding period. In particular, during periods of industry downturns we have
experienced significant delays relating to orders that were previously booked
and included in backlog.
RESEARCH AND DEVELOPMENT
We focus our research and development efforts on developing innovative thin
film products. During recent periods, we have devoted a significant amount of
resources to the Lynx2 and Lynx3 systems and ALD films. We expect to focus our
future efforts on our Lynx ALD system for 200 and 300 millimeter applications
for advanced film technologies. We maintain a Class 1 applications laboratory
and a separate thin films development area in California. By basing our products
on the Lynx system, we believe that we can focus our development activities on
the process chamber and develop new products quickly and at relatively low cost.
Our research and development expenses were $5.4 million for 1999, $8.9
million for 1998 and $12.3 million for 1997, representing 18.9%, 27.5% and 14.6%
of net sales, respectively. Our research and development expenses were lower in
1999 due to expenses associated with the ion implant product line, which was
sold to Varian Associates in July 1998. Research and development expenses
associated with our current thin film product line were $5.4 million for 1999,
$5.4 million for 1998 and $5.5 million for 1997, representing 18.9% of thin film
net sales in 1999, 47.7% in 1998 and 20.2% in 1997.
The worldwide semiconductor industry is characterized by rapidly changing
technology, evolving industry standards and continuous improvements in products
and services. Because of continual changes in these markets, we believe that our
future success will depend upon our ability to continue to improve our existing
systems and process technologies, and to develop systems and new technologies
that compete effectively. We must adapt our systems and processes to
technological changes and to support emerging industry standards for target
markets. We cannot be sure that we will complete our existing and future
development efforts within our anticipated schedule or that our new or enhanced
products will have the features to make them successful.
We may experience difficulties that could delay or prevent the successful
development, introduction or marketing of new or improved systems or process
technologies. These new and improved systems and process technologies may not
meet the requirements of the marketplace and achieve market acceptance.
Furthermore, despite testing by us, difficulties could be encountered with our
products after shipment, resulting in loss of revenue or delay in market
acceptance and sales, diversion of development resources, injury to our
reputation or increased service and warranty costs. The success of new system
introductions is dependent on a number of factors, including timely completion
of new system designs and market acceptance. If we are unable to improve our
existing systems and process technologies or to develop new technologies or
systems, we may lose sales and customers.
COMPETITION
The global semiconductor fabrication equipment industry is intensely
competitive and is characterized by rapid technological change and demanding
customer service requirements. Our ability to compete depends upon our ability
to continually improve our products, processes and services and our ability to
develop new products that meet constantly evolving customer requirements.
A substantial capital investment is required by semiconductor manufacturers
to install and integrate new fabrication equipment into a semiconductor
production line. As a result, once a semiconductor manufacturer has selected a
particular supplier's products, the manufacturer often relies for a significant
period of time upon that equipment for the specific production line application
and frequently will attempt to consolidate its other capital equipment
requirements with the same supplier. It is difficult for us to sell to a
particular customer for a significant period of time after that customer has
selected a competitor's product, and it may be difficult for us to unseat an
existing relationship that a potential customer has with one of our competitors
in order to increase sales of our products to that customer.
Each of our product lines competes in markets defined by the particular
wafer fabrication process it performs. In each of these markets we have multiple
competitors. At present, however, no single competitor competes with us in all
of the same market segments in which we compete. Competitors in a given
technology tend to have different degrees of market presence in the various
regional geographic markets. Competition is based on many factors, primarily
technological innovation, productivity, total cost of ownership of the systems,
including yield, price, product performance and throughput capability, quality,
contamination control, reliability and customer support. We believe that our
competitive position in each of our markets is based on the ability of our
products and services to address customer requirements related to these
competitive factors.
We compete principally with other methods of thin film deposition, such as
CVD and physical vapor deposition, in the overall thin film systems market. Our
direct competitors in the tungsten silicide market includes Applied Materials,
Inc. and Tokyo Electron, Ltd. Competition from these competitors increased in
1999 and we expect that such competition will continue to intensify. We believe
that we compete favorably on each of the competitive elements in this market.
We also compete in the market for CVD and physical vapor deposition
barrier, copper barrier seed and tungsten barrier combination films. Our
principal competitors in these markets are Applied Materials, Novellus Systems,
Inc., ULVAC Technologies, Inc. and Tokyo Electron. Our principal competitor with
respect to our ALD systems is ASM International.
We may not be able to maintain our competitive position against current and
potential competition. New products, pricing pressures, rapid changes in
technology and other competitive actions from both new and existing competitors
could materially affect our market position. Some of our competitors have
substantially greater installed customer bases and greater financial, marketing,
technical and other resources than we do and may be able to respond more quickly
to new or changing opportunities, technologies and customer requirements. Our
competitors may introduce or acquire competitive products that offer enhanced
technologies and improvements. In addition, some of our competitors or potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged to gain market share to our detriment. We believe that the
semiconductor equipment industry will continue to be subject to increased
consolidation, which will increase the number of larger, more powerful companies
and increase competition.
MANUFACTURING AND SUPPLIERS
Our manufacturing operations are based in our Sunnyvale, California
facility and consist of procurement, subassembly, final assembly, test and
reliability engineering. Our manufacturing facility maintains and operates a
Class-1 cleanroom to demonstrate integrated applications with its customers. The
LYNX family systems are based on an outsourced wafer handling platform, enabling
us to use a large number of common subassemblies and components. Many of the
major assemblies are procured completely from outside sources. We focus our
internal manufacturing efforts on those precision mechanical and
electro-mechanical assemblies that differentiate our systems from those of our
competitors.
Most of the components for our thin film systems are produced in
subassemblies by independent domestic suppliers according to our design and
procurement specifications. We anticipate that the use of such subassemblies
will continue to increase in order to achieve additional manufacturing
efficiencies. Many of these components are obtained from a limited group of
suppliers. We generally acquire these components on a purchase order basis and
not under long-term supply contracts. Our reliance on outside vendors generally,
and a limited group of suppliers in particular, involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing and timely delivery of components.
Because the manufacture of certain of these components and subassemblies is
an extremely complex process and can require long lead times, we could
experience delays or shortages caused by suppliers. Historically, we have not
experienced any significant delays in manufacturing due to an inability to
obtain components, and we are not currently aware of any specific problems
regarding the availability of components that might significantly delay the
manufacturing of our systems in the future. However, the inability to develop
alternate sources or to obtain sufficient source components as required in the
future, could result in delays of product shipments that would have a material
adverse effect on our business, results of operations and financial condition.
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during our sales demonstrations and research and development.
Failure to comply with present or future regulations could result in substantial
liability to us, suspension or cessation of our operations, restrictions on our
ability to expand at our present locations or requirements for the acquisition
of significant equipment or other significant expense. To date, we have
adequately complied with environmental rules and regulations. Such compliance
has not materially effected our operations.
INTELLECTUAL PROPERTY
We believe that because of the rapid technological change in the
semiconductor industry, our future prospects will depend primarily upon the
expertise and creative skills of our personnel in process technology, new
product development, marketing, application engineering and product engineering,
rather than on patent protection. Nevertheless, we have a policy to actively
pursue domestic and foreign patent protection to cover technology developed by
us. We hold 23 United States patents with seven patent applications pending in
the United States as well as several foreign patents and patent applications
covering various aspects of our products and processes. Where appropriate, we
intend to file additional patent applications to strengthen our intellectual
property rights.
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we cannot be sure that we
will be able to protect our technology adequately, and our competitors could
independently develop similar technology, duplicate our products or design
around our patents. To the extent we wish to assert our patent rights, we cannot
be sure that any claims of our patents will be sufficiently broad to protect our
technology or that our pending patent applications will be approved. In
addition, there can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented, that any rights granted under these
patents will provide adequate protection to us, or that we will have sufficient
resources to protect and enforce our rights. In addition, the laws of some
foreign countries may not protect our proprietary rights to as great an extent
as do the laws of the United States.
As is customary in our industry, from time to time we receive or make
inquiries regarding possible infringement of patents or other intellectual
property rights. Although there are no pending claims against us regarding
infringement of any existing patents or other intellectual property rights or
any unresolved notices that we are infringing intellectual property rights of
others, such infringement claims could be asserted against us or our suppliers
by third parties in the future. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays,
subject us to significant liabilities to third parties, require us to enter into
royalty or licensing agreements, or prevent us from manufacturing and selling
our products. If our products were found to infringe a third party's proprietary
rights, we could be required to enter into royalty or licensing agreements in
order to continue to be able to sell our products. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business. Our involvement in any patent
dispute or other intellectual property dispute or action to protect trade
secrets and know-how could have a material adverse effect on our business.
EMPLOYEES
As of February 29, 2000, we employed 91 full-time employees. The success of
our future operations depends in large part on our ability to recruit and retain
qualified employees, particularly those highly skilled design, process and test
engineers involved in the manufacture of existing systems and the development of
new systems and processes. The competition for such personnel is intense,
particularly in the San Francisco Bay Area, where our headquarters is located.
At times we have experienced difficulty in attracting new personnel, and we may
not be successful in retaining or recruiting sufficient key personnel in the
future. None of our employees is represented by a labor union, and we have never
experienced a work stoppage, slowdown or strike. We consider our relationships
with our employees to be good.
SALE OF ASSETS
In July 1998, we sold selected assets and transferred selected liabilities
related to the MeV ion implant equipment product line to Varian Associates, Inc.
MeV Ion Implant Market
Ion implantation is the process by which a beam of electrically charged
dopant atoms (ions) are accelerated and driven into the surface of a silicon
wafer. This process alters the electrical characteristics of the silicon by
making it more or less conductive.
The market for ion implanters consisted of three primary segments: high
current, medium current and high energy. High and medium current ion implanters
made up approximately 67% of the total ion implant market in 1998.
Ion implant sales accounted for 65% and 68% of total revenues for 1998 and
1997, respectively.
Information regarding our foreign and domestic operations and export sales
is included in Note 12 of Notes to Consolidated Financial Statements.
MeV Ion Implant Products
The Kestrel Family of Ion Implanters. Introduced in July 1997, Genus'
fourth-generation of implanters, the Kestrel Family, offered high productivity
manufacturing, low cost-of-ownership and flexibility for MeV, medium current
backup, chained implants, mainstream retrograde well and advanced well
applications.
Kestrel 650 and 750. The Kestrel 650 had been optimized to meet the
requirements of established retrograde well applications that require a lower
price/performance point. The accelerator design was the same as that of the
Tandetron 1520 that was used worldwide for retrograde well, research and
development, as well as production applications. The Kestrel 750, the most
recent addition to the Kestrel family, was best used for advanced well
applications such as triple wells and Genus developed and patented Buried
Implanted Layer for Lateral Isolation, or BILLI.
Tandetron 1520 and Genus 1510. Introduced in 1995 and 1992, respectively,
the Tandetron 1520 and Genus 1510 were our previous generation MeV ion implant
products. While we no longer actively sold these products, we did continue to
provide service and sell spare parts for these products pursuant to service and
spare parts purchase agreements until the sale of assets to Varian Associates,
Inc.
A representative list of our ion implant customers included: Advanced Micro
Devices, Atmel Corp., Fujitsu, Macrotron, Micron Technology, Newport Wafer-Fab
Ltd., Philips Semiconductor, Samsung Electronics, SGS-Thomson, and Symbios
Logic. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Risk Factors-Reliance on a Small Number of Customers and
Concentration of Credit Risk."
RECENT DEVELOPMENTS
In February 2000, we received a purchase order from a new customer for an
ALD system, which will ship during the first quarter of 2000.
ITEM 2. PROPERTIES
We maintain our headquarters, manufacturing and research and development
operations in Sunnyvale, California. We have a lease for a facility totaling
approximately 100,500 square feet. Approximately 40,000 square feet is currently
being sub-leased to third parties. This lease expires in October 2002, with a
current annual rental expense of approximately $772,000. We also lease sales and
support offices in Seoul, South Korea. We believe that our existing facilities
are adequate to meet our current requirements and that suitable additional or
substitute space will be available as needed. However, our future growth may
require that we secure additional facilities or expand our current facilities
further before the term of our headquarters lease expires. Any move to new
facilities or expansion could be disruptive and cause us to incur significant
unexpected expense.
ITEM 3. LEGAL PROCEEDINGS
We recently settled an arbitration with Varian Associates, Inc. relating to
the sale of our ion implant product line to Varian in July 1998. The original
dispute involved the rights to one ion implant product sale and related
inventory. The dispute was settled prior to arbitration in January 2000. As part
of the final settlement, Varian received the ion implant product and we recorded
a non-recurring charge of $543,000 relating to a write-off of a receivable from
Varian.
We have been named as a defendant in a claim involving an automobile
accident by one of our former employees which resulted in the death of an
individual. Significant general, punitive and exemplary damages are being sought
by the plaintiffs. We believe we are not at fault in this matter, and we intend
to defend this claim vigorously. While the outcome of this matter is not
presently determinable, we do not believe that resolution of this matter will
have a material adverse effect on our financial position or results of
operations.
We may in the future be party to litigation arising in the course of our
business, including claims that we allegedly infringe third party trademarks and
other intellectual property rights. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Information
Our common stock is traded in the over-the-counter market under the NASDAQ
symbol GGNS. The high and low last sales prices for 1999 and 1998 set forth
below are as reported by the NASDAQ National Market System. At March 24, 2000,
we had 403 registered shareholders as reported by ChaseMellon Shareholder
Services.
1999 1998
--------------- -----------------
HIGH LOW HIGH LOW
------ ------- -------- -------
First Quarter. $2-7/16 $ 1-5/32 $3-3/16 $ 2
Second Quarter 3-3/8 1-1/4 2-7/16 1
Third Quarter. 3-3/4 2-9/32 1-7/16 3/4
Fourth Quarter 5-7/16 1-31/32 1-17/32 11/16
We have not paid cash dividends on our common stock since inception, and
our Board of Directors presently intends to reinvest our earnings, if any, in
our business. Accordingly, it is anticipated that no cash dividends will be paid
to holders of common stock in the foreseeable future. Additionally, our $10
million accounts receivable based line of credit does not allow for the
distribution of dividends.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated statement of operations data and
consolidated balance sheet data for each of the five years in the period ended
December 31, 1999 are derived from our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The historical results
are not necessarily indicative of results to be expected in any future period.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998(1) 1997 1996 1995
---------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 28,360 $ 32,431 $ 84,286 $ 82,509 $100,350
Costs and expenses:
Costs of goods sold. . . . . . . . . . . . . . . . . 16,628 24,201 54,762 55,537 61,111
Research and development . . . . . . . . . . . . . . 5,368 8,921 12,327 14,639 12,259
Selling, general and administrative. . . . . . . . . 7,931 14,115 20,326 17,901 19,004
Restructuring and other(2)(3). . . . . . . . . . . . 543 12,707 0 5,890 0
---------- --------- --------- --------- --------
Income (loss) from operations. . . . . . . . . . . . . (2,109) (27,513) (3,129) (11,458) 7,976
Other income (expense), net. . . . . . . . . . . . . . 669 (86) (1,363) 53 327
---------- --------- --------- --------- --------
Income (loss) before provision for income taxes. . . . (1,440) (27,599) (4,492) (11,405) 8,303
Provision for (benefit from) income taxes. . . . . . . 177 1 14,844 (2,200) 10,979
---------- --------- --------- --------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . (1,617) (27,600) (19,336) (9,205) 19,282
Deemed dividends on preferred stock. . . . . . . . . . 0 (1,903) 0 0 0
---------- --------- --------- --------- --------
Net income (loss) attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . $ (1,617) $(29,503) $(19,336) $ (9,205) $ 16,063
========== ========= ========= ========= ========
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . (0.09) (1.71) (1.15) (0.56) 1.26
Diluted. . . . . . . . . . . . . . . . . . . . . . . . (0.09) (1.71) (1.15) (0.56) 1.20
Shares used in computing net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . 18,134 17,248 16,860 16,423 15,334
Diluted. . . . . . . . . . . . . . . . . . . . . . . 18,134 17,248 16,860 16,423 16,063
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . $ 6,739 $ 8,125 $ 8,700 $11,827 $12,630
Working capital. . . . . . . . . . . . . . . . . 14,151 15,799 30,774 39,290 50,061
Total assets . . . . . . . . . . . . . . . . . . 27,744 31,827 76,738 89,132 95,247
Long-term debt and capital lease obligations . . 0 50 971 1,260 1,034
Redeemable Series B convertible preferred stock. 0 773 0 0 0
Total shareholders' equity . . . . . . . . . . . $ 19,378 $19,953 $48,357 $68,251 $75,361
(1) In 1998, we sold the ion implant equipment product line.
(2) In 1996, we incurred a charge of $5.9 million relating primarily to payroll costs associated
with the reduction in workforce and inventory and demonstration equipment write-downs.
(3) In 1998, we recorded a restructuring charge related to the sale of the ion implant
equipment product line and the restructuring of the thin film operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. In addition to historical
information, the discussion in this Annual Report on Form 10-K contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth under
"Risk Factors" and elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We are a leading supplier of advanced manufacturing systems for the
worldwide semiconductor industry. Semiconductor manufacturers use our leading
edge thin film deposition equipment and process technology to produce integrated
circuits, commonly called chips, that are incorporated into a variety of
products, including personal computers, communications equipment and consumer
electronics. We pioneered the development of chemical vapor deposition tungsten
silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, we are leading the commercialization of atomic
layer deposition, also known as ALD technology. This technology is designed to
enable a wide spectrum of thin film applications such as aluminum oxide,
tungsten nitride and other advanced dielectric and conducting metal barrier
materials for advanced integrated circuit manufacturing.
We also continue to develop enabling thin film technology that addresses
the scaling challenges facing the semiconductor industry relating to gate,
capacitor and interconnect materials. These challenges have been labeled as "red
zones" by the International Technology Roadmap for Semiconductors because there
are no known solutions that allow for further reduction in feature sizes and
improved performance. Our innovative thin film technology solutions are designed
to enable chip manufacturers to simplify and advance their integrated circuit
production processes and lower their total cost of manufacturing per chip, known
as cost of ownership.
We provide a production proven platform that is used for both the
development and production of new thin films in integrated circuit
manufacturing. This platform is based on common architecture and a high
percentage of common parts that is designed to provide manufacturers with high
reliability and low cost of ownership across a wide range of thin film
deposition applications. The modular design of our system permits manufacturers
to add capacity and service their manufacturing systems easily. In addition to
the modular platform architecture, our systems operate on a standardized
software that is designed to support a wide range of thin film deposition
processes. Furthermore, our patented process chamber design incorporated into
our flagship LYNX product family can be configured for chemical vapor
deposition, or CVD, plasma enhanced CVD, metal organic CVD and ALD with minimal
changes to the chamber design.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Our current customers include semiconductor
manufacturers such as Infineon Technologies, Micron Technology, Inc. and Samsung
Electronics Company, Ltd.
In July 1998, we sold certain assets and transferred certain liabilities
related to the MeV ion implant equipment product line to Varian Associates, Inc.
for approximately $24.1 million. The net assets and liabilities we transferred
to Varian included inventory of $18.9 million, capital equipment and other
assets of $9.7 million, and warranty and installation liabilities of $3.6
million. We no longer engage in the ion implant business and have refocused our
efforts on thin film deposition. In connection with the Varian transaction and
the refocusing of our business on thin film products, we significantly reduced
our workforce at our Sunnyvale, California location.
In 1998, we recorded a restructuring and other charge of approximately
$12.7 million which included personnel changes of $1.7 million associated with
our workforce reduction, $5.4 million in inventory write-downs, $1.1 million in
leasehold improvement write-offs, $1.4 million for expenses associated with the
closing of several sales offices, transaction losses as a result of the sale of
the ion implant product line to Varian, $1.0 million for legal, accounting, and
banking fees associated with the Varian transaction and $2.0 million for ion
implant inventory related to the dispute with Varian in connection with the
Varian transaction.
In 1999, substantially all of our sales were derived from Lynx2 system
shipments for the tungsten silicide process application. We shipped two new Lynx
products in 1999 which accounted for 11% of total net sales in 1999. We
anticipate a greater percentage of our revenue to be generated from new products
in 2000 and beyond, because we believe that industry demand for these new
technologies will continue to increase.
Over the past few years, we were dependent on one customer, Samsung, for a
majority of our thin film product revenue. Samsung accounted for 83.9% of our
net sales in 1999 and 68.0% in 1998. There is no long-term agreement between us
and Samsung. In 1999, we shipped our Lynx2 system to a new customer, Micron
Technology, and in the first quarter of 2000, received a purchase order for an
ALD system from Infineon Technologies, also a new customer.
Revenue related to systems has been generally recognized upon shipment.
Occasionally, revenue has been recognized on certain transactions where, prior
to shipment and upon completion of customer source inspection and factory
acceptance of the system, risk of loss and title to the system passes to the
customer. A provision for the estimated future cost of system installation,
warranty and commissions is recorded when revenue is recognized. See " Recent
Accounting Pronouncements" and "Risk Factors Our quarterly financial results
fluctuate significantly and may fall short of anticipated levels, which could
cause our stock price to decline."
Our business depends upon capital expenditures by semiconductor
manufacturers. The level of capital expenditures by these manufacturers depends
upon the current and anticipated market demand for devices which use integrated
circuits. The semiconductor industry suffered a significant downturn beginning
in late 1997. This was a result of several factors, including the economic
crisis in Asia, semiconductor industry over-capacity and reduced profitability
for semiconductor manufacturers resulting from the decreasing prices of personal
computers. Accordingly, many semiconductor manufacturers delayed planned new
equipment purchases until 1999, which significantly impacted our 1998 sales. The
overall market improved throughout 1999, and accordingly we experienced higher
thin film sales in 1999 compared with 1998. The cyclical nature of the
semiconductor equipment market continues to present challenges to us in terms of
our ability to forecast both near and long-term sales. As such, we cannot assure
you that this increase in sales represents a trend that will continue into the
future.
International net sales, predominantly to customers based in South Korea,
accounted for 86.5% of total net sales in 1999, 56.7% of total net sales in 1998
and 74% of total net sales in 1997. To date, all sales have been denominated in
U.S. dollars. We anticipate that international sales, and in particular from
South Korea, will continue to account for a significant portion of our total net
sales.
The local currency is the functional currency for our foreign operations in
South Korea and Japan. All other currency is dollar denominated. Gains or losses
from translation of foreign operations where the local currencies are the
functional currency are included as a component of shareholders' equity. Foreign
currency transaction gains and losses are recognized in the statement of
operations.
In order to support our business strategy, we will be required to make
significant investments in research and development. In addition, we believe
selling, general and administrative costs will increase as sales volumes
increase. We depend on increases in sales in order to attain profitability. If
our sales do not increase, our current operating expenses could prevent us from
attaining profitability and harm our financial results.
RESULTS OF OPERATIONS
The following table sets forth, expressed as a percentage of total net
sales, certain consolidated statements of income data for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
--------- ------- -------
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . . . 58.6 74.6 65.0
Research and development . . . . . . . . . . . . . 18.9 27.5 14.6
Selling, general and administrative. . . . . . . . 28.0 43.5 24.1
Restructuring and Other. . . . . . . . . . . . . . 1.9 39.2 0
--------- ------- -------
Loss from operations. . . . . . . . . . . . . . . . (7.4) (84.8) (3.7)
Other income (expense), net. . . . . . . . . . . . . 2.3 (0.3) (1.6)
--------- ------- -------
Loss before provision for income taxes. . . . . . . (5.1) (85.1) (5.3)
Provision for income taxes . . . . . . . . . . . . . 0.6 0 17.6
--------- ------- -------
Net loss. . . . . . . . . . . . . . . . . . . . . . (5.7)% (85.1)% (22.9)%
========= ======= =======
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET SALES. Net sales in 1999 were $28.4 million compared with net sales of
$32.4 million in 1998, representing a decrease of 12.6%. The decline in our net
sales was primarily due to the divestiture of the ion implant product line to
Varian, which contributed $21.1 million of net sales in 1998 and none in 1999,
offset by increased demand for our thin film products as the semiconductor
equipment industry emerged from the 1998 and 1997 recession. Our 1999 thin film
product net sales of $28.4 million was an increase of over 250% from 1998 levels
of thin film product sales. Export sales accounted for 86% of our net sales in
1999 compared with 56% in 1998.
COST OF GOODS SOLD. Costs of goods sold in 1999 was $16.6 million compared
with $24.2 million in 1998, representing a decrease of 31.3%. This decrease was
primarily due to lower sales volume. Lower sales volumes were primarily due to
the divestiture of the ion implant product line to Varian. The decrease was
offset by $1.6 million of inventory and warranty reserve reversals recorded in
the fourth quarter of 1998. Gross profit in 1999 was $11.7 million, representing
41.4% of net sales, compared with $8.2 million or 25.4% of net sales in 1998.
Our gross profits have historically been affected by variations in average
selling prices, configuration differences, changes in the mix of product sales,
unit shipment levels, the level of foreign sales and competitive pricing
pressures.
RESEARCH AND DEVELOPMENT. Research and development expenses in 1999 were
$5.4 million compared with $8.9 million in 1998, representing a decrease of
39.8%. As a percentage of net sales, research and development expenses were
18.9% in 1999 and 27.5% in 1998. Substantially all of the decrease in research
and development expenses is attributable to expenditures in 1998 associated with
the ion implant product line. Thin film research and development spending in
1999 remained relatively constant with 1998 levels. Included in research and
development expense in 1999 is a credit of $360,000 from a government Small
Business Innovative Research grant for ALD development. We expect research and
development expenses to increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $7.9 million in 1999 compared with $14.1 million in 1998,
representing a decrease of 43.8%. As a percentage of net sales, selling, general
and administrative expenses were 28.0% in 1999 and 43.5% in 1998. The $6.2
million decrease in 1999 was due primarily to the reduction in our workforce
related to the divestiture of the ion implant product line to Varian in July
1998 as well as a $1.4 million write-off in 1998 relating to an ion implant
receivable.
RESTRUCTURING AND OTHER. In 1999, we recorded a charge of $543,000 for the
final settlement of a dispute with Varian that arose in connection with the sale
of the ion implant product line to Varian. This charge related to funds that
were held in escrow for possible claims made under our change of control
agreements with key ion implant employees who transferred to Varian as part of
the Varian transaction. No funds were distributed from this escrow account, and
the final change of control agreement expired in July 1999.
OTHER INCOME (EXPENSE), NET. We had other income of $669,000 in 1999
compared with other expense of $86,000 in 1998. Other income in 1999 consisted
of interest income and foreign currency exchange gains due to the strengthening
of the Korean won against the U.S. dollar. In 1998, other expense included
interest expense and foreign currency exchange losses during the first half of
the year, partially offset by interest income during the second half of the
year.
PROVISION FOR INCOME TAXES. We had income taxes of $177,000 in 1999
compared with immaterial income taxes in 1998. Taxes in 1999 related to income
from our South Korean subsidiary. At December 31, 1999, we had federal net
operating loss carry forwards of $78.6 million and state net operating loss
carry forwards of $24.7 million.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales in 1998 were $32.4 million compared with net sales of
$84.3 million in 1997, representing a decrease of 61.5%. The decline in our
sales was primarily due to the divestiture of the ion implant product line which
contributed $21.1 million of net sales in 1998 compared with $57.1 million in
1997, the continued recession in the semiconductor equipment industry and the
adverse effect on our sales volumes caused by the lack of capital investment by
semiconductor manufacturers due to DRAM production overcapacity.
COST OF GOODS SOLD. Cost of goods sold in 1998 was $24.2 million compared
with $55.8 million in 1997, representing a decrease of 55.8%. This decrease was
primarily due to depressed sales volumes in the first half of 1998. This
decrease was offset by $1.6 million of inventory and warranty reserve reversals
recorded in the fourth quarter of 1998. Gross profit in 1998 was $8.2 million,
representing 25.4% of net sales, compared with $29.5 million or 35.0% of net
sales in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses in 1998 were
$8.9 million compared with $12.3 million in 1997, representing a decrease of
27.6%. As a percentage of net sales, research and development expenses were
27.5% in 1998 and 14.6% in 1997. This decrease in research and development
expenses was primarily due to the divestiture of the ion implant product line.
Thin film research and development spending of $5.4 million in 1998 remained
relatively constant with 1997 levels.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $14.1 million in 1998 compared with $20.3 million in 1997,
representing a decrease of 30.6%. As a percentage of net sales, selling, general
and administrative expenses were 43.5% in 1998 and 24.1% in 1997. Our selling,
general and administrative expenses decreased in 1998 compared with 1997 due to
the divestiture of the ion implant product line and the reorganization of our
business following this divestiture. Included in selling, general and
administrative expenses in 1998 was a $1.4 million write-off of an ion implant
receivable.
RESTRUCTURING AND OTHER. We recorded restructuring and other charges of
approximately $12.7 million in 1998 which included personnel charges of $1.7
million associated with our workforce reduction, $5.4 million in inventory
write-downs, $1.1 million in leasehold improvement write-offs, $1.4 million for
expenses associated with the closing of several sales offices, transaction
losses as a result of the sale of the ion implant product line, $1.0 million for
legal, accounting and banking fees associated with this sale and $2.0 million
for ion implant inventory related to the dispute with Varian.
OTHER INCOME (EXPENSE), NET. We had other expense of $86,000 in 1998,
compared with other expense of $1.4 million in 1997. We had foreign currency
exchange losses and interest expenses during the first half of 1998 which were
partially offset by currency exchange gains and interest income during the
second half of the year. In 1997, other expenses consisted primarily of currency
exchange losses of $1.1 million in the fourth quarter due to the weakening of
the Japanese yen and Korean won against the U.S. dollar.
PROVISION FOR INCOME TAXES. In 1998, we had an immaterial tax provision.
During the fourth quarter of 1997, we determined that, based upon the weight of
available evidence, it is more likely than not that the net deferred tax asset
at December 31, 1997 would not be realized and, therefore, provided a full
valuation allowance against the net deferred tax asset resulting in a tax
provision of $14.8 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our cash and cash equivalents were $6.7 million, a
decrease of $1.4 million from cash and cash equivalents of $8.1 million held as
of December 31, 1998. At December 31, 1999, our accounts receivable was $7.6
million, a decrease of $5.4 million from accounts receivable of $13.0 million at
December 31, 1998. Several systems shipped with extended payment terms in 1998
and remained in accounts receivable at December 31, 1998. Accounts receivable
related to these systems were collected in 1999.
Cash provided by operating activities totaled $4.5 million in 1999, and
consisted of a decrease in accounts receivable of $5.1 million, an increase in
accounts payable of $2.0 million, and depreciation and amortization of $1.8
million. Net cash provided by operating activities was also affected by the
reported net loss in 1999 of $1.6 million and an increase in inventories of $1.9
million. Accounts receivable decreased due to the collection in 1999 of accounts
receivable related to systems shipped with extended payment terms in 1998.
Accounts payable increased due to the timing of payments during the last two
weeks of December. Inventories increased because we purchased and held more
inventory to increase our production options. Most of this material is expected
to be consumed during the first half of 2000. Operating activities in 1998 used
cash of $18.8 million, primarily due to a $27.6 million net loss, a $2.5 million
increase in inventories, a $11.7 million decrease in accounts payable and
accrued expenses, partially offset by a $4.8 million decrease in accounts
receivable, and non-cash charges for restructuring activities and depreciation
and amortization of $15.2 million.
Financing activities of $3.7 million in 1999 included payment of the
short-term borrowings of $4.0 million, offset by $322,000 received from the
issuance of common stock from our Employee Stock Purchase and Incentive Stock
Option Plans. Financing activities in 1998 used cash of $4.3 million, primarily
due to net repayments of short-term bank borrowings.
We incurred capital expenditures of $2.0 million during 1999. These
expenditures principally related to the acquisition of machinery and equipment
for our research and development and applications laboratories, expansion and
upgrading of our Sunnyvale, California facility, and the addition of a new
enterprise resource planning business system. We currently anticipate that
additional capital expenditures will be funded through existing working capital
or lease financing.
Our primary source of funds at December 31, 1999 consisted of $6.7 million
in cash and cash equivalents, and $7.6 million of accounts receivable, most of
which we expect to collect or to have been collected during the first half of
2000.
In November 1999, we entered into a $10 million revolving line of credit
with Venture Bank. Amounts available under the line are based on 80% of eligible
accounts receivable, and borrowings under the line are secured by all corporate
assets and bear interest at prime plus 0.25%. The line of credit expires in
November 2001. The line of credit contains covenants that require us to maintain
a minimum quick ratio and a maximum debt to tangible net equity ratio. In
addition, the line of credit requires us to have annual profitability beginning
in 2000 and a maximum quarterly loss of $1 million with no two consecutive
quarterly losses. Additionally, we are prohibited from distributing dividends.
We were in default of certain of the covenants and Venture Bank has granted us a
waiver of the default. The amount available to borrow at December 31, 1999 was
$1.5 million at a rate of 8.75%. We expect to be in default of certain of the
covenants at the end of the first quarter of 2000, and Venture Bank has granted
us a waiver of the default. We have no borrowings under the line of credit.
We believe that our existing working capital, as well as the $10 million
Venture Bank line of credit, will be sufficient to satisfy our cash needs for
the next 12 months. There can be no assurance that any required additional
funding, if needed, will be available on terms attractive to us, which could
have a material adverse affect on our business, financial condition and results
of operations. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
YEAR 2000 READINESS DISCLOSURE
We have designed our products to be year 2000 compliant, and as a result we
have not experienced significant year 2000 problems related to our products. The
majority of the computer software and hardware that we use in our internal
operations did not require replacement or modification as a result of the year
2000 issue. We did, however, implement a new enterprise resource planning system
to address year 2000 issues. We believe that our significant vendors and service
providers are year 2000 compliant and have not, to date, been made aware that
any of our significant vendors or service providers have experienced year 2000
disruptions in their systems. Our estimated expenses on year 2000 issues through
December 31, 1999 were approximately $800,000, of which approximately $500,000
was used to purchase and implement the enterprise resource planning system.
Accordingly, we do not anticipate incurring material expenses or experiencing
any material operational disruptions as a result of any year 2000 problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), SFAS 133 established a new model for
accounting for derivative instruments and hedging activities. In July 1999, the
Financial Accounting Standards Boards issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133" (SFAS 133). SFAS 137 deferred the effective date of SFAS
133 until the first quarter beginning after June 15, 2000. The impact of SFAS
133 on the consolidated financial statements has not yet been determined.
In December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition." The SEC staff addresses several issues in SAB
No. 101, including the timing for recognizing revenue derived from selling
arrangements that involve contractual customer acceptance provisions and
installation of the product occurs after shipment and transfer of title. Our
existing revenue recognition policy is to recognize revenue at the time the
customer takes title to the product, generally at the time of shipment, because
we have, in the past, routinely met our installation obligations and obtained
customer acceptance. Applying the requirements of SAB No. 101 to our present
selling arrangements for the sale of semiconductor production equipment may
require a change in our accounting policy for revenue recognition and the
deferral of the recognition of revenue from such equipment sales until
installation is complete and accepted by the customer. The effect of such a
change, if any, must be recognized as a cumulative effect of a change in
accounting no later than the quarter ending June 30, 2000. We believe the
effects on liquidity, cash flow and financial position will not be material. At
the current time, it is not possible to determine the effect this change may
have on our results of operations. However, should the Company be required to
record a cumulative effect of a change in accounting, it will result in a charge
to results of operations. We are also considering potential changes to our
standard contracts for equipment sales that could mitigate the potential impact
of SAB No. 101 on a going forward basis.
RISK FACTORS
The risks described below are not the only ones that we face. Additional
risks and uncertainties not presently known to us or that are currently deemed
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by, and
the trading price of our common stock could decline due to any of these risks.
You should also refer to the other information included in this Annual Report on
Form 10-K and the other information, our financial statements and the related
notes incorporated by reference into this Annual Report on Form 10-K.
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the factors described below and elsewhere in this Annual Report on Form 10-K.
You should not place undue reliance on these forward-looking statements.
WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO
ACHIEVE OR SUSTAIN PROFITABILITY
We have experienced losses of $1.6 million, $29.5 million, and $19.3
million for 1999, 1998 and 1997, respectively. We may not be able to attain or
sustain consistent future revenue growth on a quarterly or annual basis, or
achieve and maintain consistent profitability on a quarterly or annual basis. As
a result, our business could be materially harmed.
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
Historically, we have relied on a small number of customers for a
substantial portion of our net sales. For example, Samsung Electronics Company,
Ltd. and Micron Technology, Inc. accounted of 84% and 11% of our net sales in
1999 respectively. In addition, Samsung Electronics Company, Ltd., and Micron
Technology, Inc. represented 92% of accounts receivable at December 31, 1999.
The semiconductor manufacturing industry generally consists of a limited number
of larger companies. We consequently expect that a significant portion of our
future product sales will be concentrated within a limited number of customers.
None of our customers has entered into a long-term agreement with us
requiring them to purchase our products. In addition, sales to these customers
may decrease in the future when they complete their current semiconductor
equipment purchasing requirements. If any of our customers were to encounter
financial difficulties or become unable to continue to do business with us at or
near current levels, our business, results of operations and financial condition
would be materially adversely affected. Customers may delay or cancel orders or
may stop doing business with us for a number of reasons including:
- - customer departures from historical buying patterns;
- - general market conditions;
- - economic conditions; or
- - competitive conditions in the semiconductor industry or in the industries
that manufacture products utilizing integrated circuits.
OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE SIGNIFICANTLY AND MAY FALL SHORT OF
ANTICIPATED LEVELS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
Our net sales and operating results may fluctuate significantly from
quarter to quarter. We derive our revenue primarily from the sale of a
relatively small number of high-priced systems, many of which may be ordered and
shipped during the same quarter. Our results of operations for a particular
quarter could be materially adversely affected if anticipated orders, for even a
small number of systems, were not received in time to enable shipment during the
quarter, anticipated shipments were delayed or canceled by one or more customers
or shipments were delayed due to manufacturing difficulties. At our current
revenue level, each sale, or failure to make a sale, could have a material
effect on us. Our lengthy sales cycle, coupled with our customers' competing
capital budget considerations, make the timing of customer orders uneven and
difficult to predict. In addition, our backlog at the beginning of a quarter
typically does not include all orders required to achieve our sales objectives
for that quarter. As a result, our net sales and operating results for a quarter
depend on us shipping orders as scheduled during that quarter as well as
obtaining new orders for systems to be shipped in that same quarter. Any delay
in scheduled shipments or in shipments from new orders would materially and
adversely affect our operating results for that quarter, which could cause our
stock price to decline.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101. SAB 101
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Prior to
SAB 101, we generally recognized revenue upon shipment of a system. Applying the
requirements of SAB 101 to the present selling arrangements we use for the sale
of semiconductor production equipment may require a change in our accounting
policy for revenue recognition and deferral of the recognition of revenue from
such equipment sales until installation is complete and accepted by the
customer. The effect of such a change, if any, must be recognized as a
cumulative effect of a change in accounting no later than the quarter ending
June 30, 2000. Although SAB 101 applies to every company within our industry,
there is a risk that our stock price may be materially and adversely impacted by
SAB 101 if we are required to transition from recognizing revenue at shipment,
to customer acceptance of a system.
Since it is possible that there may be a shift in revenue recognition from
the time of shipment to the time of acceptance by the customer, certain revenue
that we would have recognized in the first and second quarters of 2000 upon
shipment of products may not be recognized until the products are accepted. We
cannot assure you as to the timing of such acceptances. Any material delay in
receipt of acceptances may have a material adverse effect on our results of
operations.
WE ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN
COUNTRIES, AND FACE RISKS BEYOND OUR CONTROL OR INFLUENCE
Export sales accounted for approximately 86%, 56% and 74% of our total net
sales in 1999, 1998 and 1997, respectively. Net sales to our South Korean-based
customer accounted for approximately 84%, 30% and 50%, respectively, of total
net sales during the same periods. We anticipate that international sales,
including sales to South Korea, will continue to account for a significant
portion of our net sales. As a result, a significant portion of our net sales
will be subject to certain risks, including:
- - unexpected changes in law or regulatory requirements;
- - exchange rate volatility;
- - tariffs and other barriers;
- - political and economic instability;
- - difficulties in accounts receivable collection;
- - extended payment terms;
- - difficulties in managing distributors or representatives;
- - difficulties in staffing our subsidiaries;
- - difficulties in managing foreign subsidiary operations; and
- - potentially adverse tax consequences.
Our foreign sales are primarily denominated in U.S. dollars and we do not
engage in hedging transactions. As a result, our foreign sales are subject to
the risks associated with unexpected changes in exchange rates, which could
effect the price of our products.
In the past, turmoil in the Asian financial markets resulted in dramatic
currency devaluations, stock market declines, restriction of available credit
and general financial weakness. For example, prices fell dramatically in 1998 as
some integrated circuit manufacturers sold DRAMs at less than cost in order to
generate cash. Currency devaluations make dollar-denominated goods, such as
ours, more expensive for international customers. In addition, difficult
economic conditions may limit capital spending by our customers. These
circumstances may also affect the ability of our customers to meet their payment
obligations, resulting in the cancellations or deferrals of existing orders and
the limitation of additional orders. As a result of any or all these factors,
our business, financial condition and results of operations may be materially
harmed.
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. The
semiconductor industry is cyclical and experiences periodic downturns both of
which reduce the semiconductor industry's demand for semiconductor manufacturing
capital equipment. Semiconductor industry downturns have significantly decreased
our revenues, operating margins and results of operations in the past. There is
a risk that our revenues and operating results will be materially harmed by any
future downturn in the semiconductor industry.
OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW THIN FILMS AND MARKET
ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE THIN FILMS
We believe that our future growth will depend in large part upon the
acceptance of our new thin films. As a result, we expect to continue to invest
in research and development in these new thin films and the systems that use
these films. There can be no assurance that the market will accept our new
products or that we will be able to develop and introduce new products or
enhancements to our existing products and processes in a timely manner to
satisfy customer needs or achieve market acceptance. The failure to do so could
have a material adverse effect on our business, financial condition and results
of operations.
In addition, we must manage product transitions successfully, as
introductions of new products could harm sales of existing products. We derive
our revenue primarily from the sale of our tungsten silicide CVD systems. We
estimate that the life cycle for these systems is three-to-five years. There is
a risk that future technologies, processes or product developments may render
our product offerings obsolete and we may not be able to develop and introduce
new products or enhancements to our existing products in a timely manner.
WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES
The semiconductor manufacturing capital equipment industry is highly
competitive. We face substantial competition throughout the world. We believe
that to remain competitive, we will require significant financial resources in
order to develop new products, offer a broader range of products, establish and
maintain customer service centers and invest in research and development.
Many of our existing and potential competitors have substantially greater
financial resources, more extensive engineering, manufacturing, marketing,
customer service capabilities and greater name recognition. We expect our
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with improved
price and performance characteristics.
If our competitors enter into strategic relationships with leading
semiconductor manufacturers covering thin film products similar to those sold by
us, it would materially adversely our ability to sell our products to such
manufacturers. In addition, to expand our sales we must often replace the
systems of our competitors or sell new systems to customers of our competitors.
Our competitors may develop new or enhanced competitive products that will offer
price or performance features that are superior to our systems. Our competitors
may also be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their product lines. We may not be able to
maintain or expand our sales if competition increases and we are not able to
respond effectively.
WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR
OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND
PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility and
proven financial performance.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. In addition, the semiconductor manufacturer frequently will attempt
to consolidate its other capital equipment requirements with the same vendor.
Accordingly, we may face narrow windows of opportunity to be selected as the
"vendor of choice" by potential new customers. It may be difficult for us to
sell to a particular customer for a significant period of time once that
customer selects a competitor's product, and we may not be successful in
obtaining broader acceptance of our systems and technology. If we are not able
to achieve broader market acceptance of our systems and technology, we may be
unable to grow our business and our operating results and financial condition
will be materially adversely affected.
OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF
OUR REVENUE
Sales of our systems depend upon the decision of a prospective customer to
increase manufacturing capacity. That decision typically involves a significant
capital commitment by our customers. Accordingly, the purchase of our systems
typically involves time consuming internal procedures associated with the
evaluation, testing, implementation and introduction of new technologies into
our customers' manufacturing facilities. For many potential customers, an
evaluation as to whether new semiconductor manufacturing equipment is needed
typically occurs infrequently. Following an evaluation by the customer as to
whether our systems meet its qualification criteria, we have experienced in the
past and expect to experience in the future delays in finalizing system sales
while the customer evaluates and receives approval for the purchase or our
systems and constructs a new facility or expands an existing facility.
Due to these factors, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort. The time
between our first contact with a customer and the customer placing its first
order typically lasts from nine to twelve months and is often even longer. This
lengthy sales cycle makes it difficult to accurately forecast future sales and
may cause our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected.
WE ARE DEPENDENT ON OUR INTELLECTUAL PROPERTY AND RISK LOSS OF A VALUABLE ASSET,
REDUCED MARKET SHARE AND LITIGATION EXPENSE IF WE CANNOT ADEQUATELY PROTECT IT
Our success depends in part on our proprietary technology. There can be no
assurance that we will be able to protect our technology or that competitors
will not be able to develop similar technology independently. We currently have
a number of United States and foreign patents and patent applications. There can
be no assurance that any patents issued to us will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us with competitive advantages.
From time to time, we have received notices from third parties alleging
infringement of such parties' patent rights by our products. In such cases, it
is our policy to defend against the claims or negotiate licenses on commercially
reasonable terms where appropriate. However, no assurance can be given that we
will be able to negotiate necessary licenses on commercially reasonable terms,
or at all, or that any litigation resulting from such claims would not have a
material adverse effect on our business and financial results.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel
or other key employees could limit or delay our ability to develop new products
and adapt existing products to our customers' evolving requirements and would
also result in lost sales and diversion of management resources. None of our
executive officers are bound by a written employment agreement, and the
relationships with our officers are at will.
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
and process engineers. Competition for such personnel is intense, particularly
in the San Francisco Bay Area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop and
market our products and perform services for our customers. As a result, our
growth could be limited due to our lack of capacity to develop and market our
products to customers, or fail to meet delivery commitments or experience
deterioration in service levels or decreased customer satisfaction.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations. If we fail to
comply with present or future regulations, we could be subject to substantial
liability for clean up efforts, property damage, personal injury and fines or
suspension or cessation of our operations. Restrictions on our ability to expand
or continue to operate our present locations could be imposed upon us or we
could be required to acquire costly remediation equipment or incur other
significant expenses.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN MANUFACTURE AND SALE OF OUR PRODUCTS
Certain of the components and sub-assemblies included in our products are
obtained from a single supplier or a limited group of suppliers. Disruption or
termination of these sources could have an adverse effect on our operations. We
believe that alternative sources could be obtained and qualified to supply these
products, if necessary. Nevertheless, a prolonged inability to obtain certain
components could have a material adverse effect on our business, financial
condition and results of operations.
WE DEPEND UPON SIX DISTRIBUTORSHIPS FOR THE SALE OF OUR PRODUCTS AND ANY
DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY EFFECT US
We currently sell and support our thin film products through direct sales
and customer support organizations in the U.S., Europe, South Korea and Japan
and through six independent sales representatives and distributors in the U.S.,
Europe, South Korea, Taiwan, China and Malaysia. We do not have any long-term
contracts with our sales representatives and distributors. Any disruption or
termination of our existing distributor relationships could have an adverse
effect on our business, financial condition and results of operations.
WE ARE ESTABLISHING A DIRECT SALES ORGANIZATION IN JAPAN WHICH COULD RESULT IN
LOST SALES OR INCREASED RISKS TO OUR BUSINESS IN JAPAN
As part of our original strategy for penetrating the Japanese market, we
established a distribution relationship with Innotech Corp. In 1998, we shifted
our strategy in Japan to a direct sales model. We have terminated our
distribution relationship with Innotech and are establishing our own direct
sales force in Japan. Although we intend to continue to invest significant
resources in Japan, including the hiring of additional personnel to support our
direct sales effort, we may not be able to maintain or increase our sales to the
Japanese semiconductor industry. We may miss sales opportunities or lose
competitive sales as we transition to this direct sales model, and our existing
Japanese customers and potential customers may be unwilling to purchase our
systems from us directly.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR
TO SECURITIES LITIGATION
Our common stock has experienced substantial price volatility, particularly
as a result of quarter-to-quarter variations in our, our competitors or our
customers actual or anticipated financial results, our competitors or our
customers announcements of technological innovations, revenue recognition
policies, changes in earnings estimates by securities analysts and other events
or factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which we do
business, may adversely effect the market price of our common stock.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation, if filed against us, could result in substantial costs
and divert our management's attention and resources.
YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS BECAUSE, WHILE OUR UPGRADED
INTERNAL SYSTEMS ARE OPERATIONAL AND THE COST OF UPGRADES WAS NOT MATERIAL, WE
RELY ON EXTERNAL SYSTEMS THAT MAY NOT BE ADEQUATELY UPGRADED FOR YEAR 2000
The date fields coded in many software products and computer systems need
to be able to distinguish 21st century dates from 20th century dates, including
leap year calculations. The failure to be able to accurately distinguish these
dates is commonly known as the year 2000 problem. While we have yet to
experience year 2000 problems, the computer software programs and operating
systems used in our internal operations, including our financial, product
development, order management and manufacturing systems, could experience errors
or interruptions due to the year 2000 problem. For example, a significant
failure of our computer integrated manufacturing systems, which monitor and
control factory equipment, could disrupt manufacturing operations and cause a
delay in completion and shipping of products. In addition, it is possible that
our suppliers' and service providers' failure to adequately address the year
2000 problem could have an adverse effect on their operations, which, in turn,
could have an adverse impact on us.
FORWARD-LOOKING STATEMENTS
Some of the information in this Annual Report on Form 10-K and in the
documents that are incorporated by reference, including the risk factors,
contains forward-looking statements that involve risks and uncertainties. These
statements relate to future events or our future financial performance. In many
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of these terms and other
comparable terminology. These statements are only predictions. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including the risks faced by us
described above and elsewhere in this Annual Report on Form 10-K.
We believe it is important to communicate our expectations to our
shareholders. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this Annual Report on Form 10-K,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We face exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as our business practices evolve and could
seriously harm our financial results. All of our international sales, except
spare parts and service sales made by our subsidiary in South Korea, are
currently denominated in U.S. dollars. All spare parts and service sales made by
the South Korean subsidiary are won denominated. An increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and, therefore, reduce the demand for our products. Reduced demand for
our products could materially adversely affect our business, results of
operations and financial condition.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Genus, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and of
cash flows, present fairly, in all material respects, the financial position of
Genus, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 9, 2000
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
1999 1998
---------- ---------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 6,739 $ 8,125
Accounts receivable (net of allowance for doubtful accounts
of $241 in 1999 and $500 in 1998). . . . . . . . . . . . . 7,629 13,008
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 7,266 5,338
Other current assets . . . . . . . . . . . . . . . . . . . . 883 379
---------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . 22,517 26,850
Property and equipment, net. . . . . . . . . . . . . . . . . 4,894 4,659
Other assets, net. . . . . . . . . . . . . . . . . . . . . . 333 318
---------- ---------
$ 27,744 $ 31,827
========== =========
LIABILITIES AND REDEEMABLE PREFERRED STOCK
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . . $ 0 $ 4,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 4,146 2,193
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 4,168 4,794
Current portion of capital lease obligations . . . . . . . . 52 64
---------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . 8,366 11,051
Capital lease obligations, less current portion. . . . . . . . 0 50
---------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 8,366 11,101
---------- ---------
Commitments and contingencies (Note 7)
Manditorily redeemable convertible preferred stock . . . . . . 0 773
---------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized 1,982,000 shares;
Issued and outstanding, none . . . . . . . . . . . . . . . 0 0
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding, 18,469,000 shares in 1999 and
17,473,000 shares in 1998. . . . . . . . . . . . . . . . . 101,042 99,849
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (79,872) (78,255)
Accumulated other comprehensive loss . . . . . . . . . . . . (1,792) (1,641)
---------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . 19,378 19,953
---------- ---------
$ 27,744 $ 31,827
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,360 $ 32,431 $ 84,286
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . 16,628 24,201 54,762
Research and development. . . . . . . . . . . . . . . . . 5,368 8,921 12,327
Selling, general and administrative . . . . . . . . . . . 7,930 14,115 20,326
Restructuring and other . . . . . . . . . . . . . . . . . 543 12,707 0
---------- --------- ---------
Loss from operations. . . . . . . . . . . . . . . . . . (2,109) (27,513) (3,129)
Other income (expense), net . . . . . . . . . . . . . . . . 669 (86) (1,363)
---------- --------- ---------
Loss before provision for income taxes. . . . . . . . . . . (1,440) (27,599) (4,492)
Provision for income taxes. . . . . . . . . . . . . . . . . 177 1 14,844
---------- --------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . (1,617) (27,600) (19,336)
Deemed dividends on preferred stock . . . . . . . . . . . . 0 (1,903) 0
---------- --------- ---------
Net loss attributable to common shareholders. . . . . . . . $ (1,617) $(29,503) $(19,336)
========== ========= =========
Basic and diluted net loss per share. . . . . . . . . . . . $ (0.09) $ (1.71) $ (1.15)
========== ========= =========
Shares used to compute basic and diluted net loss per share 18,134 17,248 16,860
========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUM. OTHER
PREFERRED COMMON STOCK ACCUMULATED COMPREHENSIVE
--------------------------
STOCK SHARES AMOUNT DEFICIT LOSS TOTAL
---------- ------------ ------------ --------------- -------- ---------
Balances, January 1, 1997. . . . . . . . . $ 0 16,726 $ 97,915 $ (29,527) $ (137) $ 68,251
Issuance of shares of common
stock under stock option plan. . . . . 0 124 364 0 0 364
Issuance of shares of common stock
under employee stock purchase
plan 0 273 870 0 0 870
Net loss . . . . . . . . . . . . . . . . 0 0 0 (19,336) 0
Translation adjustments. . . . . . . . . 0 0 0 0 (1,792)
Comprehensive loss . . . . . . . . . . . 0 0 0 0 0 (21,128)
---------- ------------ ------------ --------------- -------- ---------
Balances, December 31, 1997. . . . . . . . 0 17,123 99,149 (48,863) (1,929) 48,357
Issuance of 100 shares of Series A
convertible preferred stock and
warrants to purchase shares of
common stock . . . . . . . . . . . . . 6,222 0 385 (1,792) 0 4,815
Conversion of 2 shares of Series A
convertible preferred stock to
common stock . . . . . . . . . . . . . (124) 107 124 0 0 0
Redemption of 70 shares of Series A
convertible preferred stock. . . . . . (4,725) 0 0 0 0 (4,725)
Exchange of 28 shares of Series A
convertible preferred stock for 28
shares of Series B manditorily
redeemable convertible preferred
stock. . . . . . . . . . . . . . . . . (1,373) 0 0 0 0 (1,373)
Issuance of shares of common stock
under stock option plan. . . . . . . . 0 5 14 0 0 14
Issuance of shares of common stock
under employee stock purchase
plan 0 238 177 0 0 177
Net loss . . . . . . . . . . . . . . . . 0 0 0 (27,600) 0
Translation adjustments. . . . . . . . . 0 0 0 0 288
Comprehensive loss . . . . . . . . . . . 0 0 0 0 0 (27,312)
---------- ------------ ------------ --------------- -------- ---------
Balances, December 31, 1998. . . . . . . . 0 17,473 99,849 (78,255) (1,641) 19,953
Conversion of 16 shares of Series B
convertible preferred stock to
640 shares of common stock . . . . . . 0 640 773 0 0 773
Issuance of shares of common stock
under stock option plan. . . . . . . . 0 50 102 0 0 102
Issuance of shares of common stock under
employee stock purchase plan . . . . . 0 306 220 0 0 220
Issuance of warrants to Venture Bank to
purchase 25 shares of common
stock. . . . . . . . . . . . . . . . . 0 0 53 0 0 53
Amortization of deferred stock
compensation . . . . . . . . . . . . . 0 0 45 0 0 45
Net loss . . . . . . . . . . . . . . . . 0 0 0 (1,617) 0
Translation adjustments. . . . . . . . . 0 0 0 0 (151)
Comprehensive loss . . . . . . . . . . . 0 0 0 0 0 (1,768)
---------- ------------ ------------ --------------- -------- ---------
Balances, December 31, 1999. . . . . . . . $ 0 18,469 $ 101,042 $ (79,872) $(1,792) $ 19,378
========== ============ ============ =============== ======== =========
The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------------- --------- ---------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,617) $(27,600) $(19,336)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 1,805 2,480 5,073
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . (259) 1,670 2,930
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 14,844
Restructuring and other. . . . . . . . . . . . . . . . . . . . . . . . 543 12,707 0
Issuance of options and warrants to non-employees. . . . . . . . . . . 98 0 0
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . 5,095 4,781 (7,181)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,928) (2,461) (2,998)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (519) 650 (391)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,953 (6,530) 3,419
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (626) (5,153) (543)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 626 527
-------------- --------- ---------
Net cash provided by (used in) operating activities. . . . . . . . . 4,545 (18,830) (3,656)
-------------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . (2,040) (919) (3,835)
Sale of MeV ion implant products . . . . . . . . . . . . . . . . . . . . 0 23,151 0
-------------- --------- ---------
Net cash provided by (used in) investing activities. . . . . . . . . (2,040) 22,232 (3,835)
-------------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . 322 191 1,234
Proceeds from issuance of preferred stock and warrants . . . . . . . . . 0 4,815 0
Redemption of preferred stock. . . . . . . . . . . . . . . . . . . . . . 0 (5,325) 0
Proceeds from short-term bank borrowings . . . . . . . . . . . . . . . . 0 4,000 50,290
Payments of short-term bank borrowings . . . . . . . . . . . . . . . . . (4,000) (7,200) (45,590)
Payments of long-term debt and capital leases. . . . . . . . . . . . . . (62) (761) (939)
-------------- --------- ---------
Net cash provided by (used in) financing activities. . . . . . . . . (3,740) (4,280) 4,995
-------------- --------- ---------
Effect of exchange rate changes on cash (151) 303 (631)
-------------- --------- ---------
Net decrease in cash and cash equivalents (1,386) (575) (3,127)
Cash and cash equivalents, beginning of year 8,125 8,700 11,827
-------------- --------- ---------
Cash and cash equivalents, end of year $ 6,739 $ 8,125 $ 8,700
============== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 4 $ 186 $ 445
Cash paid for income taxes 0 6 94
Non-cash investing and financing activities:
Purchase of property and equipment under capital leases . . . . . . . . 0 0 515
Deemed dividends on preferred stock. . . . . . . . . . . . . . . . . . . 0 1,903 0
Conversion of Series A preferred stock to common stock . . . . . . . . . 0 124 0
Conversion of Series B preferred stock to common stock . . . . . . . . . 773 0 0
The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Genus, Inc. (the "Company") was incorporated in
California in 1982. The Company designs, manufactures and markets capital
equipment and deposition processes for advanced semiconductor manufacturing. The
Company's products are marketed worldwide either directly to end-users or
through exclusive sales representative arrangements. In January 1996, the
Company opened a subsidiary in South Korea to provide sales and service support
to Korean customers. The Company's customers include semiconductor manufacturers
located throughout the United States, Europe and in the Pacific Rim including
Japan, South Korea and Taiwan. The following is a summary of the Company's
significant accounting policies.
Basis of Presentation. The consolidated financial statements include the
accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of
significant intercompany accounts and transactions. The preparation of 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash equivalents consist primarily of money market funds.
Fair Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate estimated fair
value because of the short maturity of those financial instruments. Based on
rates currently available to the Company for debt with similar terms and
remaining maturities, the carrying amounts of debt approximate estimated fair
values.
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentrations of credit risk, consist principally of
cash and cash equivalents and trade receivables. The Company places cash not
required for current disbursement in money market funds in the United States.
The Company does not require collateral from its customers and maintains an
allowance for credit losses.
Two customers accounted for an aggregate of 92% of accounts receivable at
December 31, 1999. Three customers accounted for an aggregate of 78% of accounts
receivable at December 31, 1998. South Korean headquartered customers accounted
for an aggregate of 71% of accounts receivable at December 31, 1999. South
Korean and Japanese headquartered customers accounted for an aggregate of 61% of
accounts receivable at December 31, 1998. The Company has written off bad debts
of none, $2,267,000 and $2,083,000 in 1999, 1998 and 1997, respectively.
Inventories. Inventories are stated at the lower of cost or market, using
standard costs that approximate actual costs, under the first-in, first-out
method.
Long-Lived Assets. Property and equipment are stated at cost and
depreciated using the straight-line method over their estimated useful lives,
which range from three to ten years. Leasehold improvements are amortized using
the straight-line method over their estimated useful lives or the remaining
lease term, whichever is less.
Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets related to those assets may not be recoverable, the
Company estimates the future cash flows, undiscounted and without interest
charges, expected to result from the use of those assets and their eventual
disposition. If the sum of the future cash flows is less than the carrying
amounts of those assets, the Company recognizes an impairment loss based on the
excess of the carrying amounts over the fair values of the assets.
Revenue Recognition. Revenue related to systems is generally recognized
upon shipment. Occasionally, revenue is recognized on certain transactions
where, prior to shipment and upon completion of customer source inspection and
factory acceptance of the system, risk of loss and title to the system passes to
the customer. A provision for the estimated future cost of system installation,
warranty and commissions is recorded when revenue is recognized. Service revenue
is recognized when service has been completed.
Income Taxes. The Company accounts for income taxes using a method that
requires deferred tax assets to be computed annually on an asset and liability
method and adjusted when new tax laws or rates are enacted. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense (benefit) is the tax payable
(refundable) for the period plus or minus the change in deferred tax assets and
liabilities during the period.
Foreign Currency. The Company has foreign sales and service operations.
With respect to all foreign subsidiaries excluding South Korea and Japan, the
functional currency is the U.S. dollar, and transaction and translation gains
and losses are included in results of operations. The functional currency of the
Company's South Korean subsidiary is the won, and the functional currency of the
Company's Japanese subsidiary is the yen. The translation from the applicable
foreign currency to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using the weighted average exchange rate during the period.
Adjustments resulting from such translation are reflected as other comprehensive
income.
Net Loss Per Share. Basic net loss per share is computed by dividing loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
loss available to common shareholders, adjusted for convertible preferred
dividends and after-tax interest expense on convertible debt, if any, by the sum
of the weighted average number of common shares outstanding and potential common
shares (when dilutive).
Stock Compensation. The Company accounts for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees." The Company's policy
is to grant options with an exercise price equal to the quoted market price of
the Company's stock on the date of the grant. Accordingly, no compensation cost
has been recognized in the Company's statements of operations. The Company
provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
Comprehensive Income. In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for disclosure and
financial statement display for reporting total comprehensive income and its
individual components. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. The Company's comprehensive
income includes net income and foreign currency translation adjustments and is
displayed in the statement of shareholders' equity.
Recent Account Pronouncements. In June 1998, the Financial Accounting
Standards Boards issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), SFAS
133 established a new model for accounting for derivative and hedging
activities. In July 1999, the Financial Accounting Standards Boards issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133" (SFAS 133). SFAS 137 deferred
the effective date of SFAS 133 until the first quarter beginning after June 15,
2000. The impact of SFAS 133 on the Company's consolidated financial statements
has not yet been determined.
In December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition." The SEC staff addresses several issues in SAB
No. 101, including the timing for recognizing revenue derived from selling
arrangements that involve contractual customer acceptance provisions and
installation of the product occurs after shipment and transfer of title. The
Company's existing revenue recognition policy is to recognize revenue at the
time the customer takes title to the product, generally at the time of shipment,
because the Company has routinely met its installation obligations and obtained
customer acceptance. Applying the requirements of SAB No. 101 to the present
selling arrangements used by the Company for the sale of semiconductor
production equipment may require a change in the Company's accounting policy for
revenue recognition and the deferral of the recognition of revenue from such
equipment sales until installation is complete and accepted by the customer. The
effect of such a change, if any, must be recognized as a cumulative effect of a
change in accounting no later than the Company's quarter ending June 30, 2000.
NOTE 2. INVENTORIES
Inventories comprise the following (in thousands):
DECEMBER 31,
-----------------
1999 1998
--------- ------
Raw materials and purchased parts $ 5,439 $4,796
Work in process . . . . . . . . . 1,055 244
Finished goods. . . . . . . . . . 772 298
--------- ------
$ 7,266 $5,338
========= ======
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and comprise the following (in
thousands):
DECEMBER 31,
---------------------
1999 1998
---------- ---------
Equipment (useful life is 3 years). . . . . . . . . . . . . $ 8,048 $ 7,227
Demonstration equipment (useful life ranges from 3-5 years) 14,658 14,345
Furniture and fixtures (useful life is 3 years) . . . . . . 1,021 1,015
Leasehold improvements (useful life ranges from 4-10 years) 3,056 3,003
---------- ---------
26,783 25,590
Less accumulated depreciation and amortization. . . . . . . (23,048) (21,243)
---------- ---------
3,735 4,347
Construction in process . . . . . . . . . . . . . . . . . . 1,159 312
---------- ---------
$ 4,894 $ 4,659
========== =========
Equipment includes $0 and $584,000 of assets under capital leases at
December 31, 1999 and 1998, respectively. Accumulated amortization on these
assets is $0 and $584,000 at December 31, 1999 and 1998, respectively.
NOTE 4. ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
DECEMBER 31,
-----------------
1999 1998
--------- ------
System installation and warranty. . . . $ 817 $ 583
Accrued commissions and incentives. . . 364 538
Accrued compensation and related items. 872 536
Restructuring accruals. . . . . . . . . 0 1,240
Federal, state and foreign income taxes 622 456
Customer deposits . . . . . . . . . . . 420 0
Other . . . . . . . . . . . . . . . . . 1,493 1,441
--------- ------
$ 4,168 $4,794
========= ======
NOTE 5. LINE OF CREDIT
In November 1999, the Company entered into a $10 million revolving line of
credit with Venture Bank. Amounts available under the line are based on 80% of
eligible accounts receivable, and borrowings under the line of credit are
secured by all corporate assets and bear interest at prime plus 0.25%. The line
of credit expires in November 2001. The line of credit contains covenants that
require the Company to maintain a minimum quick ratio and a maximum debt to
tangible net equity ratio. In addition, the line requires the Company to have
annual profitability beginning in 2000 and a maximum quarterly loss of $1
million with no two consecutive quarterly losses. Additionally, the Company is
prohibited from distributing dividends. At December 31, 1999, the Company was in
default of certain of the covenants and Venture Bank has granted the Company a
waiver of the default. The amount available to borrow at December 31, 1999 was
$1.5 million at a rate of 8.75%. We expect to be in default of certain of the
covenants at the end of the first quarter of 2000, and Venture Bank has granted
us a waiver of the default.
NOTE 6. CAPITAL LEASE OBLIGATIONS
The Company's outstanding obligations under capital leases as of December
31, 1999 and 1998 were $52,000 and $114,000, respectively. These leases have
terms of five years and were for test equipment for the Company's applications
lab.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and various office equipment
under operating leases expiring through 2002. The Company is responsible for
property taxes, insurance and maintenance under the facility leases. Certain of
these leases contain renewal options. The Company subleases approximately 40,000
square feet of its facility to two other companies. One company began subleasing
in April 1998 and the other company began subleasing in December 1998.
At December 31, 1999, minimum lease payments required and sublease income
under these operating leases are as follows (in thousands):
LEASE PAYMENTS SUBLEASE INCOME
--------------- ----------------
2000 . . . . $ 772 $ 891
2001 . . . . 772 625
2002 . . . . 611 495
--------------- ----------------
2,155 $ 2,011
================ ===============
Rent expense was $713,000, $1,315,000 and $2,215,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Sublease rental income was
$820,000, $146,000 and none for the years ended December 31, 1999, 1998 and
1997, respectively.
Legal Proceedings
The Company has been named as a defendant in a claim involving an
automobile accident by a former employee of the Company, which resulted in the
death of an individual. General, punitive, and exemplary damages are being
sought by the plaintiffs. The Company believes it is not at fault in this
matter, and has appointed legal council to defend the claim. While the outcome
of this matter is not presently determinable, management does not believe that
resolution of this matter will have a material adverse effect on the financial
position or results of operations of the Company.
NOTE 8. SHAREHOLDERS' EQUITY
Private Placement of Convertible Preferred Stock
In February 1998, the Company issued an aggregate of 100,000 shares of 6%
Series A Convertible Preferred Stock (the "Series A Stock") and warrants to
purchase an aggregate of up to 400,000 shares of its common stock, all for an
aggregate purchase price of $5,000,000 in cash. In 1998, the Company recorded
deemed dividends on preferred stock of approximately $1,903,000 reflecting the
beneficial conversion feature, which is the difference between the proceeds
allocated to the Series A Stock and the fair value of the Series A Stock
(assuming immediate conversion) upon issuance, and the accrual of the 6%
dividends thereon.
In June 1998, 2,000 shares of the Series A Stock were converted into common
stock of the Company. In July 1998, the Company redeemed 70,000 shares of the
outstanding Series A Stock for $4,725,000 in cash (the "Redemption"), and the
remaining 28,000 shares of Series A Stock were exchanged for 28,000 shares of
Redeemable Series B Convertible Preferred Stock (the "Series B Stock") by the
existing holders of the Series A Stock (the "Exchange"). The Redemption and
Exchange were accounted for by comparing the fair value of the Series B Stock
and the $4,725,000 in cash with the carrying amount of the Series A Stock
redeemed and with the fair value of the Series A Stock converted (pursuant to
the original conversion terms of the Series A Stock); there was no material
difference between these amounts.
In November 1998, the Company redeemed 12,000 shares of the Series B Stock
for approximately $600,000 in cash. As of December 31, 1998, there were 16,000
shares of Series B Stock outstanding, all of which were converted into 640,000
shares of common stock of the Company in February 1999.
Warrants
In connection with the issuance of the Series A Stock, the Company issued
warrants for 400,000 shares of the Company's common stock to the holders of the
Series A Stock. The warrants are exercisable at any time until February 2001 for
300,000 shares of common stock at a price of $3.67 per share and for 100,000
shares at a price of $4.50 per share.
In connection with the $10 million revolving line of credit, the Company
issued to Venture Bank warrants to purchase 25,000 shares of the Company's
common stock. Based on the Black-Scholes model, the fair market value of the
warrants at the date of the grant was $53,000, which will be amortized to
interest expense over the two-year life of the line.
Net Loss Per Share
A reconciliation of the numerator and denominator of basic and diluted loss
per share is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
------------- --------- ---------
Numerator-Basic and diluted:
Net loss. . . . . . . . . . . . . . . . . . $ (1,617) $(27,600) $(19,336)
Deemed dividends on preferred stock . . . . 0 (1,903) 0
------------- --------- ---------
Net loss available to common shareholders $ (1,617) $(29,503) $(19,336)
============= ========= =========
Denominator-Basic and diluted:
Weighted average common stock outstanding . 18,134 17,248 16,860
============= ========= =========
Basic net loss per share. . . . . . . . . . . $ (0.09) $ (1.71) $ (1.15)
============= ========= =========
Stock options to purchase 2,639,219 shares of common stock were outstanding
in 1999, but were not included in the computation of diluted loss per share
because the Company has a net loss for 1999. Warrants for the purchase of
425,000 shares of common stock were outstanding at December 31, 1999, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 1999.
Stock options to purchase 2,328,190 shares of common stock were outstanding
in 1998, but were not included in the computation of diluted loss per share
because the Company has a net loss for 1998. A total of 16,000 shares of Series
B Convertible Preferred Stock and warrants for the purchase of 400,000 shares of
common stock were outstanding at December 31, 1998, but were not included in the
computation of diluted loss per share because the Company has a net loss for
1998.
Stock options to purchase 1,868,156 shares of common stock were outstanding
in 1997, but were not included in the computation of diluted loss per share
because the Company has a net loss for 1997.
Stock Option Plan
The Company has adopted the 1991 Incentive Stock Option Plan (the "Plan")
under which the Board of Directors may grant incentive and nonstatutory stock
options. The Plan expires ten years after adoption and the Board of Directors
has the authority to determine to whom options will be granted, the number of
shares, the term and exercise price. The options are exercisable at times and
increments as specified by the Board of Directors, and generally vest over a
three-year period and expire five years from the date of grant. At December 31,
1999, the Company had reserved 4,003,006 shares of common stock for issuance
under the Plan, which included 500,000 shares added to the plan in 1999. A total
of 441,638 shares remained available for future grants at December 31, 1999. At
December 31, 1997, 789,670 options were exercisable at a weighted average
exercise price of $6.50. At December 31, 1998, 573,484 options were exercisable
at a weighted average exercise price of $3.094. At December 31, 1999, 1,128,992
options were exercisable at a weighted average exercise price of $2.34.
Employee Stock Purchase Plan
The Company has reserved a total of 2,350,000 shares of common stock for
issuance under a qualified stock purchase plan, which provides substantially all
Company employees with the right to acquire shares of the Company's common stock
through payroll deductions. This total includes an additional 300,000 shares
added to the plan in 1999. Under the plan, the Company's employees, subject to
certain restrictions, may purchase shares of common stock at the lesser of 85%
of fair market value at either the beginning of each two-year offering period or
the end of each six-month purchase period within the two-year offering period.
At December 31, 1999, 2,168,794 shares have been issued under the plan. At
December 31, 1999, shares available for purchase under this plan was 181,206.
Common Stock Purchase Rights
In July 1990, the Company distributed a dividend to shareholders comprised
of a right to purchase one share of common stock (a "Right") for each
outstanding share of common stock of the Company they hold. These rights do not
become exercisable or transferable apart from the common stock until the
Distribution Date which is either the tenth day after a person or group (a)
acquires beneficial ownership of 20% or more of the Company's common stock or
(b) announces a tender or exchange offer, the consummation of which would result
in ownership by a person or group of 30% or more of the Company's common stock.
After the Distribution Date, each Right will entitle the holder to purchase from
the Company one share of common stock at a price of $28.00 per share.
If the Company is acquired in a merger or other business combination
transaction, or if 50% or more of its consolidated assets or earnings power is
sold, each Right will entitle the holder to purchase at the exercise price that
number of shares of the acquiring company having a then current market value of
two times the exercise price of the Right. In the event that the Company is the
surviving corporation in a merger and the Company's common stock remains
outstanding, or in the event that an acquiring party engages in certain
self-dealing transactions, each Right not owned by the acquiring party will
entitle the holder to purchase at the exercise price that number of shares of
the Company's common stock having a then current market value of two times the
exercise price of the Right. The Rights are redeemable at the Company's option
for $.01 per Right prior to becoming exercisable, may be amended at the
Company's option on or prior to the Distribution Date and expire on July 3,
2000.
Option Repricing
On January 28, 1998 the Board of Directors offered employees the
opportunity to reprice outstanding stock options as of February 9, 1998. The
repriced options, both vested and unvested, were precluded from exercise for a
period of one year from the repricing date. Approximately 1,544,750 options with
original exercise prices ranging from $3.88 to $8.63 were repriced at $3.03, the
fair market value as of February 9, 1998.
Activity under the Plan is set forth in the table below:
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING TOTAL EXERCISE
(IN 000'S) PRICE PER SHARE (IN 000'S) PRICE
------------ ---------------- ----------- ------
Balance, January 1, 1997 . 2,090 $ 1.75 to $8.63 $ 13,751 $ 6.58
Granted. . . . . . . . . 537 3.88 to 6.94 2,707 5.04
Exercised. . . . . . . . (124) 1.75 to 6.13 (364) 2.94
Terminated . . . . . . . (652) 2.25 to 8.63 (4,473) 6.86
------------ ---------------- ----------- ------
Balance, December 31, 1997 1,851 2.25 to 8.63 11,621 6.28
Granted. . . . . . . . . 3,764 0.88 to 3.21 8,500 2.26
Exercised. . . . . . . . (5) 2.87 to 2.87 (14) 2.87
Terminated . . . . . . . (3,309) 1.63 to 8.63 (15,600) 4.71
------------ ---------------- ----------- ------
Balance, December 31, 1998 2,301 0.88 to 8.00 4,507 1.96
Granted. . . . . . . . . 532 1.87 to 4.34 1,384 2.88
Exercised. . . . . . . . (50) 0.88 to 3.03 (102) 2.05
Terminated . . . . . . . (144) 0.88 to 4.00 (226) 1.57
------------ ================ ----------- ------
Balance, December 31, 1999 2,639 $ 0.88 to $8.00 $ 5,563 $ 2.11
============ ================ =========== ======
Options outstanding and currently exercisable by exercise price under the
option plan at December 31, 1999 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
WEIGHTED AVG.
RANGE OF NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- --------------- ---------------- -------------- ------------ --------------
0.88 - $1.25. 707,700 3.72 $ 0.90 266,370 $ 0.93
1.31 - 1.91. 660,395 3.41 1.63 201,749 1.63
2.03 - 3.03. 855,874 2.56 2.84 618,956 2.99
3.09 - 4.34. 400,000 4.44 3.14 26,667 3.09
8.00 - 8.00. 15,250 1.33 8.00 15,250 8.00
------------- --------------- ---------------- -------------- ------------ ------------
0.88 - $8.00. 2,639,219 3.36 $ 2.11 1,128,992 $ 2.34
============= =============== ================ ============== ============ ============
Stock Compensation
Pro forma information regarding net income (loss) and net income (loss) per
share is presented in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
requires that the information be disclosed as if the Company had accounted for
its employee stock-based compensation plans under the fair value method
prescribed by SFAS 123.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997:
1999 1998 1997
---------- ---------- ----------
Risk free interest rates 5.620% 5.335% 6.220%
Expected life. . . . . . 3.3 years 3.3 years 3.5 years
Expected volatility. . . 221.48% 61.4% 77.7%
Expected dividend yield. 0% 0% 0%
The weighted average fair value of options granted in 1999, 1998 and 1997
was $2.76, $1.60, and $2.92, respectively.
Under the 1989 Employee Stock Purchase Plan, the Company does not recognize
compensation cost related to employee purchase rights under the Stock Purchase
Plan. To comply with the pro forma reporting requirements of SFAS 123,
compensation cost is estimated for the fair value of the employees' purchase
rights using the Black-Scholes model with the following assumptions for those
rights granted in 1999, 1998 and 1997.
1999 1998 1997
---------- ---------- ----------
Risk free interest rates 4.95% 5.415% 5.630%
Expected life. . . . . . 0.5 years 0.5 years 0.5 years
Expected volatility. . . 221.48% 61.4% 77.7%
Expected dividend yield. 0% 0% 0%
The weighted average fair value of those purchase rights granted in 1999,
1998 and 1997 was $1.31, $0.48 and $1.80, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and basic
and diluted net loss per share would have been the pro forma amounts indicated
below (in thousands, except per share data):
1999 1998 1997
-------- --------- ---------
Pro forma net loss available to common
shareholders . . . . . . . . . . . . . . . . $(2,781) $(32,380) $(21,537)
Pro forma net loss per share-basic and diluted $ (0.15) $ (1.88) $ (1.28)
The above pro forma effects on net loss may not be representative of the
effects on future results as options granted typically vest over several years
and additional option grants are expected to be made in future years.
NOTE 9. EMPLOYEE BENEFIT PLAN
During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit
Plan") to provide retirement and incidental benefits for eligible employees. The
Benefit Plan provides for Company contributions as determined by the Board of
Directors that may not exceed 6% of the annual aggregate salaries of those
employees eligible for participation. In 1999, 1998 and 1997, the Company
contributed $30,000, $62,000 and $92,000, respectively, in contributions to the
Benefit Plan.
NOTE 10. OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
----------- ------ --------
Interest income. $ 336 $ 77 $ 156
Interest expense (4) (186) (445)
Foreign exchange 330 301 (1,107)
Other, net . . . 7 (278) 33
----------- ------ --------
$ 669 $ (86) $(1,363)
=========== ====== ========
NOTE 11. INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998 and 1997 was
$177,000, $1,000, and $14,844,000, respectively.
The components of income (loss) before income taxes were as follows (in
thousands):
1999 1998 1997
-------- --------- ---------
Domestic loss before taxes . . . . $(2,408) $(23,629) $(18,215)
Foreign income (loss) before taxes 791 (771) (1,121)
-------- --------- ---------
Loss before taxes. . . . . . . . . $(1,617) $(27,600) $(19,336)
======== ========= =========
In 1997, the income tax expense consisted of deferred federal tax of
$14,004,000 and deferred state tax of $840,000. In 1998, the income tax expense
consisted of current state tax. In 1999, the income tax expense was due to
current foreign taxes.
The Company's effective tax rate for the years ended December 31, 1999,
1998 and 1997 differs from the U.S. federal statutory income tax rate as
follows:
1999 1998 1997
----- ----- ------
Federal income tax at statutory rate 35% 35% 35%
Change in valuation allowance. . . . 0 0 (372)
Foreign income taxes . . . . . . . . (18) 0 0
Other. . . . . . . . . . . . . . . . 0 0 7
Net operating loss not benefited . . (29) (35) 0
----- ----- ------
(12)% 0% (330)%
===== ===== ======
The components of the net deferred tax asset comprise the following (in
thousands):
1999 1998
--------- ---------
Deferred tax assets (liabilities):
Net operating loss carryforwards. . . . . . . . . $ 27,635 $ 26,079
Tax credit carryforwards. . . . . . . . . . . . . 1,999 1,950
Inventory, accounts receivable and other reserves 1,455 2,100
Non-deductible accrued expenses and reserves. . . 422 1,100
Depreciation and amortization . . . . . . . . . . 1,411 1,411
Valuation allowance . . . . . . . . . . . . . . . (32,923) (32,640)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . . $ 0 $ 0
========= =========
The deferred tax assets valuation allowance at December 31, 1999 and 1998
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these tax
assets such that a full valuation allowance is necessary. These factors include
the lack of a significant history of consistent profits and the lack of
carryback capacity to realize these assets. Based on this absence of objective
evidence, management is unable to assert that it is more likely than not that
the Company will generate sufficient taxable income to realize the Company's net
deferred tax assets.
At December 31, 1999, the Company had the following income tax
carryforwards available (in thousands):
TAX REPORTING EXPIRATION DATES
-------------- ----------------
U.S. regular tax operating losses $ 78,585 2006-2019
U.S. business tax credits . . . . $ 1,914 2003-2011
State net operating losses. . . . $ 24,724 2000-2004
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of net operating loss carryforwards and credits before
utilization.
NOTE 12. SEGMENT INFORMATION
Effective for 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information."
Management of the Company has identified its operating segments based on
differences in products and services. The Company's operations have consisted of
thin film and MeV ion implant product lines. The Company sold its MeV ion
implant product line to Varian in July 1998. The Company has aggregated its two
product lines for financial reporting purposes because its product lines have
similar long-term economic characteristics and because the products and
services, production processes, types of customers, and the methods used to
distribute the products and provide the services of the product lines are
similar. All reportable segment information is equal to the financial
information reported in the Company's consolidated financial statements and
notes thereto.
Currently, the Company operates in one industry segment. The Company is
engaged in the design, manufacture, marketing and servicing of advanced thin
film deposition systems used in the semiconductor manufacturing industry.
Net sales from thin film products and services accounted for 100%, 35% and
32% of the Company's net sales for 1999, 1998 and 1997, respectively. Net sales
from MeV ion implant products and services accounted for 65% and 68% of the
Company's net sales in 1998 and 1997, respectively.
Export Sales
For reporting purposes, export sales are determined by the location of the
parent company of the Company's customer, regardless of where the delivery was
made by the Company.
Net sales by geographical region for the years ended December 31, 1999,
1998 and 1997 were as follows (in thousands):
1999 1998 1997
------- ------- -------
United States $ 3,830 $14,318 $21,914
South Korea . 23,819 9,602 42,143
Japan . . . . 216 4,566 17,700
Rest of world 495 3,945 2,529
------- ------- -------
$28,360 $32,431 $84,286
======= ======= =======
The Company did not hold any material long-lived assets in countries other
than the United States at December 31, 1998 or 1997.
Major Customers
In 1999, Samsung Electronics Company, Ltd. and Micron Technology, Inc.
accounted for 84% and 11% of net sales, respectively. In 1998, three customers,
Samsung Electronics Company, Ltd., Advanced Micro Devices and Micron Technology,
Inc., accounted for 28%, 15% and 12% of net sales, respectively. In 1998,
Samsung Electronics Company, Ltd. accounted for 68% of the Company's thin film
net sales and three customers, Advanced Micro Devices, Micron Technology, Inc.
and Atmel Corp. accounted for 21%, 18% and 14% of the Company's ion implant net
sales, respectively. In 1997, Samsung Electronics Company, Ltd. and Innotech
Corporation accounted for 47% and 17% of net sales, respectively.
NOTE 13. SALE OF ION IMPLANT PRODUCT LINE
In July 1998, the Company sold selected assets and transferred selected
liabilities related to the MeV ion implant equipment product line to Varian
Associates, Inc. for approximately $24.1 million. The net assets and liabilities
transferred to Varian included inventory of $18.9 million, capital equipment and
other assets of $9.7 million, and warranty and installation liabilities of $3.6
million. As a result of the Varian transaction, the Company no longer engages in
the ion implant business and has refocused its efforts on thin film deposition.
The Company used a portion of the net proceeds for repayment for certain
outstanding indebtedness and the redemption of 70,000 shares of Series A
Convertible Preferred Stock, with the remaining proceeds to be used for working
capital and general corporate purposes, including investment in research and
development of thin film products. In connection with the Varian transaction and
the refocusing of the Company's business on thin film products, the Company
significantly reduced the workforce at its Sunnyvale, California location.
NOTE 14. RESTRUCTURING AND OTHER
In 1998, the Company recorded restructuring and other charges of
$12,707,000 related to the Varian transaction and the restructuring of the thin
film operation. Actual costs recorded against this restructuring accrual were as
follows (in thousands):
CLOSING LEGAL
OFFICES AND ACCOUNTING
PERSONNEL INVENTORY LEASEHOLD TRANSACTION AND BANKING
CHARGES WRITEDOWNS IMPROVEMENTS LOSSES FEES
(CASH) (NON-CASH) (NON-CASH) (NON-CASH) (CASH) TOTAL
----------- ---------- ------------ ----------- ------------ ---------
Restructuring and other accrual . . . . . $ 1,746 $ 7,393 $ 1,113 $ 1,402 $ 1,053 $ 12,707
Amounts incurred in 1998. . . . . . . . . (1,446) (7,393) (1,113) (1,182) (333) (11,467)
----------- ---------- ------------ ----------- ------------ ---------
Balance at December 31, 1998. . . . . . . 300 0 0 220 720 1,240
Amounts incurred in 1999. . . . . . . . . (136) 0 0 (77) (1,027) (1,240)
(Release of reserves) additional reserves (164) 0 0 (143) 307 0
----------- ---------- ------------ ----------- ------------ ---------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
=========== ========== ============ =========== ============ =========
In 1999, the Company recorded an additional charge of $543,000 for the
final settlement of a dispute with Varian that arose in connection with the
Varian transaction. This charge related to funds that were held in escrow for
possible claims made under the Company's change of control agreements with key
ion implant employees who transferred to Varian as part of the Varian
transaction. No funds were distributed from this escrow account, and the final
change of control agreement expired in July 1999.
There was no restructuring reserve remaining as of December 31, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file a definitive proxy statement
within 120 days after the end of the fiscal year covered by this Report pursuant
to Regulation 14A relating to the Registrant's 2000 Annual Meeting of
Shareholders (the "Proxy Statement") to be held on May 31, 2000, and certain
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, who are elected by and
serve at the discretion of the Board of Directors, and their ages at March 30,
2000, are as follows:
NAME AGE POSITION
- ----------------------- ---- ------------------------------------------------------------
William W.R. Elder. . . 61 Chairman of the Board, President and Chief Executive Officer
Thomas E. Seidel, Ph.D. 64 Executive Vice President, Chief Technical Officer
Kenneth Schwanda. . . . 42 Vice President, Finance, Chief Financial Officer
Jeff Farrell. . . . . . 52 Vice President, Engineering
Robert A. Wilson. . . . 37 Vice President, Worldwide Sales
Mario M. Rosati . . . . 53 Secretary and Director
Todd S. Myhre . . . . . 54 Director
G. Frederick Forsyth. . 56 Director
George D. Wells . . . . 64 Director
Robert J. Richardson. . 54 Director
Except as set forth below, all of the executive officers have been
associated with us in their present or other capacities for more than the past
five years. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. There are no family relationships among our
executive officers.
WILLIAM W.R. ELDER was a founder of Genus and is our Chairman of the Board,
President and our Chief Executive Officer. From October 1996 to April 1998, Dr.
Elder served only as Chairman of the Board. From April 1990 to September 1996,
Dr. Elder was Chairman of the Board, President and Chief Executive Officer of
the Company. From November 1981 to April 1990, Dr. Elder was President and a
director of the Company.
THOMAS E. SEIDEL has served as our Executive Vice President and Chief
Technical Officer since January 1996. From July 1988 to January 1996, Dr. Seidel
was associated with SEMATECH, a semiconductor-industry consortium, in various
senior management positions, most recently as Chief Technologist and Director of
Strategic Technology.
KENNETH SCHWANDA has served as our Vice President of Finance and Chief
Financial Officer since February 1999. Mr. Schwanda joined the Company in
December 1992 and has held various financial management positions, most
currently as Vice President of Finance. Mr. Schwanda began his professional
career in 1979 at Harris Corporation, a global communications company, where he
held accounting and finance positions.
JEFF FARRELL has served as our Vice President of Engineering since March
1996. From August 1979 to March 1996, Mr. Farrell was employed by Advanced Micro
Devices, a semiconductor manufacturer.
ROBERT A. WILSON has served as our Vice President of Worldwide Sales since
January 1999. Mr. Wilson is also a director of Genus Japan. Mr. Wilson joined
the Company in January 1987 and has held several product and technical marketing
positions with the Company until his transition to sales in 1992.
MARIO M. ROSATI has served as our Secretary since May 1996 and as a
director since our inception in November 1981. Mr. Rosati is also a director of
Aehr Test Systems, a manufacturer of semiconductor test equipment; CATS Software
Inc., a supplier of client/server software products for financial risk
management; Meridian Data, Inc., a developer of compact disc-read only memory
and compact disc-recordable systems and related software for both networks and
personal computers; Ross Systems, Inc., a supplier of enterprise-wide business
systems and related services to companies installing open systems/client server
software products; and Sanmina Corporation, an electronics manufacturer of
multilayered printed circuit boards, backplane assemblies, subassemblies, and
printed circuit board assemblies. Mr. Rosati is a member of Wilson Sonsini
Goodrich & Rosati, P.C., general counsel to the Company.
TODD S. MYHRE has served as a director since January 1994. Since September
1999, he served as Interim Chief Executive Officer and a Board member for
Ybrain.com, an eCommerce company focused on the college student market. From
April 1998 to August 1999 and from September 1995 to January 1996, he served as
President, Chief Executive Officer, and a Board member of GameTech
International, an electronic gaming manufacturer. From February 1996 to February
1998, Mr. Myhre was an international business consultant. From January 1993 to
August 1993, from August 1993 to December 1993 and from January 1994 to August
1995, Mr. Myhre served as Vice President and Chief Financial Officer of the
Company, as Executive Vice President and Chief Operating Officer and as
President and a Director of the Company.
G. FREDERICK FORSYTH has served as a director since February 1996. Since
March 1999, Mr. Forsyth has served as President, Systems Engineering and
Services of Solectron Corp. From August 1997 to March 1999, Mr. Forsyth served
as President, Professional Products Division of Iomega, Inc. From June 1989 to
February 1997, Mr. Forsyth was associated with Apple Computer, Inc., a personal
computer manufacturer, in various senior management positions, most recently as
Senior Vice President and General Manager, Macintosh Product Group.
GEORGE. D. WELLS has served as a director since March 2000. From July 1992
to October 1996, Mr. Wells served as President and Chief Executive Officer of
Exar Corporation. From April 1985 to July 1992, he served as President and Chief
Operating Officer of L.S.I. Logic Corporation and became Vice Chairman in March
1992. From May 1983 to April 1985, Mr. Wells was President and Chief Executive
Officer of Intersil, Inc., a subsidiary of General Electric Company.
ROBERT J. RICHARDSON has served as a director since March 2000. Since
January 2000, Mr. Richardson has been a semiconductor industry consultant. From
November 1997 to January 2000, Mr. Richardson served as Chairman, Chief
Executive Officer and President of Unitrode Corporation. From June 1992 to
November 1997, he served in various positions at Silicon Valley Group, Inc.
including President Lithography Systems, President Track Systems Division, and
Corporate Vice-President New Business Development and Marketing. From October
1988 to June 1992, Mr. Richardson was President and General Manager, Santa Cruz
Division at Plantronics, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets-December 31, 1999 and 1998
Consolidated Statements of Operations-Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity-Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows-Years Ended December 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. Financial statement schedules have been
omitted because they are not applicable or are not required or the
information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Report.
Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter ended December 31, 1999.
GENUS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement, dated April 15, 1998, by and between
Varian Associates, Inc. and Registrant and exhibits thereto (15)
3.1 Amended and Restated Articles of Incorporation of Registrant as
filed June 6, 1997 (11)
3.2 By-laws of Registrant, as amended (13)
4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between
Registrant and Bank of America, N.T. and S.A., as Rights Agent (4)
4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998,
among the Registrant and the Investors (14)
4.3 Registration Rights Agreement, dated February 2, 1998, among the
Registrant and the Investors (14)
4.4 Certificate of Determination of Rights, Preferences and Privileges of
Series A Convertible Preferred Stock (14)
4.5 Certificate of Determination of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock (17)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the
Registrant and the Investors (17)
10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4
Mulliken Way, Newburyport, Massachusetts, and amendment and extension
of lease, dated March 17, 1987 (1)
10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at
Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1)
10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10)
10.5 International Distributor Agreement, dated November 23, 1987,
between General Ionex Corporation and Innotech Corporation (1)
10.6 Distributor/Representative Agreement, dated August 1, 1984,
between Registrant and Aju Exim (formerly Spirox Holding Co./You One
Co. Ltd.) (1)
10.7 Exclusive Sales and Service Representative Agreement, dated
October 1, 1989, between Registrant and AVBA Engineering Ltd. (3)
10.8 Exclusive Sales and Service Representative Agreement, dated as of
April 1, 1990, between Registrant and Indosale PVT Ltd. (3)
10.9 License Agreement, dated November 23, 1987, between Registrant and
Eaton Corporation (1)
10.10 Exclusive Sales and Service Representative Agreement, dated May 1,
1989, between Registrant and Spirox Taiwan, Ltd. (2)
10.11 Lease, dated April 7, 1992, between Registrant and The John A. and
Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad
Drive, Sunnyvale, California (6)
10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.13 License and Distribution Agreement, dated September 8, 1992,
between the Registrant and Sumitomo Mutual Industries, Ltd. (8)
10.14 Lease Agreement, dated October 1995, for Registrant's facilities at
Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9)
10.15 International Distributor Agreement, dated July 18, 1997, between
Registrant and Macrotron Systems GmbH (12)
10.16 Credit Agreement, dated August 18, 1997, between Registrant and
Sumitomo Bank of California (12)
10.17 Settlement Agreement and Mutual Release, dated April 20, 1998,
between Registrant and James T. Healy (16)
10.18 Form of Change of Control Severance Agreement (16)
10.19 Settlement Agreement and Mutual Release, dated January 1998, between
the Registrant and John Aldeborgh (18)
10.20 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Mary Bobel (18)
10.21 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Fred Heslet
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and
amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10,
1988, and December 15, 1988, which Registration Statement became effective
November 10, 1988.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and
amended May 24, 1989, which Registration Statement became effective May 24,
1989.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Report on Form 8-K dated June 12, 1992.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 21, 1992.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
(10) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(12) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(13) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(14) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated February 12, 1998.
(15) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated April 15, 1998.
(16) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K/A for the year ended December 31, 1997.
(17) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated July 29, 1998.
(18) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998.
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, in the City of
Sunnyvale, State of California, on the 30th day of March 2000.
GENUS, INC.
By: /s/Kenneth Schwanda
-------------------------
Kenneth Schwanda
Vice President, Finance
Chief Financial Officer
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 dates indicated.
NAME TITLE DATE
- ------------------------- -------------------------------- --------------
/s/William W.R. Elder . Chairman of the Board, President March 30, 2000
- -------------------------
William W.R. Elder. . . and Chief Executive Officer
/s/Kenneth Schwanda . . Vice President, Finance March 30, 2000
- -------------------------
Kenneth Schwanda. . . . Chief Financial Officer
/s/G. Frederick Forsyth Director March 30, 2000
- -------------------------
G. Frederick Forsyth
/s/Todd S. Myhre. . . . Director March 30, 2000
- -------------------------
Todd S. Myhre
/s/Mario M. Rosati. . . Director March 30, 2000
- -------------------------
Mario M. Rosati
/s/George D. Wells. . . Director March 30, 2000
- -------------------------
George D. Wells
/s/Robert J. Richardson Director March 30, 2000
- -------------------------
Robert J. Richardson
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-28394, 33-38657, 33-56192, 333-29999, 333-70815
and 333-84837) and Form S-3 (No. 333-48021) of Genus, Inc. of our report dated
February 9, 2000 relating to the financial statements, which appears in this
Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
MARCH 30, 2000
[ARTICLE] 5
[CIK] 0000837913
[NAME] GENUS, INC.
[MULTIPLIER] 1000
[CURRENCY] USD
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] DEC-31-1999
[EXCHANGE-RATE] 1
[CASH] 6739
[SECURITIES] 0
[RECEIVABLES] 7870
[ALLOWANCES] (241)
[INVENTORY] 7266
[CURRENT-ASSETS] 22517
[PP&E] 27942
[DEPRECIATION] (23408)
[TOTAL-ASSETS] 27744
[CURRENT-LIABILITIES] 8366
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 101042
[OTHER-SE] (81664)
[TOTAL-LIABILITY-AND-EQUITY] 27744
[SALES] 28360
[TOTAL-REVENUES] 28360
[CGS] 16628
[TOTAL-COSTS] 30469
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] (1440)
[INCOME-TAX] 177
[INCOME-CONTINUING] (1617)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (1617)
[EPS-BASIC] (.09)
[EPS-DILUTED] (.09)