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As filed with the Securities and Exchange Commission on April 1, 2002
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, 2001
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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 94-2790804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 February
28, 2002 in the over-the-counter market as reported by the Nasdaq National
Market, was approximately $78.6 million. 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 February 28, 2002, Registrant had 26,287,803 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 2002 Annual Meeting of
Shareholders - Items 10, 11, 12 and 13.
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TABLE OF CONTENTS
PART I. PAGE
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceeding 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Consolidated Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
PART III.
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
SIGNATURES
EXHIBITS
INDEX
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Since 1982, we have been supplying advanced manufacturing systems to the
semiconductor industry worldwide. Major 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 (CVD)
tungsten silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, today 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, hafnium oxide and other advanced dielectric insulating and conducting
materials for advanced integrated circuit manufacturing.
We have implemented a strategy of targeting non-semiconductor markets, as
we are confident that our developed films can serve multiple applications in
both semiconductors and non-semiconductor segments. In addition to expanding our
total available market, this strategy of diversifying our customer base is
intended to gain us some protection against cyclical downturns in the
semiconductor industry. We think our emerging ALD technology will prove
effective in expanding and diversifying our customer base.
We continue to develop enabling thin film technology that addresses the
scaling challenges facing the semiconductor industry relating to gate and
capacitor materials. The International Technology Roadmap for Semiconductors
(ITRS) has labeled these challenges as "red zones" 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.
As it is in the semiconductor industry, non-semiconductor business segments
have scaling initiatives as well. For example, the making of thin film magnetic
heads in the data storage industry has scaling requirements analogous to the
scaling trends in semiconductors. A key part of our business strategy includes
providing enabling thin film solutions for non-semiconductor applications.
We provide a production-proven platform that is used for both the
development and volume production of new thin films in integrated circuit
manufacturing. This platform is based on a common architecture and a high
percentage of common parts that are 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 to service their manufacturing systems easily. In addition
to the modular platform architecture, our systems operate on 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
(CVD), plasma enhanced 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., NEC and
Samsung Electronics Company, Ltd. and non-semiconductor customers such as
Read-Rite Corporation, which is an independent manufacturer of magnetic
recording heads for hard disk drives and a recognized technology leader in the
data storage industry.
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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
(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. Although the
semiconductor industry has grown over 30 years with an average compound annual
growth rate (CAGR) of 15%, it is prone to cyclic variations. Typically there are
periods of high demand followed by periods of low demand. Each cycle is one to
three years of high growth and one to three years of low growth. Currently we
are witnessing the biggest recession in the history of the semiconductor and
semiconductor equipment industries. VLSI Research, an independent research
company specializing in the high technology industry, estimates that bookings in
the semiconductor equipment industries in 2001 declined by around 71% compared
to the prior year and industry shipments in 2001 were down 38% compared to 2000.
Additionally, VLSI expects 2002 shipments to be down 5% compared to 2001.
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 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
increasing complexity of integrated circuits and the accompanying reductions in
feature size require more advanced and expensive wafer fabrication equipment,
which can 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 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 the
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 (mm)
wafers, up from the 100mm wafers used ten to fifteen years ago. Currently, many
integrated circuit makers have commenced pilot production lines using 300mm
wafers. We believe that most major manufacturers will add 300mm production
capabilities within the next one to four years.
4
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
0.13 micron and below, the industry will face significant challenges and
roadblocks pertaining to improving device performance and feature size
reduction. The International Technology Roadmap has labeled these challenges
"red zones" 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 of thin film deposition equipment to
semiconductor and non-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.
5
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, and
blanket tungsten, and ALD films such as aluminum oxide, tantalum oxide, titanium
oxide, zirconium oxide, hafnium oxide, titanium nitride and tungsten nitride.
These innovative thin films solve certain key device and interconnect problems
faced by semiconductor manufacturers as they scale their device geometries below
0.13 micron.
VERSATILE PRODUCTION PLATFORM
Our LNYX series of systems is based on a common outsourced, reliable
wafer-handling robotic platform. The LNYX systems are designed to be flexible
and can be configured for multiple deposition processes, such as CVD, plasma
enhanced CVD and ALD. Our LNYX 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
Our LNYX series equipment offers low cost of ownership by featuring
multiple deposition processes capabilities, production-proven process chamber
design, advanced software architecture and reliable wafer handling. Based on
feedback from our installed customer base, we estimate that our production
systems consistently achieve greater than 90% availability, and that the mean
time between failures of our system is greater than 300 hours. In addition, our
customers have confirmed that we offer among the lowest costs of operation. We
are committed to improving these results; achieving these same levels of
performance or better 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.
MARKETS AND APPLICATIONS
In 2001, we continued to expand our product line with new films and
applications that allow us to serve broader markets. In 1999, Genus had tungsten
silicide and tungsten nitride for gate and barrier applications and we were just
introducing ALD technology. As we turn into 2002, we have tungsten silicide,
tungsten nitride and blanket tungsten by conventional CVD, and aluminum oxide,
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tantalum oxide, titanium oxide, hafnium oxide and zirconium oxide as well as
titanium nitride and tungsten nitride by ALD. In addition, Genus has the
demonstrated capability to integrate these ALD films as alloys and nanolaminates
(layered structures) for the engineering of specialized capabilities on its LNYX
series platforms. These 10 films serve the Company for applications in
semiconductors for gate, capacitor and interconnect, as well as
non-semiconductor applications (e.g., in particular, aluminum oxide for thin
film magnetic heads of hard disk drives). In the near term, our key target
applications are gate and capacitor for semiconductors; and ALD dielectrics for
gap applications in thin film heads.
By focusing on a broader set of film markets, we believe we can reduce our
dependence on the volatile dynamic-random-access memory (DRAM) market, as well
as benefit from participation in the logic segment and non-semiconductor market
opportunities. In summary, we are now participating in semiconductor memory
with gate and capacitor films, in semiconductor logic with advanced gate films,
and in non-semiconductor gap dielectrics for thin film magnetic heads. We moved
from solely memory applications to this level of diversification in the last
three years.
We focus on the following thin film market segments:
CVD SILICIDE AND METAL, AND ALD DIELECTRICS AND METAL BARRIERS FOR GATE STACK
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 Rapid integrated gate (RinG) that we
have developed and beyond that to use various metal barrier films in combination
with high-k dielectrics.
Capacitor films
Genus is commercializing its ALD technology with the application to
advanced capacitors. These include: cylinder ("stacked"), trench, embedded, rf
and decoupling capacitor applications. Genus is in beta phase with several
applications and customers using both ALD dielectric and metal electrode films.
The state of the art has been advanced due to high conformality and high quality
Genus ALD films. The opportunity to increase the number of beta sites and move
to pilot production exists.
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.
Non-semiconductor films
Genus has developed a market for its ALD films in the thin film magnetic
head (reader) market. This market developed because of a production ready-made
solution that the Genus ALD dielectrics provide for the scaling of the gap
dielectrics. The market is scaling to thinner films, ideally suited to the ALD
approach. Other non-semiconductor markets are targeted, these include:
Magnetic Random Access Memory (MRAM). Optical interconnects / filters, Organic
Light Emiting Diodes (OLEDs), Microelectromechanical Systems (MEMS), and photo
masks, in fact anywhere that film uniformity and conformality are enabling.
However, it is too early to predict timing of the penetration in many of these
markets.
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
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wafer handler and its wafer controlling software. The LYNX process modules are
generically appropriate for CVD, plasma enhanced 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 load locks, 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 300mm
wafer sizes and is designed for the deposition of the following thin film
applications:
CVD --
- tungsten silicide-monosilane
- tungsten silicide-dichlorosilane
- tungsten nitride
- tungsten
ALD --
- aluminum oxide
- advanced metal oxides (e.g., tantalum oxide, titanium oxide, zirconium
oxide, hafnium oxide)
- nanolaminates and alloys
- metal films (e.g., titanium nitride and tungsten nitride)
LYNX Series
LYNX2(R). Manufacturers of advanced DRAM devices of 0.35 to 0.18 micron
currently use the LYNX2(R) system in production. LYNX2(R) systems support over
150 process modules in high volume production. Production availability for the
LYNX2(R)system runs from 90-95%. LYNX2(R) platforms are also used for customer
development and pilot manufacturing for more advanced semiconductor applications
below 0.18 micron. The LYNX2(R)features a wafer-handling platform that is
compatible with the Modular Equipment Standards Committee (MESC). This platform
uses a centrally located, dual-end effectors 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, and hardware
status and service features. The modular design of the LYNX2(R)allows the
addition of up to four process modules, which can be run serially or in
parallel. The LYNX2(R) 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(TM). We introduced the LYNX3(TM) in January 1999 as our first 300mm
low pressure CVD process module in a beta system. The LYNX3(TM) process module
is based on a newly developed and patented process chamber concept that results
in exceptional uniformity. The LYNX3(TM) is designed to run all films currently
supported by the LYNX2(R), as well as all films currently in development. The
LYNX3(TM) system supports up to five process modules, which can be run serially
or in parallel. Also, we have developed an advanced version of the LYNX3(TM),
which is designed to be a "bridge tool", capable of running either 200 or 300mm
wafers.
The range of thin films that can be deposited using the LYNX product family
include:
- 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 made other
advanced ALD dielectrics available during 2000 and 2001. We believe
8
that our ALD aluminum oxide-based 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.
- ALD Metal Films. Metal films have been developed and offer application
for metal gate (work function control as well as barrier), capacitor
electrodes, contact and interconnect barriers. The applications are
current in the case of capacitor electrodes and contact barrier. For
interconnects they will likely come to be needed below the 90mm
feature size, where barrier film thickness decrease below 100
angstroms. Somewhat beyond 2005, there will be an interest in these
barriers for metal gate electrodes.
- 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.
- Rapid Integrated Gate. 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. This film is a low-cost
candidate for production using tungsten gate technology.
- Metal Oxide Alloys and Nanolaminates. With the development of Genus
ALD, the Company has been able to demonstrate a film flexibility
otherwise not known. For example, Genus LYNX ALD system can provide
the flexibility to deposit up to 3 compound films in alloy and / or
nanolaminate form. The capability has become enabling for the
"engineering" of composite films for optimal performance in next
generation semiconductor devices. Composites of both dielectrics and
metals can be achieved.
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.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Currently, the Company operates in one industry segment. The Company is
engaged in the design, manufacturing, marketing and servicing of advanced thin
film deposition systems used in the semiconductor manufacturing industry. Please
refer to Item 6, Selected Financial Data, and Item 8, Consolidated Financial
Statements and Supplementary Data of this 10K report for operating segment
financial information.
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, South Korea and Europe. 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. We also
offer training to our customers at our headquarters.
9
SALES AND MARKETING
We maintain direct sales and service offices in the United States, Japan,
South Korea and Europe. From these offices and other locations, we provide
customer support directly and maintain, "spares depots" for our products. We
also have sales representatives in the northwestern U.S., Taiwan, Singapore,
Malaysia and China.
CUSTOMERS
We rely on a limited number of customers for a substantial portion of our
net sales. Our major customers in 2001 included Samsung, NEC, Infineon, SCS and
Read-Rite. As of December 31, 2001 we had seven customers in four market
segments serving four market segments - Memory, Logic, Data Storage and MEMS,
compared to two customers serving only the memory market segment in 2000.
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 $3.2 million as of December 31, 2001.
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(R) and LYNX3systems and ALD films. We expect to focus our
future efforts on our Lynx ALD system for 200 and 300mm 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 $12.1 million for 2001, $8.7
million for 2000, and $5.4 million for 1999, representing 25%, 21%, and 19% of
revenues, respectively. Our research and development expenses were higher in
2001 primarily due to investments made in developing demonstration equipment.
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
10
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.
Our direct competitors in the CVD tungsten silicide market include Applied
Materials, Inc. and Tokyo Electron, Ltd. our direct competitors in the ALD
market include ASM International and Veeco Instruments. Competition from these
competitors increased in 2000 and 2001, 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 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.
11
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 clean room 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 affected 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 25 United States patents with 12 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
12
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.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such 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.
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The complaint seeks monetary and injunctive relief. On
August 1, 2001, Genus filed a counterclaim against ASMA and ASM International,
N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent")
entitled "Method of Selective Etching Native Oxide" and for antitrust
violations. Genus also seeks a declaratory judgment that ASMA's claims regarding
the 365 and 590 Patents are invalid and unenforceable. An initial Case
Management Conference was held on October 16, 2001. On January 9, 2002, the
court issued an order granting ASM leave to amend its complaint to add Dr.
Arthur Sherman as a party and to add a claim that Genus is directly and
indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled
"Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow",
which ASM claims to own. The court also severed and stayed discovery regarding
Genus' antitrust claims until after the patent litigation is resolved. On
February 4, 2002, Genus filed for declaratory judgment on the grounds that
ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim
Construction Hearings regarding these claims are set for June 14, 2002 (for the
590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002
(for the 165 Patent).
We intend to defend our position vigorously. The outcome of any litigation
is uncertain, however, and we may not prevail. Should we be found to infringe
any of the patents asserted, in addition to potential monetary damages and any
injunctive relief granted, we would need either to obtain a license from ASM to
commercialize our products or redesign our products so they do not infringe any
of these patents. If we were unable to obtain a licenses or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale of our atomic layer products. In this case our business may
not develop as planned, and our results could materially suffer.
EMPLOYEES
As of December 31, 2001, we employed 138 full-time employees worldwide. 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
are 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.
Information regarding our foreign and domestic operations and export
revenues is included in Note 12 of the Notes to the Consolidated Financial
Statements.
13
RECENT DEVELOPMENTS
On January 25, 2002, the Company sold 3,871,330 shares of common stock, and
warrants to purchase 580,696 shares of common stock, for gross proceeds of
approximately $8.7 million or net aggregate proceeds of $7.9 million.
ITEM 2. PROPERTIES
We maintain our headquarters, manufacturing and research development
operations in Sunnyvale, California. We have a lease for a facility totaling
approximately 100,500 square feet. Our lease expires in October 2012, with a
current annual rental expense of approximately $903,000. In 2003, our annual
rental expense will be $1,828,000. We currently have about 20,000 square feet
of office and clean room space available for subletting. We also have leases
for our sales and support offices in Seoul, South Korea and Tokyo, Japan. 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.
In 2000, we were subleasing approximately 27,000 square feet to a third
party. In September 2001, this third party terminated their sublease and we
reclaimed the office space. Total amount of sublease income in 2001 was
approximately $596,000.
ITEM 3. LEGAL PROCEEDINGS
In May of 1999, Varian Semiconductor Equipment Associates, Inc. ("Varian")
filed a Statement of Claims with the American Arbitration Society of Santa Clara
County, California seeking to enforce certain provisions of the April 15, 1998
Asset Purchase Agreement by and between Varian and Genus (the "Asset Sale").
The dispute specifically involved ownership rights of certain high-energy ion
implanter assets. Varian and Genus entered into a Settlement and Mutual Release
(the "Release") in January of 2000. As partial consideration under the Release,
Genus agreed to relinquish its ownership interest in certain funds provided to
Varian in conjunction with the Asset Sale. These funds were held in an escrow
account maintained by Varian, the amount of which was $543,000.
In July 1999, we were named as a co-defendant in a claim filed at the
Superior Court of the state of California for the county of Santa Clara,
involving an automobile accident by one of our former employees, which resulted
in the death of an individual. Significant general, punitive and exemplary
damages were being sought by the plaintiffs. In June 2001, the plaintiffs
settled with our insurance carrier for an amount within our insurance policy
limits.
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The complaint seeks monetary and injunctive relief. On
August 1, 2001, Genus filed a counterclaim against ASMA and ASM International,
N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent")
entitled "Method of Selective Etching Native Oxide" and for antitrust
violations. Genus also seeks a declaratory judgment that ASMA's claims regarding
the 365 and 590 Patents are invalid and unenforceable. An initial Case
Management Conference was held on October 16, 2001. On January 9, 2002, the
court issued an order granting ASM leave to amend its complaint to add Dr.
Arthur Sherman as a party and to add a claim that Genus is directly and
indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled
"Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow",
which ASM claims to own. The court also severed and stayed discovery regarding
Genus' antitrust claims until after the patent litigation is resolved. On
February 4, 2002, Genus filed for declaratory judgment on the grounds that
ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim
14
Construction Hearings regarding these claims are set for June 14, 2002 (for the
590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002
(for the 165 Patent).
On December 13, 2001, Process Tube Systems, Inc. filed suit against Genus
in the Superior Court of California, County of Santa Clara, asserting that Genus
breached a certain purchase order agreement dated September 29, 2000. The
complaint sought damages in the amount of $282,384 plus costs, fees, and
interest.
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.
15
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 only class of Genus securities that is traded is Genus common
stock. The high and low closing sales prices for 2000 and 2001 set forth below
are as reported by the NASDAQ National Market System. At February 28, 2002, we
had 418 registered shareholders as reported by Mellon Investor Services. The
closing sales price of Genus common stock on December 31, 2001, the last trading
day in 2001, was $ 2.43.
2000 2001
------------------ --------------
HIGH LOW HIGH LOW
-------- -------- ------ ------
First Quarter. . . . $ 16-3/4 $ 4-1/4 $4.094 $1.656
Second Quarter . . . 12-5/16 5-5/8 7.280 2.875
Third Quarter. . . . 10 3-13/16 6.050 1.769
Fourth Quarter . . . $ 4-3/4 $1-19/32 $3.250 $1.909
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.
16
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
=================================================
2001 2000 1999 1998(1) 1997
======= ======== ========= ======== =========
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . . . . . $48,739 $40,638 $28,360 $ 32,431 $ 84,286
Costs and expenses:
Costs of goods sold . . . . . . . . . . . . 32,500 24,385 16,628 29,600 54,762
Research and development. . . . . . . . . . 12,118 8,659 5,368 8,921 12,327
Selling, general and administrative . . . . 10,381 10,093 7,930 14,115 20,326
Restructuring and other(2). . . . . . . . . 0 0 543 7,308 0
--------------------------------------------------
Loss from operations. . . . . . . . . . . . . (6,260) (2,499) (2,109) (27,513) (3,129)
Other income (expense), net . . . . . . . . . (336) 108 669 (86) (1,363)
--------------------------------------------------
Loss before provision for income taxes and
cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . (6,596) (2,391) (1,440) (27,599) (4,492)
Provision for income taxes. . . . . . . . . . 70 490 177 1 14,844
--------------------------------------------------
Loss before cumulative effect of change in
accounting principle. . . . . . . . . . . . . (6,666) (2,881) (1,617) (27,600) (19,336)
Cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . 0 (6,770) 0 0 0
--------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . (6,666) (9,651) (1,617) (27,600) (19,336)
Deemed dividends on preferred stock . . . . . 0 0 0 (1,903) 0
--------------------------------------------------
Net loss attributable to common shareholders. $(6,666) $(9,651) $(1,617) $(29,503) $(19,336)
=================================================
Net loss per share before cumulative
effect of change in accounting principle
Basic . . . . . . . . . . . . . . . . . . . (0.31) (0.15) (0.09) (1.71) (1.15)
Diluted . . . . . . . . . . . . . . . . . . (0.31) (0.15) (0.09) (1.71) (1.15)
Net loss per share:
Basic . . . . . . . . . . . . . . . . . . . (0.31) (0.51) (0.09) (1.71) (1.15)
Diluted . . . . . . . . . . . . . . . . . . (0.31) (0.51) (0.09) (1.71) (1.15)
Cumulative effect of change in accounting
principle (3)
Basic . . . . . . . . . . . . . . . . . . . (0.36)
Diluted . . . . . . . . . . . . . . . . . . (0.36)
Shares used in computing net loss
per share:
Basic . . . . . . . . . . . . . . . . . . . 21,163 18,937 18,134 17,248 16,860
Diluted . . . . . . . . . . . . . . . . . . 21,163 18,937 18,134 17,248 16,860
17
The following are pro forma amounts with the change in accounting principle
related to revenue recognition applied retroactively to years prior to 2000.
Revenues. . . . . . . . . . . . . . . . . . . $48,739 $40,638 $27,992 $ 33,599 *
Net loss. . . . . . . . . . . . . . . . . . . (6,666) (2,881) (3,232) (25,963) *
Net loss per share:
Basic . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.15) $ (0.18) $ (1.51) *
Diluted . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.15) $ (0.18) $ (1.51) *
DECEMBER 31,
=============================================
2001 2000 1999 1998(1) 1997
-------- ------- ------- -------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . $ 3,043 $ 3,136 $ 6,739 $ 8,125 $ 8,700
Working capital . . . . . . . . . . . . . . . . (2,600) 896 14,151 15,799 30,774
Total assets. . . . . . . . . . . . . . . . . . 35,902 44,535 27,744 31,827 76,738
Long-term debt and capital lease obligations 0 0 0 50 971
Redeemable Series B convertible preferred stock 0 0 0 773 0
Total shareholders' equity. . . . . . . . . . . $12,128 $11,292 $19,378 $19,953 $48,357
(1) In 1998, we sold the ion implant equipment product line.
(2) 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.
(3) In 2000, the Company changed its accounting method for recognizing revenue
to comply with Staff Accounting Bulletin number 101.
* Data is not available to provide pro forma information for this year.
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
Since 1982, we have been supplying advanced manufacturing systems to the
semiconductor industry worldwide. Major 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 (CVD)
tungsten silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, today 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, hafnium oxide and other advanced dielectric insulating and conducting
metal barrier materials for advanced integrated circuit manufacturing.
Genus' consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(US GAAP). The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
18
revenues and expenses during the reporting period. On a quarterly basis,
management reevaluates its estimates and judgments based on historical
experience and relevant current conditions and adjusts the financial statements
as required.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Over the past few years we were dependent
on one customer, Samsung, for a majority of our thin film product revenue.
Samsung accounted for 73% of our revenue in 2001, 92% in 2000 and 84% in 1999.
There is no long-term agreement between us and Samsung. In 1999, we shipped our
LYNX2(R) system to a new customer, Micron Technology, and in the first quarter
of 2000, we shipped an ALD system to Infineon Technologies, also a new customer.
In 2001, we shipped systems to four new customers.
International revenue accounted for 93% of revenue in 2001, 98% of revenue
in 2000 and 86% of revenue in 1999. We anticipate that international sales, and
in particular from South Korea, will continue to account for a significant
portion of our total revenue.
The Company's selling arrangements generally involve contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title. As a result, effective January 1, 2000, to comply with the
provisions of Securities and Exchange Commission Staff Accounting Bulletin No.
101, the Company deferred the recognition of revenue from such equipment sales
until installation is complete and the product is accepted by the customer.
Prior to January 1, 2000, revenue related to systems had been generally
recognized upon shipment. A provision for the estimated future cost of system
installation, warranty and commissions was recorded when revenue was recognized.
Under SAB 101, warranty obligations are accrued upon final customer acceptance,
which coincides with recognition of revenue. The cost of inventory shipped to
customers for which we are awaiting customer acceptance is recorded as
"Inventory at customers' locations."
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 and
comprehensive loss. Foreign currency transaction gains and losses are recognized
in the statement of operations.
Business activity in the semiconductor and semiconductor manufacturing
equipment industries has been cyclical; for this and other reasons, Genus'
results of operations for the twelve months ended December 31, 2001, may not
necessarily be indicative of future operating results.
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.
CRITICAL ACCOUNTING POLICIES
We have identified the following as critical accounting policies to our Company:
revenue recognition, accrual for warranty expenses, valuation of inventories and
valuation of research and demonstration equipment (demonstration equipment).
Revenue recognition
Genus' revenue recognition policy is based on guidance provided in SEC
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". Genus recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's price
is fixed and determinable, collectibility is reasonably assured, and Genus has
19
completed any systems installation obligations. Revenues from sales of systems
and major system upgrades are currently recognized when installation is complete
and the customer accepts the product, in writing. Revenues from sale of spare
parts and system upgrades are recognized upon shipment. Revenues related to
maintenance and service contracts are recognized ratably over the duration of
the contracts.
Revenues can fluctuate significantly as a result of the timing of customers
acceptances. At December 31, 2001 and 2000, the Company had deferred revenue of
$7.4 million and $18.6 million, respectively.
Accrual for warranty expenses
The Company provides one-year labor and two-year material warranty on its
products. Warranty expenses are accrued upon revenue recognition. At present,
based upon historical experience, the Company accrues material warranty equal to
2% and 5% of shipment value for its LYNX2(R) and LYNX3 products, respectively,
and labor warranty equal to $20,000 per system for both its LYNX2(R) and LYNX3
products. At the end of every quarter, the Company reviews its actual spending
on warranty and reassess if its accrual is adequate to cover warranty expenses
on the systems in the field which are still under warranty. Differences between
the required accrual and booked accrual are charged to warranty expenses for the
period. At December 31, 2001 and 2000, the Company accrued $803,000 and
$757,000, respectively, for material and labor warranty obligations. Actual
results could differ from estimates. In the unlikely event that a problem is
identified that would result in the need to replace components on a large scale,
material effects on our operating results and financial position may result.
Valuation of Inventories
Inventories are recorded at the lower of standard cost, which approximates
actual cost on a first-in-first-out basis, or market value. We write down
inventories to net realizable value based on forecasted demand and market
conditions. Raw material and purchased parts include spare parts inventory for
systems at a carrying value of $4.4 million and $6.1 million for 2001 and 2000,
respectively. The forecasted demand for spare parts take into account the
Company's obligations to support systems for periods that are as long as 5
years.
Actual demand and market conditions may be different from those projected
by the Company. This could have a material effect on operating results and the
financial position. In 2001, as a result of unfavorable economic conditions and
diminished demand for semiconductor products, the Company experienced a decline
in sales and recorded inventory charges of $317,000 related primarily to excess
inventories. These charges have been included in cost of sales in our
consolidated statements of operations. At December 31, 2001 and 2000, the
Company had inventory valuation allowances of $2.1 million and $2.8 million,
respectively.
Valuation of research and demonstration equipment
Equipment, furniture and fixtures 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.
Equipment includes research and demonstration equipment, which is located
in our Applications Laboratory and are used to demonstrate to our customers the
capabilities of our equipment to process wafers and deposit films. The gross
value of demonstration equipment is based on the cost of materials and actual
factory labor and overhead expenses incurred in manufacturing the equipment.
Costs related to refurbishing or maintaining existing demonstration equipment,
which do not add to the capabilities or useful life of the equipment, are not
capitalized and are expensed as incurred. Demonstration equipment is stated at
cost and depreciated over a period of five years.
20
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.
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
Revenues in 2001 were $48.7 million, up 20% from 2000. Revenues in 2001
were based on customer acceptances on twelve systems including seven 200mm
systems using CVD technology, one 300mm system using CVD technology and four
200mm systems using ALD technology. Revenues in 2000 were based on customer
acceptances of eleven 200mm CVD systems and one 200mm ALD system. Average
selling prices in 2001 were slightly higher than in 2000 reflecting a favorable
mix of more ALD and 300mm modules, which in general, have higher prices than CVD
and 200mm products. Revenues from sale of spare parts and services in 2001 were
$7.1 million, approximately the same as in 2000.
Going forward we expect revenues in 2002 to be up compared to 2001 with
most of the growth coming in the second half of the year.
Shipments in 2001 were $38.2 million, 19% below 2000. For the semiconductor
equipment industry as a whole, shipments in 2001 were 38% below 2000, based on
data published by VLSI Research.
Orders in 2001 were $33.1 million, 20% below the level of orders received
in 2000. For the semiconductor equipment industry as a whole, orders in 2001
were 71% below 2000, based on data published by VLSI Research. Orders in 2001
included bookings for three CVD 200mm systems, one CVD process module and four
ALD systems. Orders in 2000 included bookings for ten 200mm CVD systems and two
ALD systems. We ended 2001 with a total of seven customers serving four market
segments - Capacitor, Logic, Data Storage and MEMS, compared to two customers
serving only the capacitor market segment in 2000. We now offer two product
platforms, the LYNX3, which can be used to produce both 200mm and 300mm wafers,
and LYNX2(R), our core production platform for all 200mm applications to date.
Also, we now have two fully supported core technologies - CVD tungsten products
and ALD high K (dielectric constant) oxides, both available on LYNX2(R) and
LYNX3.
Gross profit margin in 2001 was 33% of revenues compared to a gross profit
margin of 40% in 2000. Although average selling prices in 2001 were slightly
higher than in 2000, overall gross margin was lower in 2001 due to two factors:
- - First, capacity variances were incurred due to our lower production volume,
particularly in the fourth quarter, and fixed costs related to
manufacturing and international service operations. We partially addressed
this capacity issue in October 2001 by laying off 10 employees and
implementing an across the board reduced work week. We will continue to
monitor our capacity utilization and take actions as required.
- - Second, we incurred incremental manufacturing variances of approximately
$1.5 million, primarily attributable to the introduction of LYNX3, and
excess-inventory write-offs of approximately $317,000 during the third
quarter.
Going forward, we expect gross margins to continuously improve with the increase
in volume.
Research and development (R&D) expenses were $12.1 million in 2001
representing 25% of revenues compared to $8.7 million in 2000, representing 21%
of revenues. The increase in R&D expenses of $3.4 million, between 2000 and
21
2001, was primarily due to increased usage of outside consultants ($1.8
million), expenses related to the reconfiguration of demonstration equipment
($800,000) and additional depreciation on research equipment ($600,000). In
2001, we added significant capacity in our demonstration lab and are now able to
turnaround customer requests for demos in 15 to 30 days compared to turnaround
times of 45 to 60 days in 2000. We believe that our demonstration lab now has
adequate capacity for the foreseeable future and we expect a significant
reduction in R&D expenses related to demonstration equipment in 2002.
Selling, general and administrative (SG&A) expenses were $10.4 million in
2001, 21% of revenues, compared to expenses of $10.1 million, 25% of revenues,
in 2000. Increases in salaries related to higher headcount ($700,000) and
severance expenses ($150,000) were partially offset by reduced selling
commissions ($500,000) and by various cost cutting actions, including temporary
salary reductions and shutdown periods, implemented in Q4 of 2001.
Other expenses were $336,000 in 2001 compared to other income of $108,000
in 2000. Expenses in 2001 were primarily due to interest expense on higher
average outstanding debt.
Provision for income taxes was $70,000 in 2001 compared to $490,000 in 2000
primarily reflecting the accrual for taxes in our Korean and Japanese
subsidiaries. We continue to provide a full valuation allowance against the tax
benefit associated with the losses in our U.S. and foreign subsidiaries.
At December 31, 2001, we had federal net operating loss carry-forwards of
$92.2 million and state net operating loss carry-forwards of $18.8 million.
2000 COMPARED WITH 1999
Revenues in 2000 were $40.6 million compared with revenues of $28.4 million
in 1999, representing an increase of 43%. A total of 12 systems were accepted by
the customer in 2000, and qualified for revenue recognition. A total of 5
systems that shipped in 2000 were not signed off and accepted by customers, and
this revenue was deferred at December 31, 2000. Export sales accounted for 92%
of revenue in 2000 compared with 86% in 1999. Revenues for 2000 of $40.6
million, compared to $28.0 million which reflect the 1999 net revenues applying
the change in accounting principle related to revenue recognition, represents an
increase of 45%.
Gross profit margin in 2000 was $16.3 million, representing 40% of
revenues, compared with $11.7 million or 41% in 1999. Costs of goods sold for
1999 reflecting the change in accounting principle were $17.9 million and the
gross profit was $10.1 million or 36%. The gross margin % was lower on higher
sales volumes, and was attributed to lower margins due to competitive pricing
pressures on our standard tungsten silicide products, and increased worldwide
customer service and manufacturing expenses to support our sales growth in 2000,
including a new office in Japan. 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 expenses in 2000 were $8.7 million compared with
$5.4 million in 1999, representing an increase of 61%. As a percentage of
revenues, research and development expenses were 21% in 2000 and 19% in 1999.
The increase in research and development expenses is attributable to investments
in development programs for ALD productization and films, our three 300mm
system, new tungsten products, and continuous improvement programs for existing
products. These programs are essential in our efforts to broaden our customer
base and penetrate new markets in both semiconductor and non-semiconductor
applications.
Selling, general and administrative expenses were $10.1 million in 2000
compared with $7.9 million in 1999, representing an increase of 27%. As a
percentage of revenues, selling, general and administrative expenses were 25% in
2000 and 28% in 1999. The $2.2 million increase in 2000 was due primarily to
22
increased investment in sales and marketing to support the 43% revenue growth
and 66% shipment growth we experienced in 2000, and focused efforts toward new
customers and market segments.
We had other income (net) of $108,000 in 2000 compared with other income of
$669,000 in 1999. Other income in 2000 consisted of interest income and foreign
currency exchange gains due to the strengthening of the Korean won against the
U.S. dollar during the first half of 2000, offset by foreign currency exchange
losses incurred in the fourth quarter. In 1999, other income included interest
income and foreign currency exchange gains.
We provided for income taxes of $490,000 in 2000 compared with $177,000 of
income taxes in 1999. In both years, income taxes were related to income
generated from our South Korean subsidiary.
In 2000, we recorded a non-recurring charge of $6.8 million for the
cumulative effect of a change in accounting principle due to the adoption of SAB
101. This amount represents the gross profit on systems that shipped during
1999, but did not receive final customer acceptance during 1999. Included in
this number were 5 systems and some upgrades, which had a total sales value of
$13.5 million.
In December 2000, the Company changed its accounting method for recognizing
revenue on sales with an effective date of January 1, 2000. The Company's
selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. As a result, effective January 1, 2000, to comply with the provisions of
Securities and Exchange Commission Staff Accounting Bulletin No. 101, the
Company deferred recognition of revenue from such equipment sales until
installation is complete and the product is accepted by the customer. The
Company previously recognized revenue related to systems upon shipment. A
provision for the estimated future cost of system installation, warranty and
commissions was recorded when revenue was recognized. Service revenue is
recognized when service has been completed. The cumulative effect in prior
years of the change in accounting method was a charge of $6.8 million or $0.36
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, our cash and cash equivalents were $3.0 million,
compared to $3.1 million as of December 31, 2000. Accounts receivable was $4.3
million, a decrease of $4.2 million from $8.5 million as of December 31, 2000,
as we were able to collect on most of our overdue receivables.
Cash used by operating activities totaled $1.9 million 2001, and consisted
primarily of net loss of $6.7 million and decreases in deferred revenues of
$11.2 million, partially offset by depreciation of $3.0 million and reductions
in receivables of $4.2 million and reductions in inventories of $9.2 million.
Inventory reductions were primarily related to improved supply chain management,
decreases in inventory held at customer sites from $9.5 million to $5.1 million
and to reductions in shipment backlog, which reduced from $8.4 million at the
end of December 2000 to $3.2 million on December 31, 2001.
Financing activities provided cash of $9.4 million for 2001. In May, we
received approximately $6.9 million of net proceeds from the sale of 2.5 million
shares of our common stock and warrants for 1.3 million additional shares of our
common stock. Additionally, we increased our net short-term borrowings by $1.8
million.
We incurred capital expenditures of $7.4 million in 2001. These
expenditures were primarily related to the continuing program of upgrading
existing equipment in our development and applications laboratories to meet our
most advanced system capabilities and specifications, especially for our ALD
processes. This has improved our product and film development capabilities, and
increased our customer demonstration capabilities, which is critical in the
sales process.
23
Our primary source of funds at December 31, 2001 consisted of $3.0 million
in cash and cash equivalents, and $4.3 million of accounts receivable, most of
which we have collected during the three months ending March 31, 2002.
Significant financing transactions completed since December 31, 2000 include the
following:
- - On May 17, 2001, we sold 2,541,785 shares of our common stock, and warrants
to purchase up to 1,270,891 of additional shares of common stock, for net
proceeds of approximately $6.9 million. Additional warrants were issued to
Burnham Securities and Wells Fargo Van Kasper for their services as
placement agents in the transaction, for an additional 190,634 shares of
our common stock.
- - On December 20, 2001, we replaced the $10.0 million line of credit with
Venture bank with a $10.0 million line of credit from Silicon Valley bank.
The Silicon Valley bank agreement includes a domestic revolving line of
credit of $7.5 million, secured against domestic eligible receivables and a
foreign line of credit of $7.5 million, financed by EXIM bank, secured
against foreign eligible receivables and inventory. The initial term of the
loan is 12 months ending December 20, 2002. Total availability under both
lines at any given point in time is limited to $10.0 million. The interest
rate for borrowings under both the domestic and foreign lines is prime plus
1.75% per annum calculated on the basis of a 360-day year. The loan
agreement is collateralized by a first priority perfected security interest
in the Company's assets and has a covenant requiring the Company to
maintain a minimum tangible net worth of $12.0 million plus 50% of
consideration for subsequent equity issuances and 50% of net income of
future quarters. The minimum tangible net worth requirement is reduced by
any losses in a subsequent quarter, but will not be reduced to less than
$12.0 million. At December 31, 2001, $4.5 million was outstanding under
this agreement and there were no additional funds available to borrow.
- - On January 4, 2002, we received gross proceeds of $1.2 million under a
secured loan with CitiCapital, a division of Citigroup. The loan is payable
over 36 months, accrues interest of 8.75% per annum and is secured by two
systems in our demonstration lab.
- - On January 25, 2002, the Company sold 3,871,330 shares of our common stock
and warrants to purchase up to 580,696 of additional shares of common stock
for net proceeds of approximately $7.9 million.
- - On March 27, 2002, we amended our line of credit with Silicon Valley Bank
to increase the funds available under both lines of credit to $15.0
million, to extend the initial term of the loan to 15 months ending March
19, 2003 and to reset the covenant to $12.0 million plus 50% of
consideration for equity issuances subsequent to March 8, 2002.
A summary of our contractual obligations as of December 31, 2001 is as follows
(amounts in $000):
Less than After 5
Total Revolving 1 year 1-3 years 4-5 years years
------- ---------- ------- ---------- ---------- --------
Silicon Valley Bank $ 4,481 $ 4,481 $ - $ - $ - $ -
Operating Leases 19,031 N/A 944 3,257 3,281 11,549
------- ---------- ------- ---------- ---------- --------
$23,512 $ 4,481 $ 944 $ 3,257 $ 3,281 $ 11,549
======= ========== ======= ========== ========== ========
As of February 28, 2002, our cash balance was $9.8 million. We believe that
our existing working capital and credit lines will be sufficient to satisfy our
cash needs for the next 12 months. Accordingly, these financial statements have
been prepared on a going concern basis. However, we may need additional cash for
financing our growth. We are reviewing the possibility of procuring additional
financing through bank credit lines, equipment leases and various equity-based
24
transactions. 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
any additional debt financing, if available, may involve further restrictive
covenants.
RECENT ACCOUNTING PRONOUNCEMENTS.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. We believe the adoption of SFAS No.
141, to date has not had significant impact on our consolidated financial
statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We
believe the adopting of SFAS 142 will not have a significant impact on our
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of long-lived assets, except for certain
obligations of leases. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and provides further guidance regarding
the accounting and disclosure of long-lived assets. The Company is required to
adopt SFAS 144 effective January 1, 2002. We believe the adoption of SFAS No.
144 will not have a significant impact on our consolidated financial statements.
RISK FACTORS
The risks described below are not the only risks 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 those risks.
You should also refer to the other information and our financial statements
included in this 10K report and the related information incorporated by
reference into this 10K report.
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 $6.7 million, $9.6 million and $1.6 million
for 2001, 2000 and 1999, respectively.
25
We may not be able to attain or sustain consistent future revenue growth on
an annual basis, or achieve and maintain consistent profitability on an annual
basis.
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 revenues. For example, in 2001 Samsung
Electronics Company, Ltd., Read-Rite Corporation, NEC, Infineon and SCS
accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In 2000, Samsung
Electronics Company, Ltd. and Micron Technology, Inc. accounted for 92% and 5%
of revenues, respectively. In 1999, Samsung Electronics Company Ltd. and Micron
Technology, Inc. accounted for 84% and 11% of revenues, respectively.
The semiconductor manufacturing industry generally consists of a limited
number of larger companies. Consequently, we expect that a significant portion
of our future product sales will continue to be concentrated within a limited
number of customers, even though we are making progress in reducing the
concentration of our reliance on customers through our strategy of product and
customer diversification.
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 harmed. 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.
WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT
ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES
Export sales accounted for approximately 93%, 98% and 86% of our total net
sales in 2001, 2000 and 1999, respectively. Net sales to our South Korean-based
customers accounted for approximately 73%, 92% and 84% of total net sales,
respectively. 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 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.
26
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
affect 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
because integrated circuit manufacturers sold dynamic random access memory
chips, called DRAM's, at less than cost in order to generate cash. The cash
shortfall caused Asian semiconductor companies to defer or cancel investments in
new production facilities, thereby reducing our anticipated sales of our
semiconductor manufacturing equipment in Asia in 1998.
Also during this time, the value of the won, the currency of South Korea,
declined significantly against the U.S. dollar. As a result, purchases of U.S.
manufactured products became very costly. Since most of our sales were made to
South Korean customers, these circumstances adversely impacted our customers'
ability to invest in new facilities and equipment that reduced our shipments and
profitability in 1998.
Wherever currency devaluations occur abroad, our goods become more
expensive for our customers in that region. 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.
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. Although we
are marketing our atomic layer deposition technology to non-semiconductor
markets such as markets in magnetic thin film heads, flat panel displays,
micro-electromechanical systems and inkjet printers, we are still dependent on
the semiconductor market. 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. During the industry
downturn in 1998, several of our customers delayed or cancelled investments in
new manufacturing facilities and equipment due to declining DRAM prices, the
Asian economic downturn, and general softening of the semiconductor market. This
caused our sales in 1998 to be significantly lower than in the prior three
years.
After the dramatic industry boom for semiconductor equipment that peaked
early in the year 2000, another cyclical downturn is presently occurring. The
sharp and severe industry downturn in 2001 was the largest in the industry's
history. Almost all previous downturns have been solely due to pricing declines.
The 2001 downturn in the industry marked a corresponding decline in unit
production. Genus recently reported a loss for our 2001 financial results. There
is a risk that our revenues and operating results will continue to be further
impacted by the continued downturn in the semiconductor industry and global
economy.
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 and processes, especially our atomic layer
deposition technology. 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
27
achieve market acceptance. The failure to do so could harm our business,
financial condition and results of operations.
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 equipment used to chemically deposit tungsten silicide in the
manufacture of memory chips. We estimate that the life cycle for these tungsten
silicide deposition 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 affect 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 our resources do not allow us to respond
effectively to such competitive forces.
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. To do otherwise creates risk for the manufacturer because the
manufacture of a semiconductor requires many process steps and a fabrication
facility will contain many different types of machines that must work cohesively
to produce products that meet the customers' specifications. If any piece of
equipment fails to perform as expected, the customer could incur significant
costs related to defective products, production line downtime, or low production
yields.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we have
observed that once a particular piece of equipment is selected from a vendor,
the customer is likely to continue purchasing that same piece of equipment from
the vendor for similar applications in the future. Our customer list, though
28
limited, has expanded in recent months. Yet our broadening market share remains
at risk to choices made by customers that continue to be influenced by
pre-existing installed bases by competing vendors.
A 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 harmed.
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 of 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 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 for that period.
OUR INTELLECTUAL PROPERTY IS IMPORTANT TO US AND WE RISK LOSS OF A VALUABLE
ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSES 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. On August
1, 2001, we filed a counterclaim against ASM International N.V., charging ASM
with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective
Etching Native Oxide," and with committing antitrust violations designed to harm
the atomic layer deposition market.
There can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented or that the rights granted there under
will provide us with competitive advantages.
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
29
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.
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitles "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The complaint seeks monetary and injunctive relief. On
August 1, 2001, Genus filed a counterclaim against ASMA and ASM International,
N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent")
entitled "Method of Selective Etching Native Oxide" and for antitrust
violations. Genus also seeks a declaratory judgment that ASMA's claims regarding
the 365 and 590 Patents are invalid and unenforceable. An initial Case
Management Conference was held on October 16, 2001. On January 9, 2002, The
Court issued an order granting ASM leave to amend its complaint to add Dr.
Sherman as a party and to add a claim that Genus is directly and indirectly
infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for
Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims
to own. The court also severed and stayed discovery regarding Genus' antitrust
claims until after trial of the patent claims. On February 4, 2002, Genus filed
for declaratory judgment on the grounds that ASMA's claims regarding the 165
Patent are invalid and unenforceable. The Claim Construction Hearings regarding
these claims are set for June 14, 2002 (for the 590 and 365 Patents), June 24,
2002 (for the 568 Patent), and September 26, 2002 (for the 165 Patent).
We intend to defend our position vigorously. The outcome of any litigation
is uncertain, however, and we may not prevail. Should we be found to infringe
any of the patents asserted, in addition to potential monetary damages and any
injunctive relief granted, we would need either to obtain a license from ASM to
commercialize our products or redesign our products so they do not infringe any
of these patents. If we were unable to obtain a license or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale of our atomic layer products. In this case our business may
not develop as planned, and our results could materially suffer.
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.
30
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.
We use the following regulated gases at our manufacturing facility in
Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen.
We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The
city of Sunnyvale, California, imposes high environmental standards to
businesses operating within the city. Genus has met the city's stringent
requirements and has received an operating license from Sunnyvale. Presently,
our compliance record indicates that our methods and practices successfully meet
standards. Moving forward, if we fail to continuously maintain high standards to
prevent the leakage of any toxins from our facilities into the environment,
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 THE MANUFACTURE AND SALE OF OUR PRODUCTS
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 components could have a
material adverse effect on our operating results.
WE DEPEND UPON SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR
PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT 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 negatively impact
sales and revenue.
WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN
EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE
We terminated our relationship with our distributor, Innotech Corp. in
Japan in 1998. In 2000, we invested significant resources in Japan by
establishing a direct sales organization, Genus-Japan, Inc. Although we continue
to invest significant resources in our Japan office and have received orders
from two new Japanese customers in 2001, we may not be able to attract new
customers in the Japanese semiconductor industry, and as a result, we may fail
to yield a profit or return on our investment in Japan.
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
31
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 affect 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.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A disaster
could severely damage our ability to deliver our products to our customers. Our
products depend on our ability to maintain and protect our operating equipment
and computer systems, which is primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. Although we maintain general
business insurance against interruptions such as fires and floods, there can be
no assurance that the amount of coverage will be adequate in any particular
case.
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR
CAUSE OUR STOCK PRICE TO DROP
As of January 31, 2002, we have a total of 5,231,431 shares of common stock
underlying warrants and outstanding employee stock options. Of the stock
options, 1,835,202 shares are exercisable as of January 31, 2002. All of the
shares underlying the warrants are currently exercisable. Some warrants have
terms providing for an adjustment of the number of shares underlying the
warrants in the event that we issue new shares at a price lower than the
exercise price of the warrants, where we make a distribution of common stock to
our shareholders or effect a reclassification.
If all of the shares underlying the exercisable options and warrants were
exercised and sold in the public market, the value of your current holdings in
Genus may decline as a result of dilution to your percentage ownership in Genus
or as a result of a reduction in the per share value of our stock resulting from
the increase in the number of Genus shares available on the market, if such
availability were to exceed the demand for our stock.
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
Pursuant to a preferred stock rights agreement, our board of directors has
declared a dividend of one right for each share of our common stock that was
outstanding as of October 13, 2000. The rights trade with the certificates for
the common stock until a person or group acquires beneficial ownership of 15% or
m ore of our common stock. After such an event, we will mail rights certificates
to our shareholders and the rights will become transferable apart from the
common stock. At that time, each right, other than rights owned by an acquirer
or its affiliates, will entitle the holder to acquire, for the exercise price, a
number of shares of common stock having a then-current market value of twice the
exercise price.
In the event that circumstances trigger the transferability and
exercisability of rights granted in our preferred stock rights agreement, your
current holdings in Genus may decline as a result of dilution to your percentage
ownership in Genus or as a result of a reduction in the per share value of our
stock resulting from the increase in the number of outstanding shares available.
32
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this 10K report that may not prove to
be accurate.
This 10-K report contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding, among other items, our business
strategy, growth strategy and anticipated trends in our business. We may make
additional written or oral forward-looking statements from time to time in
filings with the Securities and Exchange Commission or otherwise. When we use
the words "believe," "expect," "anticipate," "project" and similar expressions,
this should alert you that this is a forward-looking statement.
We base these forward-looking statements on our expectations. They are
subject to a number of risks and uncertainties that cannot be predicted,
quantified or controlled. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements.
Statements in this 10-K report, and in documents incorporated into this
10-K report, including those set forth above in "Risk Factors," describe
factors, among others, that could contribute to or cause these differences. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this 10-K report will in fact transpire
or prove to be accurate. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
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. Won denominated sales made by the South
Korean subsidiary for the year ended December 31, 2001 amounted to won 6.0
billion, or $4.6 million; sales for the year ended December 31, 2000 amounted to
won 10.4 billion, or $9.1 million; and sales for the year ended December 31,
1999 amounted to won 6.1 billion, or $5.2 million. Sales made by the Japanese
subsidiary for the year ended December 31, 2001 amounted to yen 369.0 million,
or $3.1 million. There were no sales from our Japanese subsidiary in 2000 and
1999. 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. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, independent accountants, dated February 11, 2002,
except as to the fourth paragraph of Note 6, which is as of March 27, 2002, are
included in a separate section of this Report.
SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA
The following table presents our consolidated statements of operations data
for each of the eight quarters in the period ended December 31, 2001 In our
opinion, this information has been presented on the same basis as the audited
consolidated financial statements included in a separate section of this report,
and all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts below to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements and related notes. The operating results for any quarter
33
should not be relied upon as necessarily indicated of results for any future
period. We expect our quarterly operating results to fluctuate in future
periods due to a variety of reasons, including those discussed in "Business
Risks."
FIRST QTR SECOND QTR THIRD QTR FOURTH QTR
====================================================
(IN THOUSANDS, EXCEPT SHARE DATA)
2001
Revenues $ 14,309 $ 13,659 $ 15,094 $ 5,677
Gross profit 5,706 5,039 4,794 700
Net income (loss) 131 (853) (744) (5,200)
Basic net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.23)
Diluted net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.23)
2000
Revenues
As originally reported $ 12,277 $ 12,356 $ 14,165 $ 15,683
Effect of revenue recognition change (8,451) (5,770) 378 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter 3,826 6,586 14,543 15,683
----------- ------------ ----------- ------------
Gross profit
As originally reported 5,465 5,450 6,043 6,361
Effect of revenue recognition change (4,483) (3,039) 456 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter 982 2,411 6,499 6,361
----------- ------------ ----------- ------------
Cumulative effect of change in
accounting principle (6,770) - - -
----------- ------------ ----------- ------------
Net income (loss)
As originally reported 971 955 1,190 1,099
Effect of revenue recognition change (11,308) (3,014) 456 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter $ (10,337) $ (2,059) $ 1,646 $ 1,099
=========== ============ =========== ============
Basic income per share: Income before
cumulative effect of accounting change
As originally reported $ 0.05 $ 0.05 $ 0.06 $ 0.06
Effect of revenue recognition change (0.24) (0.16) 0.03 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter (0.19) (0.11) 0.09 0.06
----------- ------------ ----------- ------------
Cumulative effect of change
in accounting principle (0.36) - - -
----------- ------------ ----------- ------------
Net income
As originally reported 0.05 0.05 0.06 0.06
Effect of revenue recognition change (0.60) (0.16) 0.03 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter $ (0.55) $ (0.11) $ 0.09 $ 0.06
=========== ============ =========== ============
Diluted income per share: Income before
cumulative effect of accounting change
As originally reported $ 0.05 $ 0.05 $ 0.06 $ 0.05
Effect of revenue recognition change (0.24) (0.16) 0.02 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter (0.19) (0.11) 0.08 0.05
----------- ------------ ----------- ------------
34
Cumulative effect of change in
accounting principle (0.36) - - -
----------- ------------ ----------- ------------
Net income (loss)
As originally reported 0.05 0.05 0.06 0.05
Effect of revenue recognition change (0.60) (0.16) 0.02 -
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter $ (0.55) $ (0.11) $ 0.08 $ 0.05
=========== ============ =========== ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 2001, the directors and executive officers of the
Company, who are elected by and serve at the discretion of the Board of
Directors, are as follows:
NAME AGE POSITION
- ----------------------- --- ----------------------------------------------------------
William W.R. Elder. . . 63 Chairman and Chief Executive Officer
Thomas E. Seidel, Ph.D. 66 Executive Vice President, Chief Technical Officer
Shum Mukherjee. . . . . 51 Executive Vice President, Finance, Chief Financial Officer
* Werner Rust . . . . . 59 Vice President, Worldwide Sales & Marketing
Eddie Lee . . . . . . . 50 Executive Vice President, Advanced Engineering
Mario M. Rosati . . . . 55 Secretary and Director
Todd S. Myhre . . . . . 57 Director
G. Frederick Forsyth. . 57 Director
George D. Wells . . . . 66 Director
Robert J. Richardson. . 55 Director
Except for Mr. Mukherjee and Mr. Lee, all of the 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.
* Mr. Rust will be approved as an officer in the May 2002 meeting of the
Board of Directors.
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.
SHUM MUKHERJEE has served as our Executive Vice President of Finance and
Chief Financial Officer since October 2001. Mr. Mukherjee has broad financial
management experience. From 1978 to 1984, Mr. Mukherjee was with Ford of Europe,
Raychem Corporation (now a division of Tyco International) from 1984 to 1998 and
with E*TRADE Group from 1998 to 2001. Mr. Mukherjee earned a Masters Degree in
Management from the Sloan School of Management at Massachusetts Institute of
Technology.
WERNER RUST has served as our Vice President of Sales and Marketing
Worldwide since November 2001. Mr. Rust has more than 20 years' experience in
semiconductor sales and marketing. From 1994 to 1996, Mr. Rust served as
Director of Marking at GaSonics. From 1997 to 1998, Mr. Rust served as General
Manager of Low-K Dielectric at Fairchild Technologies. From 1998 to February
2001, Mr. Rust served as Director of Marketing at SVG. From February 2001 to
September 2001, Mr. Rust served as CMO/Etch of Strategic Marketing at Applied
Materials.
EDDIE LEE has served as our Executive Vice President, Advanced Technology,
Engineering and Strategic Marketing since February 2001. Mr. Lee joined the
Company in August 2000, as Vice President of New Technology Business
Development. Prior to joining the Company, Mr. Lee was Vice President of
36
Technology at Silicon Valley Group. Working in the thin film industry since
1974, Mr. Lee has held managerial positions at Honeywell, Advanced Micro Devices
and Varian. He is currently on the technical advisory board of two other
privately held companies in a non-competing field with Genus.
MARIO M. ROSATI has served as our Secretary since May 1996 and as a
director since our inception in November 1981. He has been a member, since 1971,
of the law firm Wilson Sonsini Goodrich & Rosati, Professional Corporation,
general counsel to the Company. Mr. Rosati is also a director of Aehr Test
Systems, a manufacturer of computer hardware testing systems, Sanmina
Corporation, an electronics contract manufacturer, Symyx Technologies, Inc., a
combinatorial materials science company, The Management Network Group, Inc., a
management consulting firm focused on the telecommunications industry, and
Vivus, a specialty pharmaceutical company, all publicly-held companies. He is
also a director of a number of privately held companies.
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 e-commerce 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
May 2000, Mr. Forsyth has served as President and CEO of NewRoads, Inc. From
March 1999 to May 2000, Mr. Forsyth 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
"Board of Directors and Committees," "Summary Compensation Table," "Stock
Options and Stock Appreciation Rights" and "Retirement Benefits" in the
Company's definitive Proxy Statement for the fiscal year ended December 31,
2001, which we will file with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this report.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"Information Relating to Directors, Nominees and Executive Officers" in the
Company's definitive Proxy Statement for the fiscal year ended December 31,
2001, which we will file with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
"Certain Transactions" in the Company's definitive Proxy Statement for the
fiscal year ended December 31, 2001 which we will file with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report
38
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. Consolidated Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Operations - Years Ended December 31, 2001, 2000
and 1999
Consolidated Statements of Shareholders' Equity and comprehensive income
(loss) - Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended December 31, 2001, 2000
and 1999
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule.
Schedule II "Valuation and Qualifying Accounts"
3. Exhibits and reports on form 8-K. 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.
On December 13, 2001, the Company filed a Form 8-K with the Securities and
Exchange Commission its intention to conduct a private placement
transaction in the first quarter of 2002.
39
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
comprehensive loss and of cash flows present fairly, in all material respects,
the financial position of Genus, Inc. and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of recognizing revenue to comply
with Securities and Exchange Commission Staff Accounting Bulletin No. 101.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 11, 2002, except as to the fourth paragraph of Note 6,
which is as of March 27, 2002
40
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
2001 2000
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 3,043 $ 3,136
Accounts receivable (net of allowance for doubtful accounts
of $69 in 2001 and $363 in 2000) . . . . . . . . . . . . . 4,262 8,479
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 12,648 21,849
Other current assets . . . . . . . . . . . . . . . . . . . . 1,221 675
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . 21,174 34,139
Equipment, furniture and fixtures, net . . . . . . . . . . . 14,573 10,207
Other assets, net. . . . . . . . . . . . . . . . . . . . . . 155 189
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 35,902 $ 44,535
========= =========
LIABILITIES
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . . $ 4,481 $ 2,719
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 8,352 8,647
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 3,553 3,315
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 7,388 18,562
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 23,774 33,243
--------- ---------
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized 2,032 shares;
Issued and outstanding, none . . . . . . . . . . . . . . . . 0 0
Common stock, no par value:
Authorized 50,000 shares;
Issued and outstanding, 22,365 shares in 2001 and
19,319 shares in 2000. . . . . . . . . . . . . . . . . . . 110,753 102,837
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (96,189) (89,523)
Note receivable from shareholder . . . . . . . . . . . . . . (151) 0
Accumulated other comprehensive loss . . . . . . . . . . . . (2,285) (2,022)
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . 12,128 11,292
--------- ---------
Total liabilities and shareholders' equity . . . . . . . . $ 35,902 $ 44,535
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
41
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,739 $40,638 $28,360
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . 32,500 24,385 16,628
Research and development. . . . . . . . . . . . . . . . . . . 12,118 8,659 5,368
Selling, general and administrative . . . . . . . . . . . . . 10,381 10,093 7,930
Restructuring and other . . . . . . . . . . . . . . . . . . . 0 0 543
------ -------- ---------
Loss from operations. . . . . . . . . . . . . . . . . . . . (6,260) (2,499) (2,109)
Other income (expense), net . . . . . . . . . . . . . . . . . . (336) 108 669
------ -------- ---------
Loss before provision for income taxes and cumulative effect
of change in accounting principle . . . . . . . . . . . . . . (6,596) (2,391) (1,440)
Provision for income taxes. . . . . . . . . . . . . . . . . . . 70 490 177
------ -------- ---------
Loss before cumulative effect of change in accounting principle (6,666) (2,881) (1,617)
Cumulative effect of change in accounting principle . . . . . . 0 (6,770) 0
------ -------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,666) $(9,651) $(1,617)
======== ======== ========
Per share data:
Basic and diluted loss per share before cumulative effect. . . $ (0.31) $ (0.15) $ (0.09)
Cumulative effect of change in accounting principle . . . . . . 0 (0.36) 0
------ -------- ---------
Basic and diluted net loss per share. . . . . . . . . . . . . . $ (0.31) $ (0.51) $ (0.09)
======== ======== ========
Shares used to compute basic and diluted net loss per share . . 21,163 18,937 18,134
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
42
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(IN THOUSANDS)
NOTES
COMMON STOCK RECEIVABLE ACCUMULATED OTHER
---------------- FROM ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHAREHOLDERS DEFICIT LOSS TOTAL
------ -------- -------------- ------------- --------------- --------
Balances, January 1, 1999. . . . . . . . . 17,473 $ 99,849 0 $ (78,255) $ (1,641) $19,953
Conversion of 16 shares of Series B
convertible preferred stock to 640
shares of common stock . . . . . . . . 640 773 0 0 0 773
Issuance of shares of common
stock under stock option plan. . . . . 50 102 0 0 0 102
Issuance of shares of common stock under
employee stock purchase plan . . . . . 306 220 0 0 0 220
Issuance of warrants to Venture Bank to
purchase 25 shares of common stock . . 0 53 0 0 0 53
Amortization of deferred stock
compensation . . . . . . . . . . . . . 0 45 0 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. . . . . . . . 18,469 101,042 0 (79,872) (1,792) 19,378
Issuance of shares of common stock
under stock option plan. . . . . . . . 490 1,023 0 0 0 1,023
Issuance of shares of common
stock from warrants and options. . . . 72 0 0 0 0 0
Issuance of shares of common stock under
employee stock purchase plan . . . . . 288 282 0 0 0 282
Stock-based compensation . . . . . . . . 0 490 0 0 0 490
Net loss . . . . . . . . . . . . . . . . 0 0 0 (9,651) 0
Translation adjustments. . . . . . . . . 0 0 0 0 (230)
Comprehensive loss. . . . . . . . . . . . 0 0 0 0 0 (9,881)
------ -------- -------------- ------------- --------------- --------
Balances, December 31, 2000. . . . . . . . 19,319 102,837 0 (89,523) (2,022) 11,292
Issuance of shares of common stock and
warrants to purchase common stock
under private placement, net of
issuance cost of $725. . . . . . . . . 2,542 6,900 0 0 0 6,900
Issuance of shares of common stock
under stock option plan. . . . . . . . 243 521 (151) 0 0 370
Issuance of shares of common stock
under employee stock purchase plan . . 261 417 0 0 0 417
Stock-based compensation . . . . . . . . 0 78 0 0 0 78
Net loss . . . . . . . . . . . . . . . . 0 0 0 (6,666) 0
Translation adjustments. . . . . . . . . 0 0 0 0 (263)
Comprehensive loss . . . . . . . . . . . . 0 0 0 0 0 (6,929)
------ -------- -------------- ------------- --------------- --------
Balances, December 31, 2001. . . . . . . . 22,365 $110,753 $ (151) $ (96,189) $ (2,285) $12,128
====== ======== ============== ============= =============== ========
The accompanying notes are an integral part of the consolidated financial
statements.
43
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
--------- --------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,666) $ (9,651) $(1,617)
Adjustments to reconcile net loss to net cash from operating
activities:
Cumulative effect of change in accounting principle. . . . . 0 6,770 0
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 3,034 1,740 1,805
Provision for doubtful accounts. . . . . . . . . . . . . . . 0 (188) 51
Restructuring and other. . . . . . . . . . . . . . . . . . . 0 0 543
Stock-based compensation . . . . . . . . . . . . . . . . . . 78 490 98
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . 4,217 (662) 4,785
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 9,201 (10,414) (1,928)
Other assets . . . . . . . . . . . . . . . . . . . . . . . (512) 352 (519)
Accounts payable . . . . . . . . . . . . . . . . . . . . . (295) 4,501 1,953
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 238 111 (626)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . (11,174) 4,659 0
--------- --------- --------
Net cash provided by (used in) operating activities. . . . (1,879) (2,292) 4,545
--------- --------- --------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures . . . . . . (7,400) (5,053) (2,040)
--------- --------- --------
Net cash used in investing activities. . . . . . . . . . . (7,400) (5,053) (2,040)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock . . . . . . . . . 7,687 1,305 322
Proceeds from short-term bank borrowings . . . . . . . . . . 14,236 6,719 0
Payments of short-term bank borrowings . . . . . . . . . . . (12,474) (4,000) (4,000)
Payments of long-term debt and capital leases. . . . . . . . 0 (52) (62)
--------- --------- --------
Net cash provided by (used in) financing activities. . . . 9,449 3,972 (3,740)
--------- --------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . . (263) (230) (151)
--------- --------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . . (93) (3,603) (1,386)
Cash and cash equivalents, beginning of year . . . . . . . . . 3,136 6,739 8,125
--------- --------- --------
Cash and cash equivalents, end of year . . . . . . . . . . . . $ 3,043 $ 3,136 $ 6,739
========= ========= ========
Supplemental Cash Flow Information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 470 $ 76 $ 4
Cash paid for income taxes . . . . . . . . . . . . . . . . . . 1 177 0
Non-cash investing and financing activities:
Conversion of Series B preferred stock to common stock . . . $ 0 $ 0 $ 773
The accompanying notes are an integral part of the consolidated financial
statements.
44
- --------------------------------------------------------------------------------
GENUS, INC. AND SUBSIDIARIES
NOTES TO THE 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 inter-company 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.
Liquidity. During the year ended December 31, 2001, the Company was in the
process of executing its business strategy and has plans to eventually achieve
profitable operations. Management believes that existing cash and available
financing will be sufficient to meet projected working capital, capital
expenditures and other cash requirements for the next twelve months.
Accordingly, these financial statements have been prepared on a going concern
basis.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with 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, short term bank borrowings and accounts
payable approximate estimated fair value because of the short maturity of those
financial instruments.
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.
One customer accounted for an aggregate of 99% of accounts receivable at
December 31, 2001. Two customers accounted for an aggregate of 91% of accounts
receivable at December 31, 2000. The Company has written off bad debts of
$294,000, none, and none in 2001, 2000, and 1999, 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.
Included in the inventory are customer evaluation units. If not purchased by the
customer within 6 months after shipment date, the units are amortized over 3
years.
Long-Lived Assets. Equipment, furniture and fixtures 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
45
the straight-line method over their estimated useful lives or the remaining
lease term, whichever is less.
Equipment includes demonstration equipment, which is located in our Applications
Laboratory and are used to demonstrate to our customers the capabilities of our
equipment to process wafers and deposit films. The gross value of demonstration
equipment is based on the cost of materials and actual factory labor and
overhead expenses incurred in manufacturing the equipment. Costs related to
refurbishing or maintaining existing demonstration equipment, which do not add
to the capabilities or useful life of the equipment, are not capitalized and are
expensed as incurred. Demonstration equipment is stated at cost and depreciated
over a period of five years.
Revenue Recognition. The Company's selling arrangements generally involve
contractual customer acceptance provisions and installation of the product
occurs after shipment and transfer of title. As a result, effective January 1,
2000, to comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101, the Company defers recognition of revenue from such
equipment sales until installation is complete and the product is accepted by
the customer. Under SAB 101, warranty obligations are accrued upon final
customer acceptance which coincides with recognition of revenue. Prior to
January 1, 2000, revenue related to systems was generally recognized upon
shipment. A provision for the estimated future cost of system installation,
warranty and commissions was recorded when revenue was recognized. Service
revenue is recognized when service has been completed.
Product Warranty. The Company provides one-year labor and two-year material
warranty on its products. Warranty expenses are accrued upon revenue
recognition. At present, based upon historical experience, the Company accrues
material warranty equal to 2% and 5% of shipment value for its LYNX2(R) and
LYNX3 products, respectively, and labor warranty equal to $20,000 per system for
both its LYNX2(R) and LYNX3 products. At the end of every quarter, the Company
reviews its actual spending on warranty and reassess if its accrual is adequate
to cover warranty expenses on the systems in the field which are still under
warranty. Differences between the required accrual and booked accrual are
charged to warranty expenses for the period.
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 more
likely than not 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 cumulative
translation adjustments.
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" and Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation." Generally, the Company's policy is
46
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 loss. 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 loss
includes net loss and foreign currency translation adjustments and is displayed
in the statement of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS. In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
believe the adoption of SFAS No. 141 to date has not had significant impact on
our consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We
believe the adopting of SFAS 142 will not have a significant impact on our
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of long-lived assets, except for certain
obligations of leases. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statue, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and provides further guidance regarding
the accounting and disclosure of long-lived assets. The Company is required to
adopt SFAS 144 effective January 1, 2002. We believe the adoption of SFAS No.
144 will not have a significant impact on our consolidated financial statements.
NOTE 2. ACCOUNTING CHANGE - REVENUE RECOGNITION
In December 2000, the Company changed its accounting method for recognizing
revenue on sales with an effective date of January 1, 2000. The Company's
selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. As a result, effective January 1, 2000, to comply with the provisions of
Securities and Exchange Commission Staff Accounting Bulletin No. 101, the
Company defers recognition of revenue from such equipment sales until
installation is complete and the product is accepted by the customer. The
Company previously recognized revenue related to systems upon shipment. A
provision for the estimated future cost of system installation, warranty and
commissions was recorded when revenue was recognized.
47
The cumulative effect on prior years of the change in accounting method was
a charge of $6.8 million or $0.36 per basic and diluted share.
Unaudited Pro forma amounts of the retroactive application of the change in
accounting principle under SAB 101 are as follows (amounts are in thousands):
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues. . . . . . $48,739 $40,638 $27,992
Net loss. . . . . . (6,666) (2,881) (3,232)
Net loss per share:
Basic . . . . . . $ (0.31) $ (0.15) $ (0.18)
Diluted . . . . . $ (0.31) $ (0.15) $ (0.18)
NOTE 3. INVENTORIES
Inventories comprise the following (in thousands):
DECEMBER 31,
================
2001 2000
======= =======
Raw materials and purchased parts $ 4,446 $ 6,081
Work in process . . . . . . . . . 2,499 5,624
Finished goods. . . . . . . . . . 630 647
Inventory at customers' locations 5,073 9,497
------- -------
$12,648 $21,849
======= =======
Finished goods include customer evaluation units with a net book value of
$619,000 and $563,000 at December 31, 2001 and 2000, respectively. Inventory at
customers' locations represent the cost of systems shipped to customers for
which we are awaiting customer acceptance.
NOTE 4. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost and comprise the
following (in thousands):
DECEMBER 31,
====================
2001 2000
======== ==========
Equipment (useful life of 3 years). . . . . . . . . . . . . $ 9,165 $ 8,698
Demonstration equipment (useful life ranges from 3-5 years) 24,161 18,089
Furniture and fixtures (useful life of 3 years) . . . . . . 1,083 1,029
Leasehold improvements (useful life ranges from 4-10 years) 4,385 3,694
--------- ---------
38,794 31,510
Less accumulated depreciation and amortization. . . . . . . (27,611) (24,740)
--------- ---------
11,183 6,770
Construction in progress. . . . . . . . . . . . . . . . . . 3,390 3,437
--------- ---------
$ 14,573 $ 10,207
========= =========
NOTE 5. ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands): DECEMBER 31,
=================
2001 2000
========= ======
System installation and warranty. . . . . . . . . . . $ 803 $ 757
Accrued commissions and incentives. . . . . . . . . . 330 242
Accrued compensation and related items. . . . . . . . 723 615
Federal, state and foreign income taxes . . . . . . . 444 828
Other . . . . . . . . . . . . . . . . . . . . . . . . 1,254 873
--------- ------
$ 3,553 $3,315
========= ======
48
NOTE 6. SHORT-TERM BANK BORROWING
In November 1999, the Company entered into a $10.0 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 expired in November 2001.
In July 2001, our 100% owned subsidiary in Japan, Genus Japan Inc.,
negotiated a financing arrangement, secured by customer receivables, with Aozora
Bank, Ltd. in Tokyo. The agreement ends on April 30, 2002. The interest rate for
borrowings under this agreement is 6.5%. As of December 31, 2001, there was no
balance outstanding and available under this line of credit.
In December 2001, the Company replaced the $10.0 million line of credit
with Venture bank with a $10.0 million line of credit from Silicon Valley bank.
The Silicon Valley bank agreement includes a domestic revolving line of credit
of $7.5 million, secured against domestic eligible receivables and a foreign
line of credit of $7.5 million, financed by EXIM bank, secured against foreign
eligible receivables and inventory. The initial term of the loan is 12 months
ending December 20, 2002. Total availability under both lines at any given point
in time is limited to $10.0 million. The interest rate for borrowings under both
the domestic and foreign lines is prime plus 1.75% per annum calculated on the
basis of a 360-day year. The loan agreement is collateralized by a first
priority perfected security interest in the Company's assets and has a covenant
requiring the Company to maintain a minimum tangible net worth of $12.0 million
plus 50% of consideration for subsequent equity issuances and 50% of net income
of future quarters. The minimum tangible net worth requirement is reduced by any
losses in a subsequent quarter, but will not be reduced to less than $12.0
million. There was $4.5 million outstanding and there were no additional funds
available to borrow under this agreement at December 31, 2001.
On March 27, 2002, we amended our line of credit with Silicon Valley Bank
to increase the funds available under both lines of credit to $15.0 million, to
extend the initial term of the loan to 15 months ending March 19, 2003 and to
reset the covenant to $12.0 million plus 50% of consideration for equity
issuances subsequent to March 8, 2002.
On January 4, 2002, the Company received gross proceeds of $1.2 million
under a secured loan with CitiCapital, a division of Citigroup. The loan is
payable over 36 months, accrues interest of 8.75% per annum and is secured by
two systems in our demonstration lab. There was no outstanding balance under
this agreement at December 31, 2001.
NOTE 7. COMMITMENTS AND CONTINGENCIES
We maintain our headquarters, manufacturing and research and development
operations in Sunnyvale, California. Our lease for the Sunnyvale facility
expires in October 2012 with a current annual rental expense of approximately
$903,000. Commencing in 2003, our annual rental expense will be $1,828,000,
which includes $200,000 per year to recognize the impact of future rental
increases on a straight-line basis. We also have leases for our sales and
support offices in Seoul, South Korea and Tokyo, Japan. 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.
At December 31, 2001, minimum lease payments required under these operating
leases are as follows (in thousands):
2002. . . . . $ 944
2003. . . . . 1,628
2004. . . . . 1,628
2005. . . . . 1,628
2006. . . . . 1,653
Thereafter. . 11,549
-------
19,031
=======
49
Rent expense was $682,000, $806,000, and $713,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. Sublease rental income was
$596,000, $1,104,000 and $820,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
In September 2001, the sublease tenant terminated their sublease and we
reclaimed the office space.
LEGAL PROCEEDINGS
In May 1999, Varian Semiconductor Equipment Associates, Inc. ("Varian")
filed a Statement of Claims with the American Arbitration Society of Santa Clara
County, California seeking to enforce certain provisions of the April 15, 1998
Asset Purchase Agreement by and between Varian and Genus (the "Asset Sale").
The dispute specifically involved ownership rights of certain high-energy ion
implanter assets. Varian and Genus entered into a Settlement and Mutual Release
(the "Release") in January of 2000. As partial consideration under the Release,
Genus agreed to relinquish its ownership interest in certain funds provided to
Varian in conjunction with the Asset Sale. These funds were held in an escrow
account maintained by Varian, the amount of which was $543,000. Such amount was
recorded as restructuring and other expenses in 1999.
In July 1999, we were named as a co-defendant in a claim filed at the
Superior Court of the state of California for the county of Santa Clara,
involving an automobile accident by one of our former employees, which resulted
in the death of an individual. Significant general, punitive and exemplary
damages were being sought by the plaintiffs. In June 2001, the plaintiffs
settled with our insurance carrier for an amount within our insurance policy
limits.
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The complaint seeks monetary and injunctive relief. On
August 1, 2001, Genus filed a counterclaim against ASMA and ASM International,
N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent")
entitled "Method of Selective Etching Native Oxide" and for antitrust
violations. Genus also seeks a declaratory judgment that ASMA's claims regarding
the 365 and 590 Patents are invalid and unenforceable. An initial Case
Management Conference was held on October 16, 2001. On January 9, 2002, the
court issued an order granting ASM leave to amend its complaint to add Dr.
Arthur Sherman as a party and to add a claim that Genus is directly and
indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled
"Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow",
which ASM claims to own. The court also severed and stayed discovery regarding
Genus' antitrust claims until after the patent litigation is resolved. On
February 4, 2002, Genus filed for declaratory judgment on the grounds that
ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim
Construction Hearings regarding these claims are set for June 14, 2002 (for the
590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002
(for the 165 Patent).
We may in the future be party to litigation arising in the ordinary 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.
NOTE 8. SHAREHOLDERS' EQUITY
Sale of Common Stock
50
On May 17, 2001, the Company sold 2,541,785 shares of our common stock and
warrants to purchase up to 1,461,525 of additional shares of common stock for
net proceeds of approximately $6.9 million.
On January 25, 2002, the Company sold 3,871,330 shares of our common stock
and warrants to purchase up to 580,696 of additional shares of common stock for
net proceeds of approximately $7.9 million.
Warrants and Options
In connection with a private placement in April 1995, the Company granted
options for 118,000 shares of the Company's common stock to the investors. On
April 25, 2000, the grantees elected to exercise their options to purchase all
118,000 shares. As provided in the option agreements, the grantees received a
reduced number of shares in exchange for the aggregate exercise price due,
resulting in the issuance by the Company of 17,000 shares.
In connection with the November 1999 $10.0 million revolving line of
credit, the Company issued to Venture Bank warrants to purchase 25,000 shares of
the Company's common stock at a price of $2.39 per share. Based on the
Black-Scholes option-pricing model, the fair market value of the warrants at the
date of the grant was $53,000, which was amortized to interest expense over the
two-year life of the line.
In connection with the sale of common stock in May 2001, the Company issued
warrants to purchase 1,461,525 shares of common stock. Of these warrants,
1,270,891 shares have an exercise price of $3.50; 69,375 shares have an exercise
price of $3.00 and 121,259 shares have an exercise price of $5.24. The warrants
have terms providing for an adjustment of the number of shares underlying the
warrants in the event that we issue new shares at a price lower than the
exercise price of the warrants, where we make a distribution of common stock to
our shareholders or effect a reclassification.
In connection with the sale of common stock in January 2002, the Company
issued warrants to purchase 580,696 shares of common stock at an exercise price
of $3.23. The warrants have terms providing for an adjustment of the number of
shares underlying the warrants in the event that we issue new shares at a price
lower than the exercise price of the warrants, where we make a distribution of
common stock to our shareholders or effect a reclassification.
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,
============================
2001 2000 1999
======== ======== ========
Loss attributable to common shareholders before cumulative effect
of change in accounting principle:
Numerator-Basic and diluted:
Net loss attributable to common shareholders . . . . . . . . . $(6,666) $(2,881) $(1,617)
======== ======== ========
Denominator-Basic and diluted:
Weighted average common stock outstanding. . . . . . . . . . . 21,163 18,937 18,134
======== ======== ========
Basic net loss per share . . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.15) $ (0.09)
======== ======== ========
Net loss attributable to common shareholders:
Numerator-Basic and diluted:
Net loss attributable to common shareholders . . . . . . . . . $(6,666) $(9,651) $(1,617)
======== ======== ========
Denominator-Basic and diluted:
Weighted average common stock outstanding . . . . . . . . . . 21,163 18,937 18,134
======== ======== ========
Basic net loss per share . . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.51) $ (0.09)
======== ======== ========
51
Stock options to purchase 3,378,321 shares of common stock with a weighted
average exercise price of $3.72 were outstanding on December 31, 2001, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 2001. Warrants for the purchase of 1,486,525 shares of common
stock with a weighted average exercise price of $3.60 were outstanding at
December 31, 2001, but were not included in the computation of diluted loss per
share because the Company has a net loss for 2001.
Stock options to purchase 2,972,386 shares of common stock with a weighted
average exercise price of $4.28 were outstanding on December 31, 2000, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 2000. Warrants for the purchase of 325,000 shares of common
stock with a weighted average exercise price of $3.57 were outstanding at
December 31, 2000, but were not included in the computation of diluted loss per
share because the Company has a net loss for 2000.
Stock options to purchase 2,639,219 shares of common stock with a weighted
average exercise price of $2.11 were outstanding on December 31, 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 with a weighted average exercise price of $3.79 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 Option Plan
In March of 2000, the Company adopted the 2000 Incentive Stock Option Plan
to replace the 1991 Incentive Stock Option Plan. The 1991 Incentive Stock Option
Plan was scheduled to expire ten years after its adoption in 1991. Under the
2000 Incentive Stock Option Plan, the Board of Directors can grant incentive and
nonstatutory stock options. The Board of Directors has the authority to
determine to whom options will be granted, the number of options, 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, 2001, the Company had
reserved 5,503,006 shares of common stock for issuance under the 2000 Incentive
Stock Option Plan, which included 700,000 shares added to the plan in 2001 and a
total of 469,056 shares remained available for future grants at December 31,
2001.
Activity under the 1991 and 2000 Incentive Stock Option Plans is set forth
in the table below:
(in thousands, except per share data):
AVAILABLE OPTIONS OUTSTANDING WEIGHTED
AVAILABLE =================== AVERAGE
FOR EXERCISE
GRANT OPTIONS PRICE PER SHARE AMOUNT PRICE
========== ========= ===================== ========= ========
Balance, January 1, 1999 . 829 2,301 $ 0.88 to $8.00 $ 4,507 $ 1.96
Granted. . . . . . . . . . (532) 532 1.87 to 4.34 1,384 2.88
Exercised. . . . . . . . . - (50) 0.88 to 3.03 (102) 2.05
Terminated . . . . . . . . 144 (144) 0.88 to 4.00 (226) 1.57
---------- --------- --------------------- --------- ------
Balance, December 31, 1999 441 2,639 0.88 to 8.00 5,563 2.11
Granted. . . . . . . . . . (1,052) 1,052 2.25 to 15.75 8,795 8.36
Exercised. . . . . . . . . - (490) 0.88 to 3.22 (1,023) 2.09
Terminated . . . . . . . . 229 (229) 0.88 to 15.75 (602) 2.63
Authorized . . . . . . . . 800 - - - --
---------- --------- --------------------- --------- ------
Balance, December 31, 2000 418 2,972 0.88 to 15.75 12,733 4.28
Granted. . . . . . . . . . (1,005) 1,005 1.59 to 6.83 2,859 2.85
Exercised. . . . . . . . . - (243) 2.02 to 7.32 (521) 2.15
Terminated . . . . . . . . 356 (356) 2.02 to 15.75 (2,489) 6.99
Authorized . . . . . . . . 700 - - - - -
---------- --------- --------------------- --------- ------
Balance, December 31, 2001 469 3,378 $ 0.88 to $15.75 12,582 $ 3.72
========== ========= ===================== ========= ======
52
Options outstanding and currently exercisable by exercise price under the
option plan at December 31, 2001 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
============================================= =============================
WEIGHTED AVG.
RANGE OF NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
============== ============= ================ =============== =========== ===============
$0.88 - $0.88 502,573 1.72 $ 0.88 502,573 $ 0.88
1.25 - 1.63 351,170 1.67 1.56 351,170 1.56
1.84 - 2.30 387,244 4.55 2.26 39,556 2.14
2.38 - 2.56 366,833 3.60 2.43 88,654 2.40
2.63 - 3.02 30,250 4.43 2.90 2,695 2.77
3.03 - 3.03 371,000 1.11 3.03 371,000 3.03
3.04 - 3.09 368,223 3.16 3.08 187,426 3.09
3.13 - 5.34 514,778 3.73 5.04 182,771 4.96
5.93 - 8.88 341,250 3.32 7.87 120,460 7.86
10.00 - 15.75 145,000 3.20 15.17 55,004 15.24
- --------------- ------------- ---------------- --------------- ----------- ---------------
$0.88 - $15.75 3,378,321 2.89 $ 3.72 1,901,309 $ 2.99
=============== ============= ================ =============== =========== ===============
On January 24, 2001, the Company's Chief Executive Officer issued a full
recourse promissory note for $151,000 in connection with the exercise of stock
options. The note bears interest of 8% per annum and is repayable on January 24,
2004.
Employee Stock Purchase Plan
The Company has reserved a total of 2,950,000 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 300,000 shares added to the plan
in each 2000 and 2001. 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 period or the end of each
six-month purchase period. At December 31, 2001, 2,717,942 shares have been
issued under the plan. At December 31, 2001, shares available for purchase under
this plan were 232,058.
Share Purchase Rights Plan
On September 7, 2000, the Company's Board of Directors declared a dividend
pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar
earlier plan that had expired on July 3, 2000. The intended purpose of the
Rights Plan is to protect shareholders' rights and to maximize share value in
the event of an unfriendly takeover attempt. As of the record date of October
13, 2000, each share of common stock of Genus, Inc. outstanding was granted one
right under the new plan. Each right is exercisable only under certain
circumstances and upon the occurrence of certain events and permits the holder
to purchase from the Company one one-thousandth (0.001) of a share of Series C
Participating Preferred Stock at an initial exercise price of forty dollars
($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred
stock authorized in connection with the Rights Plan will be used for the
exercise of any preferred share purchase rights in the event that any person or
group (the Acquiring Person) acquires beneficial ownership of 15% or more of the
outstanding common stock. In such event, the shareholders (other than the
Acquiring Person) would receive common stock of the Company having a market
value of twice the exercise price. Subject to certain restrictions, the Company
may redeem the rights issued under the Rights Plan for $0.001 per right and may
amend the Rights Plan without the consent of rights holders. The rights will
expire on October 13, 2010, unless redeemed by the Company.
53
Pro Forma Disclosures
Pro forma information regarding net loss and net 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 options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- ----------
Risk free interest rates 4.19% 5.17% 5.62%
Expected life. . . . . . 3.0 years 3.3 years 3.3 years
Expected volatility. . . 112% 222% 221%
Expected dividend yield. 0% 0% 0%
The weighted average fair value of options granted in 2001, 2000 and 1999 was
$1.93, $8.09, and $2.76, 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 2001, 2000 and 1999.
2001 2000 1999
---------- ---------- ----------
Risk free interest rates 3.42% 5.17% 4.95%
Expected life. . . . . . 0.5 years 0.5 years 0.5 years
Expected volatility. . . 78% 222% 221%
Expected dividend yield. 0% 0% 0%
The weighted average fair value of those purchase rights granted in 2001,
2000 and 1999 was $1.30, $4.66 and $1.31, 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):
2001 2000 1999
-------- --------- --------
Pro forma net loss attributable to common
shareholders . . . . . . . . . . . . . . . . $(9,906) $(12,578) $(2,781)
Pro forma net loss per share-basic and diluted $ (0.47) $ (0.66) $ (0.15)
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.
54
Stock Compensation
In 1998 and 1999, the Company granted options to outside consultants to
purchase 23,000 and 5,000 shares of common stock, respectively. These options
have exercise prices between $0.875 and $3.03 per share. The options vest over
three years and expire between February 2001 and March 2002. The work is to be
conducted over a 3-year period coinciding with the vesting of the options.
Unvested options are to be forfeited if the consultants cease performing their
work. The Company accounts for consultants options in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In
accordance with this standard, changes in the estimated fair value of these
options are recognized as compensation expense in the period of the change.
The Company recorded $45,000, $218,000 and $16,000 as compensation expense
relating to these options in 1999, 2000 and 2001, respectively.
In addition, the Company recorded $28,000 and $209,000 of stock compensation
in 2001 and 2000, respectively, resulting from a shortfall in shares approved
for the ESPP. The calculation and recording of expense was made in accordance
with EITF 97-12, "Accounting for Increased Share Authorizations in an IRS
Section 423 Employee Stock Purchase Plan under APB Opinion No. 25." In
accordance with this consensus, a compensation charge is calculated for the
amount by which the quoted stock price on the date of shareholder approval, less
a 15% discount, exceeds the price at which options were granted under the ESPP.
The compensation charge so determined is amortized over the term of the options
issued under the ESPP that remains after shareholder approval of additional
shares.
During 2001, the Company recorded $34,000 of stock compensation in
connection with the accelerated vesting of options granted to a terminated
employee.
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 2001, 2000 and 1999, the Company
contributed $101,000, $142,000, and $30,000, respectively, to the Benefit Plan.
NOTE 10. OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31,
=======================
2001 2000 1999
====== ====== =======
Interest income . . . $ 75 $ 252 $ 336
Interest expense. . . (496) (118) (4)
Foreign exchange. . . (27) (58) 330
Other, net. . . . . . 112 32 7
------ ------ ------
$(336) $ 108 $ 669
====== ====== ======
NOTE 11. INCOME TAXES
Income tax expense for the years ended December 31, 2001, 2000 and 1999 was
$70,000, $490,000 and $177,000, respectively.
The components of income (loss) before income taxes were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
============================
2001 2000 1999
======== ======== ========
Domestic loss before taxes . . . . . . . . . . . . . $(6,905) $(3,829) $(2,231)
Foreign income (loss) before taxes . . . . . . . . . 309 1,438 791
-------- -------- --------
Loss before taxes and cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . $(6,596) $(2,391) $(1,440)
======== ======== ========
55
The income tax expense for 2001, 2000 and 1999, respectively, was due to
current foreign taxes.
The Company's effective tax rate for the years ended December 21, 2001,
2000 and 1999 differs from the U.S. federal statutory income tax rate as
follows:
YEAR ENDED DECEMBER 31, 2001
============================
2001 2000 1999
====== ======= =======
Federal income tax at statutory rate 35.0% 35.0% 35.0%
Foreign income taxes. . . . . . . . . (1.1) (20.5) (18.3)
Net operating loss not benefited. . . (35.0) (35.0) (29.0)
------ ------- -------
(1.1%) (20.5%) (12.3%)
====== ======= =======
Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31, 2001
====================
2001 2000
======== ==========
Deferred tax assets
Depreciation and amortization . . . . . . . . . . $ 1,118 $ 2,182
Inventory, accounts receivable and other reserves 1,187 1,556
Tax credits . . . . . . . . . . . . . . . . . . . 1,517 1,161
Accrued expenses. . . . . . . . . . . . . . . . . 718 855
Deferred revenue. . . . . . . . . . . . . . . . . 1,063 5,774
Net operating loss carry forwards . . . . . . . . 32,446 19,298
--------- ---------
38,049 30,826
Deferred tax asset valuation allowance. . . . . . (38,049) (30,826)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . $ - $ -
========= =========
The deferred tax assets valuation allowance at December 31, 2001 and 2000 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
carry-back capacity to realize these assets. Based on these factors, 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, 2001, the Company had the following income tax carry-forwards
available (in thousands):
TAX REPORTING EXPIRATION DATES
============== ================
U.S. regular tax operating losses $ 92,208 2005-2021
U.S. business tax credits . . . . 1,577 2002-2021
State net operating losses. . . . $ 18,780 2002-2005
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 carry-forwards and credits before
utilization.
56
NOTE 12. SEGMENT INFORMATION
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.
Export Revenues
For reporting purposes, export revenues are determined by the location of
the parent company of the Company's customer, regardless of where the delivery
was made by the Company.
Revenues by geographical region for the years ended December 31, 2001,
2000, and 1999 were as follows (in thousands):
YEAR ENDED DECEMBER 31, 2001
============================
2001 2000 1999
------- ------- -------
United States. . . . . . . $ 3,200 $ 3,095 $ 3,830
South Korea. . . . . . . . 35,767 37,123 23,819
Japan. . . . . . . . . . . 3,089 149 216
Taiwan . . . . . . . . . . 2,300 0 0
Germany. . . . . . . . . . 2,706 0 0
Rest of world. . . . . . . 1,677 271 495
------- ------- -------
$48,739 $40,638 $28,360
======= ======= =======
The Company did not hold any material long-lived assets in countries other
than the United States at December 31, 2001 and December 21, 2000.
Major Customers
In 2001, Samsung Electronics Company, Ltd, Read-Rite Corporation, NEC,
Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively.
In 2000, Samsung Electronics Company, Ltd. and Micron Technology, Inc. accounted
for 91% and 5% of revenues, respectively. In 1999, Samsung Electronics Company,
Ltd. and Micron Technology, Inc accounted for 84% and 11% of revenues,
respectively.
57
ITEM 14 (A) 2. FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Genus, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 11, 2002, except as to the fourth paragraph of Note 6, which is
as of March 27, 2002, appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 11, 2002
58
Genus, Inc.
Schedule II "Valuation and Qualifying Accounts"
- --------------------------------------------------------------------------------------
Description Balance at Additions Deductions Balance at
Beginning of Charged to Charged to end
Period costs/exp Other of period
- --------------------------------------------------------------------------------------
1999
Allowance for doubtful accounts $ 500 $ 308 $ 257 $ 551
Allowance for excess and
obsolete inventory 3,769 533 1,857 2,445
2000
Allowance for doubtful accounts 551 0 188 363
Allowance for excess and
obsolete inventory 2,445 400 15 2,830
2001
Allowance for doubtful accounts 363 0 294 69
Allowance for excess and
obsolete inventory $ 2,830 $ 317 $ (1,032) $ 2,115
- --------------------------------------------------------------------------------------
59
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 28th day of March 2002.
GENUS, INC.
By: /s/SHUM MUKHERJEE
---------------------------
Shum Mukherjee
Executive 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 28, 2002
- -------------------------
William W.R. Elder and Chief Executive Officer
/s/ SHUM MUKHERJEE Executive Vice President, Finance March 28, 2002
- -------------------------
Shum Mukherjee Chief Financial Officer
/s/ G. FREDERICK FORSYTH Director March 28, 2002
- -------------------------
G. Frederick Forsyth
/s/ TODD S. MYHRE Director March 28, 2002
- -------------------------
Todd S. Myhre
/s/ MARIO M. ROSATI Director March 28, 2002
- -------------------------
Mario M. Rosati
/s/ GEORGE D. WELLS Director March 28, 2002
- -------------------------
George D. Wells
/s/ ROBERT J. RICHARDSON Director March 28, 2002
- -------------------------
Robert J. Richardson
60
GENUS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2001
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 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.2 Registrant's 2000 Stock Plan (19)
10.3 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)
10.4 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.5 Settlement Agreement and Mutual Release, dated April 20, 1998, between
Registrant and James T. Healy (16)
10.6 Form of Change of Control Severance Agreement (16)
10.7 Settlement Agreement and Mutual Release, dated January 1998, between
the Registrant and John Aldeborgh (18)
10.8 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Mary Bobel (18)
10.9 Loan and Security Agreement, dated December 20, 2001, between
Registrant and Silicon Valley Bank.
10.10 Loan and Security Agreement (Exim Program) dated December 20, 2001,
between Registrant and Silicon Valley Bank
10.11 Intellectual Property Security Agreement, dated December 20, 2001,
between Registrant and Silicon Valley Bank.
10.12 Certified Resolution and Incumbency Certificate Between Registrant
and Silicon Valley Bank
10.13 Lease Agreement, dated December 21, 2001, between Registrant and Citi
Bank.
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
- ----------------
(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.
61
(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.
(19) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K /Afor the year ended December 31, 2000.
(20) Incorporated by reference to the exhibit filed on July 20, 2001 with
the Registrant's Annual Report on Form 10-K/A for the year ended
December 31, 2000.
62