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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999
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, 1998
-------------------
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 Identification Number)
incorporation or organization)
1139 Karlstad Drive, Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 747-7120
---------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par
value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 22,
1998 in the over-the-counter market as reported by the NASDAQ National Market,
was approximately $32,499,410. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 22, 1999, Registrant had 18,113,791 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 1999 Annual Meeting of
Shareholders-Items 10, 11, 12 and 13.
PART I
ITEM 1.
BUSINESS
Genus, Inc. ("Genus" or "the Company") was formed in 1982 and designs,
manufactures and markets capital equipment and processes for advanced
semiconductor manufacturing. The Company's thin film deposition products are
used worldwide to produce integrated circuits ("ICs") for the data processing,
communications, medical, military, transportation and consumer electronics
industries. Genus pioneered the technical development of chemical vapor
deposition ("CVD") tungsten silicide ("WSiX"), which perform two critical steps
in the manufacture of semiconductors. These technologies enable chip
manufacturers to simplify their IC production process and lower their
cost-of-ownership.
The Company's global customer base consists of semiconductor manufacturers
in the United States, Europe and Asia/Pacific including Japan, South Korea and
Taiwan.
CURRENT MARKET AND PRODUCTS
Thin Film (CVD) Market
The manufacture of ICs includes the formation of isolation, transistor and
interconnect capabilities. Genus' CVD equipment provides thin films for the gate
electrode of the transistor and for barrier metal to clad the interconnect and
contact elements. WSiX is used as a gate electrode and also improves the
conductivity of local interconnects, producing faster Dynamic Random Access
Memory ("DRAM"), Static Random Access Memory ("SRAM") and flash memory devices.
Tungsten nitride ("WN") is emerging as a barrier-of-choice for advanced gate
formation, memory cell electrodes and metal interconnect and contact
applications in logic.
CVD sales accounted for 35%, 32% and 38% of total revenues for 1998, 1997
and 1996, respectively.
The current products manufactured by Genus include three CVD systems. These
products are available with a variety of options and/or upgrades.
Thin Film Products
Genus' CVD systems are designed for the deposition of WSiX and WN on the
gate electrode and interconnect. The Company offers the Lynx2(TM) (formerly
called the 7000 Series), a single wafer, thin film cluster tool. Genus' two
other hardware architectures, the 8700 Series and the 6000 Series, deposit WSiX
using batch processes.
Genus Lynx2 System. Introduced in December 1994, the Genus 7000 Series was
renamed the Lynx2 in July 1997 in conjunction with the introduction of two new
films. The Lynx2 system was designed to meet the advanced technology
requirements of the 16Mbit DRAM generation and beyond. This single wafer, open
architecture cluster tool supports silane ("SiH4") and dichlorosilane ("DCS")
process chemistries. Semiconductor manufacturers benefit by the high throughput
offered by the Lynx2, which results in higher productivity and lower
cost-of-ownership. By offering the lowest fluorine content, manufacturers using
DCS also gain more reliable gate oxides with the Genus Lynx2. In addition, its
low deposited stress provides higher process yields with improved step coverage.
This system is currently used in production by manufacturers of advanced
DRAM and flash memory devices to 0.18-micron. The Lynx2 features a Modular
Equipment Standards Committee ("MESC") compatible wafer handling platform from
Brooks Automation with a centrally located, dual end effector robot for high
throughput operation with up to four process modules. The cluster tool is
controlled by an easy-to-use Windows(TM)-based graphic user interface. The
modular design of the Lynx2 enables the addition of other process modules to the
cluster tool. Other manufacturing advantages offered by the Lynx2 include 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.
LRS Silicide. LRS silicide, a Low-Resistivity, low-Stress ("LRS") CVD WSiX,
was introduced by Genus in December 1996. LRS silicide offers a 20% reduction in
resistivity and extremely as-deposited low stress, while retaining the
advantages of conventional DCS chemistry. Memory device manufacturers using the
production-proven DCS and tungsten hexafluoride chemistries can easily insert
LRS silicide into existing process flows, providing increased yields and faster
devices.
PECVD Tungsten Nitride. In July 1997, Genus announced the industry's first
plasma-enhanced CVD ("PECVD") WN barrier film. This film, compatible with the
Lynx2 product platform, has the potential for broadening Genus' thin film
customer base by bringing the Company's CVD products into the logic market. WN
enables gigabit-scale DRAM device production by serving as the top barrier
electrode for tantalum oxide ("Ta2O5") capacitors. WN is amorphous as deposited
(to 500 degrees centigrade), and acts as a superior barrier even when deposited
to a thickness of 100 angstroms. It has also been proven to be a superior
barrier for copper diffusion relative to titanium nitride ("TiN"), and can be
used as an adhesion layer for blanket tungsten.
CVD Tungsten Nitride. In November 1998, Genus introduced the availability
of a new CVD WN film. This film, compatible with the Lynx2 product platform, may
offer significant advantages in the production of next generation DRAM devices.
WN, when used as an electrode material, results in 10 times lower leakage for
Ta2O5 capacitors compared to other electrode materials, such as TiN. Genus' CVD
technique to deposit WN uniformly coats the intricate structures that are
present in modern DRAM capacitors. This development gives the advantage of
controlling particles and repeatability to levels consistent with today's
production requirements.
Lynx2 CBS. In November 1998, Genus introduced the first all CVD-based
integrated approach for copper barrier seed ("CBS") for advanced metallization.
The Lynx2 CBS enables efficient scaling of copper metallization to the
0.18-0.15-micron generation and beyond, and is based on a well-established low
temperature, highly conformal PECVD WN barrier film. This integrated product is
available on the Lynx2.
Lynx3(TM). In January 1999, Genus introduced its first 300 mm low pressure
chemical vapor deposition ("LPCVD") cluster tool. The Lynx3 is based on a newly
developed and Genus-patented process chamber concept that results in exceptional
uniformity.
Genus 8700 Series and 6000 Series. The 8700 Series and 6000 Series are
Genus' previous generation thin film products. While Genus no longer actively
sells these products, it does continue to sell spare parts and provide service
for these products pursuant to spare parts purchase and service agreements.
Genus' thin films manufacturing facility maintains and operates a Class-1
cleanroom to demonstrate integrated applications with its customers. The Genus
technical staff includes an experienced consulting resource for successful
process integration of its products and processes.
Samsung Electronics Company, Ltd. is the primary customer for the current
generation thin film product. A representative list of Genus' CVD customers for
spare parts and service revenue are Advanced Micro Devices, Fujitsu, Hitachi,
IBM, Integrated Device Technology, Intel, M/A Com, Sanyo, and SGS-Thomson. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors-Reliance on a Small Number of Customers and
Concentration of Credit Risk."
MARKETING, SALES AND SERVICE
Genus sells and supports its CVD products through direct sales and customer
support organizations in the U.S. and South Korea and through seven exclusive,
independent sales representatives and distributors in the U.S., Europe, Japan,
South Korea, China and Southeast Asia. Yarbrough Southwest provides sales
distribution in the southwestern region of the U.S. and SemiTorr provides sales
distribution in the Northwest. Tony Fletcher & Assoc. supports and sells Genus'
equipment in Europe, and AVBA, Ltd. represents Genus in Israel. In August 1998,
the exclusive sales and service agreement with Innotech Corp. was terminated,
and Innotech is now under contract as a non-exclusive service organization, with
primary responsibility for the systems that were sold under their sales tenure.
Pacific International has been contracted as the new sales representative for
Japan. United Vision International (UVI) has been contracted as an exclusive
sales and service representative for China and Malaysia. Genus Korea, Ltd.,
provides in-country field service and support, and in late 1997, assumed all
responsibilities for system sales in South Korea. Sales in the Singapore and
Taiwan market segments were served by the representative organizations of Spirox
Singapore, Pte. Ltd. and Spirox Taiwan, respectively. As of January 1, 1999,
sales and service responsibility for this region transferred to IdealTech. Genus
distributes spare parts from several worldwide depots including Sunnyvale,
California and Seoul, Korea. To facilitate its marketing efforts, the Company
has cleanroom applications laboratories in Sunnyvale, California.
Genus' products are sold primarily to domestic and foreign device
manufacturers, including both foundries (companies producing semiconductors
principally for other semiconductor manufacturers) and companies producing
semiconductors mainly for outside sales.
The Company maintains sales, technical support and service personnel at its
principal executive offices located in Sunnyvale, California. Genus has also
established a subsidiary, Genus Korea, Ltd., to facilitate its sales and service
activities in Seoul, Korea. This subsidiary provides installation, field service
and maintenance, as well as additional technical support to assist Genus'
customers in effectively utilizing the Company's products. Other foreign
subsidiaries include Genus KK in Tokyo, Japan, Genus Europa Ltd., France, Genus
Europa GmbH in Stuttgart, Germany and Genus Europa Srl. in Milan, Italy. The
Company warrants its products against defects in material and workmanship for 12
months.
While the Company has experienced no difficulty to date in complying with
U.S. export controls, these rules could change in the future and make it more
difficult or impossible for the Company to export its products to various
countries and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. In 1998, three customers, Samsung
Electronics Company, Ltd., Advanced Micro Devices and Micron Technology, Inc.
accounted for 28%, 15% and 12%, respectively, of the Company's net sales. In
1998, three customers, Samsung Electronics Company, Ltd., M/A Com and SGS
Thomson accounted for 68%, 8% and 5%, respectively of the Company's CVD net
sales and three customers, Advanced Micro Devices, Micron Technology, Inc. and
Atmel accounted for 21%, 18% and 14%, respectively, of the Company's ion
implantation net sales. In 1997, Samsung Electronics Company, Ltd. and Innotech
Corporation accounted for 47% and 17%, respectively, of the Company's net sales.
Additionally, three customers, Samsung Electronics Company, Ltd., Philips
Semiconductor and Atmel, accounted for an aggregate of 78% of accounts
receivable at December 31, 1998; and three customers, Samsung Electronics
Company, Ltd., Micron Technology, Inc. and Innotech Corporation, accounted for
an aggregate of 75% of accounts receivable at December 31, 1997. Because the
semiconductor manufacturing industry is concentrated in a limited number of
generally larger companies, the Company expects that a significant portion of
its future product sales will be concentrated within a limited number of
customers. None of these customers has entered into a long-term agreement
requiring it to purchase the Company's products. Furthermore, sales to certain
of these customers may decrease in the future when those customers complete
their current semiconductor equipment purchasing requirements for new or
expanded fabrication facilities. The loss of a significant customer or any
reduction in orders from a significant customer, including reductions due to
customer departures from recent buying patterns, market, economic or competitive
conditions in the semiconductor industry or in the industries that manufacture
products utilizing ICs, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Backlog. The Company's backlog at December 31, 1998 was approximately
$293,679 compared with approximately $25.6 million at December 31, 1997. A
multiple system purchase order from a major DRAM manufacturer was received in
February 1999, and not included in the 1998 backlog. Backlog in 1997 also
included the ion implant product line, which was sold to Varian. Genus includes
in its backlog only those orders for which a customer purchase order has been
received and a delivery date within 12 months has been specified. Because of the
possibility of customer changes in delivery schedules or cancellations of
orders, the Company's backlog as of any particular date may not be
representative of actual sales for any succeeding period.
RESEARCH AND DEVELOPMENT
Constant technological change, fierce competition and a high rate of
technical obsolescence are key characteristics of the semiconductor equipment
industry. Genus' future prospects depend in part on the Company's ability to
broaden its market acceptance by differentiating its products on the basis of
production-worthiness, technical capability, productivity, particle control and
customer support. For thin film, the Company's research and development has
focused on tungsten nitride film, a general-purpose process module and advanced
ultra thin film CVD technologies. For ion implant, the Company's research and
development focused on a multipurpose implanter. The Company has a Class 1
applications laboratory and a separate thin films development area in
California. The Company spent $8.9 million, $12.3 million and $14.6 million on
R&D during 1998, 1997 and 1996, respectively. R&D decreased in 1998 primarily
due to the Asset Sale. To maintain close relationships with its customers and
remain responsive to their requirements, continued investment is needed for thin
film R&D.
COMPETITION
The Company believes that the principal competitive factors in the
semiconductor equipment market are product performance, quality and reliability,
wafer throughput, customer support, equipment automation, price and
relationships.
Genus competes with a number of companies that historically have had wider
name recognition, broader product acceptance within the industry and
substantially greater resources. In addition, the rapid rate of technological
change in the industry creates opportunities for firms to enter this market and
apply new technologies to meet its needs. Accordingly, the Company anticipates
that it will continue to face competition in the domestic as well as foreign
market from both well-established and new competitors. There can be no assurance
that the Company can successfully compete with such companies.
Genus competes with other producers of CVD systems, as well as alternative
methods of deposition, such as sputtering and thin films other than WSiX, WN and
DCS. The Company has an installed base of over 400 tools worldwide. The Company
estimates that its market share for the stand-alone WSiX was 32% for 1998. The
Company faces direct competition in all three films from Applied Materials, Inc.
and Tokyo Electron, Ltd. The impact of their presence in these niche markets
continued to increase during 1998. There can be no assurance that levels of
competition in the Company's particular CVD product market will not intensify or
that Genus' technical advantages may not be reduced or lost as a result of
technical advances made by competitors or changes in semiconductor processing
technology.
MANUFACTURING AND SUPPLIERS
Most of the components for the Company's CVD systems are produced in
subassemblies by independent domestic suppliers according to the Company's
design and procurement specifications. The Company anticipates that the use of
such subassemblies will continue to increase in order to achieve additional
manufacturing efficiencies. The Company has alternate sources of supply for the
components and parts purchased from outside suppliers, except for certain
components used in its CVD tungsten products that are presently available only
from a single source. To date, the Company has been able to obtain adequate
supplies of such components in a timely manner from existing sources. The
inability to develop alternate sources or to obtain sufficient source components
as required in the future, however, could result in delays of product shipments
that would have a material adverse effect on the Company's operating results.
The Company's thin film CVD operation is located in Sunnyvale, California.
INTELLECTUAL PROPERTY
The Company believes that because of the rapid technological change in the
industry, its future prospects will depend primarily upon the expertise and
creative skills of its personnel in process technology, new product development,
marketing, application engineering and product engineering, rather than on
patent protection. Nevertheless, the Company has a policy to actively pursue
domestic and foreign patent protection to cover technology developed by the
Company. The Company currently holds 17 United States patents relating to thin
film. All of the patents have at least five years remaining on their term.
EMPLOYEES
As of December 31, 1998, the Company employed 83 people on a full-time
basis. Genus reduced its workforce by 25% in the April 1998 reorganization, and
transferred 145 ion implant employees to Varian in July 1998, as part of the
Asset Sale. The Company believes that its relations with its employees are
satisfactory. None of the employees are covered by a collective bargaining
agreement.
ENVIRONMENTAL REGULATION
Federal, state and local regulations impose various environmental controls
on the discharge of chemicals and gases used in the manufacturing process. The
Company believes that its activities conform to present environmental
regulations. Increasing public attention has, however, been focused on the
environmental impact of semiconductor operations. While the Company has not
experienced any materially adverse effects on its operations from governmental
regulations, there can be no assurance that changes in such regulations will not
impose the need for additional capital equipment or other requirements. Any
failure by the Company to adequately restrict the discharge of hazardous
substances could subject it to future liabilities or could cause its
manufacturing operations to be suspended.
SALE OF ASSETS
In July 1998, the Company sold selected assets and transferred selected
liabilities related to the Millions of Electron Volts ("MeV") ion implantation
equipment product line to Varian Associates, Inc.
MeV Ion Implantation Market
Ion implantation is the process by which a beam of electrically charged
dopant atoms (ions) are accelerated and driven into the surface of a silicon
wafer. This process alters the electrical characteristics of the silicon by
making it more or less conductive.
The market for ion implanters consisted of three primary segments: high
current, medium current and high energy. High and medium current ion implanters
made up approximately 67% of the total ion implantation market.
Ion implantation sales accounted for 65%, 68% and 62% of total revenues for
1998, 1997 and 1996, respectively.
Information regarding the Company's foreign and domestic operations and
export sales is included in Note 14 of Notes to Consolidated Financial
Statements.
MeV Ion Implant Products
The Kestrel(TM) Family of Ion Implanters. Introduced in July 1997, Genus'
fourth-generation of implanters, the Kestrel Family, offered high productivity
manufacturing, low cost-of-ownership and flexibility for MeV, medium current
backup, chained implants, mainstream retrograde well and advanced well
applications.
Kestrel 650 and 750. The Kestrel 650 had been optimized to meet the
requirements of established retrograde well applications that require a lower
price/performance point. The accelerator design was the same as that of the
Tandetron(TM) 1520 that was used worldwide for retrograde well, R&D, as well as
production applications. The Kestrel 750, the most recent addition to the
Kestrel family, was best used for advanced well applications such as triple
wells and Genus developed and patented Buried Implanted Layer for Lateral
Isolation ("BILLI").
Tandetron 1520 and Genus 1510. Introduced in 1995 and 1992, respectively,
the Tandetron 1520 and Genus 1510 were Genus' previous generation MeV ion
implant products. While the Company no longer actively sold these products, the
Company did continue to provide service and sell spare parts for these products
pursuant to service and spare parts purchase agreements.
A representative list of Genus' ion implant customers included: Advanced
Micro Devices, Atmel, Fujitsu, Macrotron, Micron Technology, Inc., Newport
Wafer-Fab Ltd., Philips Semiconductor, Samsung, SGS-Thomson, and Symbios Logic.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors-Reliance on a Small Number of Customers and
Concentration of Credit Risk."
ITEM 2. PROPERTIES
The Company's executive offices, thin film manufacturing and R&D operations
are presently located in one building in Sunnyvale, California, totaling
approximately 100,500 square feet, of which the Company has subleased
approximately 40,000 square feet to third parties. The California facilities are
occupied under a lease expiring in October 2002, with a current annual rental
expense of approximately $713,580. The Company also leases sales and support
offices in Seoul, Korea. The Company owns substantially all of the machinery and
equipment used in its facilities. See Notes 3 and 8 of Notes to Consolidated
Financial Statements. The Company believes that its existing facilities and
capital equipment are adequate to meet its current requirements and that
suitable additional or substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company and Varian Associates, Inc. ("Varian") are in the process of
resolving a dispute through arbitration. This dispute is in regard to whether
Genus or Varian has rights to one ion implant sale and related inventory. In
accordance with generally accepted accounting principles, if the Company
prevails in the arbitration, any adjustments to the Company's financial
statements as a result of this gain contingency will be made in the quarter in
which the decision is rendered and the collection of the amount in question is
probable. The Company is not conceding any rights to the disputed sales and
believes that it will prevail in the arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Information
The common stock of Genus, Inc. is traded in the over-the-counter market
under the NASDAQ symbol GGNS. The high and low last sales prices for 1998 and
1997 set forth below are as reported by the NASDAQ National Market System. At
March 22, 1999, the Company has 439 registered shareholders as reported by
ChaseMellon Shareholder Services.
1998 1997
---------------- ------------------
HIGH LOW HIGH LOW
------- ------ -------- -------
First Quarter $ 4 $ 2 $ 6-7/8 $ 3-5/8
Second Quarter 2-3/4 31/32 6-7/16 3-1/8
Third Quarter 1-9/16 7/16 7-7/8 4-1/2
Fourth Quarter 1-3/4 5/8 6-15/16 3-1/8
The Company has not paid cash dividends on its common stock since
inception, and its Board of Directors presently intends to reinvest the
Company's earnings, if any, in its business. Accordingly, it is anticipated that
no cash dividends will be paid to holders of common stock in the foreseeable
future.
In February 1998, the Company issued equity securities to accredited
investors through a private placement of 100,000 shares of Series A Convertible
Preferred Stock ("Series A Stock") and warrants to purchase an aggregate of
400,000 shares of common stock ("Warrants") for net proceeds of $4.8 million. In
August 1998, the Company redeemed 70,000 shares of the outstanding Series A
Stock for cash and exchanged the outstanding 28,000 shares of Series A Stock for
Series B Convertible Preferred Stock ("Series B Stock"). The Series B Stock was
convertible into shares of the Company's common stock at the option of the
holder at a conversion price of $1.25. As of March 1, 1999, no remaining Series
B Stock were outstanding as all have been redeemed or converted to common stock.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act of 1993 in reliance on Section 4(2) of
such Securities Act as transactions by an issuer not involving any public
offering. The recipients of the securities represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and Warrants issued in such transactions. All recipients
had adequate access, through their relationships with the Company, to
information about the Company. The resale of the common stock issued upon
conversion of the Series B Stock and exercise of the Warrants has been
registered pursuant to the Registration Statement on Form S-3 dated August 5,
1998, and all amendments and supplements thereto.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
Net sales $ 32,431 $ 84,286 $ 82,509 $100,350 $63,616
Gross profit 8,230 29,524 26,972 39,239 24,967
Gross profit as a
percentage of sales 25% 35% 33% 39% 39%
Income (loss) from
operations (27,513) (3,129) (11,458) 7,976 3,729
Net income (loss) available
to common shareholders (29,503) (19,336) (9,205) 19,282 4,177
Net income (loss) per
share-basic (1.71) (1.15) (0.56) 1.26 0.33
Net income (loss) per
share-diluted (1.71) (1.15) (0.56) 1.20 0.32
Cash and cash equivalents 8,125 8,700 11,827 12,630 10,188
Total assets 31,827 76,738 89,132 95,247 54,997
Long-term obligations,
less current portion 50 971 1,260 1,034 523
Working capital 15,799 30,774 39,290 50,061 23,201
Shareholders' equity 19,953 48,357 68,251 75,361 36,986
Backlog 294 25,554 19,846 44,996 44,011
Number of employees 83 301 325 319 264
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", "anticipation" or
"expectation" as well as other statements which are not historical fact are
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. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Risk Factors" in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in or incorporated by reference into this report. The
following discussion should be read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in this report.
1998 Compared to 1997
In July 1998, the Company sold selected assets and transferred selected
liabilities related to the Millions of Electron Volts ("MeV") ion implantation
equipment product line to Varian Associates, Inc. ("Varian") for approximately
$24.2 million ("Asset Sale"). As a result of the Asset Sale, the Company no
longer engages in the ion implant business and has refocused its efforts on thin
film deposition. The Company used the net proceeds of the Asset Sale for
repayment of certain outstanding indebtedness as well as for working capital and
general corporate purposes, including investment in Research & Development
("R&D") of thin film products. In connection with the Asset Sale and the
refocusing of the Company's business on thin film products, the Company
significantly reduced the workforce at its Sunnyvale, California location. In
addition, James Healy resigned as President and Chief Executive Officer of the
Company and William W.R. Elder, the Company's Chairman, returned to a full-time
role as Chairman, President and Chief Executive Officer.
The components of the Company's statements of operations, expressed as
percentage of net sales, are as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
-------- ------- -------
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold 74.6 65.0 67.3
Research and development 27.5 14.6 17.7
Selling, general and administrative 43.5 24.1 21.7
Special charge 39.2 0 7.2
-------- ------- -------
Income (loss) from operations (84.8) (3.7) (13.9)
Other income (expense), net (0.3) (1.6) 0.1
-------- ------- -------
Income (loss) before provision for income taxes (85.1) (5.3) (13.8)
Provision for (benefit from) income taxes 0 17.6 (2.7)
-------- ------- -------
Net income (loss) (85.1)% (22.9)% (11.1)%
======== ======= =======
Net sales for the year ended December 31, 1998 were $32.4 million, compared
to net sales of $84.3 million in 1997. The primary reason for the decline in
sales volume was the divestiture of the ion implant product line, which
contributed $23.8 million of revenue in 1998 compared to $57.1 million in 1997.
Also, the semiconductor equipment industry continued in one of its worst
recessions in 1998, and the Company's sales volumes were adversely affected by
the lack of capital investment by semiconductor manufacturers due to DRAM
overcapacity. To strengthen the Company's financial position, Genus made the
decision during the second quarter to sell the MeV ion implant products to
Varian Associates, Inc. and focus the Company's resources on the thin film
product line. Export sales accounted for 56% of the Company's net sales in 1998,
compared to 74% in 1997. Non-system sales were 32% of total revenue, compared to
20% in 1997. This was attributed to significantly fewer system unit shipments in
1998 compared to 1997, while non-system revenues decreased at a slower pace.
In 1998, the Company recorded a special charge of approximately $12.7
million (Note 15). Included in this special charge are personnel charges of $1.7
million associated with the Company's reduction in workforce as well as $5.4
million in inventory write-downs, and $1.1 million in leasehold improvement
write-offs. In addition, this charge included $1.4 million for expenses
associated with the closing of several sales offices and transaction losses as a
result of the sale of the ion implant products to Varian and $1.0 million for
legal, accounting, and banking fees associated with the Varian transaction.
Finally, the special charge included a $2.0 million write-off of ion implant
inventory that is currently a matter of dispute with Varian in connection with
the Asset Sale. The Company and Varian are in the process of resolving the
dispute through arbitration to determine whether the Company or Varian has
rights to the one ion implant sale and related inventory. If and when the
Company prevails in the arbitration, any adjustments to the Company's financial
statements as a result of this gain contingency will be made in the quarter in
which the decision is rendered and the collection from the end customer of the
amount in question is probable. The Company is not conceding any rights to the
disputed sale.
At December 31, 1998, the following cash components of the special charge
remain unpaid: $300,000 in payroll costs associated with the reduction in force,
$220,000 in foreign subsidiary closing costs, and $720,000 in transaction costs.
The Company expects these amounts to be paid by the end of the second quarter of
1999.
Gross margin for the year ended December 31, 1998 was 25.4%, a 10.6
percentage point decline compared to 35% in 1997. Inventory and warranty reserve
reversals of $1.6 million during 1998 increased the gross margin percentage by
5%. The decrease in gross margin is primarily attributed to underabsorbed
fixed operations and service costs due to depressed sales volumes during the
first half of 1998. During that time, Genus operated as a two-product line
company, with separate manufacturing facilities for each product line. During
the second half of 1998, when the Company was a focused thin film equipment
provider, the gross margins from operations (exclusive of the $1.6 million in
inventory and warranty reserve reversals taken in the fourth quarter) were 38.6%
(see Note 15 in Notes to Consolidated Financial Statements). The Company's
gross margins have historically been affected by variations in average selling
prices, changes in the mix of product sales, unit shipment levels, the level of
foreign sales and competitive pricing pressures. The Company anticipates that
these conditions may continue for the foreseeable future in light of current
market conditions.
As a percentage of net sales, R&D expenses for the year ended December 31,
1998 were 28%, compared to 15% for the year ended December 31, 1997. On a dollar
basis, R&D expenses of $8.9 million for 1998 were $3.4 million lower than 1997,
due to decreased expenditures associated with the MeV ion implant product line
which was sold in July, 1998. Thin film R&D spending of $5.4 million in 1998 was
relatively flat compared to 1997. The Company serves markets that are highly
competitive and rapidly changing, and the Company believes that it must continue
to maintain its investment in R&D to develop competitive products. Accordingly,
the Company anticipates that R&D expenses will increase in the future, as we
continue to invest in programs critical to our future success.
Selling, General and Administrative ("SG&A") expenses were 44% of net sales
for the year ended December 31, 1998, compared to 24% of net sales for the year
ended December 31, 1997. While the Company took significant actions to reduce
SG&A expenses in 1998, the decreased sales volumes adversely affected the
percentage. Actual SG&A expenses were $14.1 million in 1998, a $6.2 million
decrease over 1997. Included in SG&A for 1998 was a $1.4 million net charge for
the write-off of an outstanding receivable from Innotech Corporation, formerly
the Company's Japanese distributor.
In 1998, the Company had $86,000 in other expense, compared to $1.4 million
for the comparable period in 1997. Due to the strengthening of the Korean won
and the Japanese yen, the Company recorded a foreign exchange gain of $318,000
during the fourth quarter of 1998. In the fourth quarter of 1997, the Company
incurred foreign exchange losses of $1.1 million due to the weakening of these
two currencies. Net interest expense for the year was $109,000, compared to
$289,000 for 1997.
Due to current market conditions, the fluctuation in the Company's order
rates in the last 12 months, the Company's continued reliance on one customer
for a significant portion of its orders, the slowdown in the Korean
semiconductor market, the continued competitive market environment for the
Company's products, and the historically cyclical nature of the semiconductor
equipment market, the Company remains cautious about the prospects for its
business over the next twelve months. The Company continues to make strategic
investments in new product development and manufacturing improvements with a
view of augmenting future performance by enhancing product offerings; however,
such investments may adversely effect short-term operating performance. The
Company is also continuing its efforts to implement productivity improvements
for future operating performance. There can be no assurance that the Company's
strategic efforts will be successful.
1997 Compared to 1996
Net sales for the year ended December 31, 1997 were $84.3 million, compared
to net sales of $82.5 million for the year ended December 31, 1996. While 1997
sales were essentially flat on a year-to-year basis, the Company experienced
volatility on a quarterly basis during both years. Sales for the nine month
period ended September 30, 1997 increased over the same period for 1996 as the
industry and the Company recovered from the slowdown in the DRAM market
experienced during the latter half of 1996. However, in the fourth quarter of
1997, the Company's sales fell from the prior quarter due partially to the
financial crisis in Asia that caused some customers to push out their required
delivery dates. Export sales accounted for 74% of the Company's net sales in
1997, compared to 84% in 1996. Non-system sales remained relatively flat
year-to-year, accounting for 20% of revenue in 1997, compared to 23% in 1996.
During 1996, in response to the industry slowdown, the Company incurred
$5.9 million in special charges during the third and fourth quarters as it
restructured its operations to attain profitability at a decreased sales level.
These charges reflected capacity cost reductions, including reductions in
headcount, write-off of some manufacturing equipment and increased inventory
reserves. During 1997, these measures resulted in lower expenses in cost of
goods sold and R&D.
Gross margin for the year ended December 31, 1997 was 35%, a two percentage
point improvement compared to 33% for the year ended December 31, 1996.
Improvements in operating efficiencies as a result of the restructuring were
mitigated by pricing pressures, especially from Asian customers. The Company's
gross margins have historically been affected by variations in average selling
prices, changes in the mix of product sales, unit shipment levels, the level of
foreign sales and competitive pricing pressures.
As a percentage of net sales, R&D expenses for the year ended December 31,
1997 were 15%, compared to 18% for the year ended December 31, 1996. On a dollar
basis, R&D expenses during 1997 decreased $2.3 million when compared to the same
period in 1996, primarily due to the restructuring. The Company serves markets
that are highly competitive and rapidly changing, and the Company believes that
it must continue to maintain its investment in R&D to develop competitive
products.
SG&A expenses were 24% of net sales for the year ended December 31, 1997,
compared to 22% of net sales for the year ended December 31, 1996. Included in
SG&A for 1997 was a write-off of an outstanding receivable from a Malaysian
customer. Absent this bad debt expense, SG&A expense would have increased only
approximately $300,000 or 2% from 1996.
In 1997, the Company had $1.4 million in other expense, compared to $53,000
in other income for the comparable period in 1996. As a result of the Asian
financial crisis and the devaluation of the Korean won, the Company incurred a
foreign exchange transaction loss of $1.1 million during the fourth quarter of
1997. Net interest expense for the year was $289,000 as compared to net interest
income of $124,000 for 1996 as a result of higher outstanding short-term
borrowings and lower levels of invested cash and cash equivalents during 1997.
During the fourth quarter of 1997, management determined that, based upon
the weight of available evidence as prescribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), it is
more likely than not that the net deferred tax asset at December 31, 1997 will
not be realized and, therefore, provided a full valuation allowance against the
net deferred tax asset resulting in a tax provision of $14.8 million for the
year. Accordingly, the effective tax rate for the year ended December 31, 1997
was 330% compared to an effective tax rate of (19)% in 1996.
Liquidity and Capital Resources
At December 31, 1998, the Company's cash and cash equivalents were $8.1
million, a decrease of $575,000 from the prior year. Operating activities in
1998 used cash of $18.9 million, primarily due to a $27.6 million net loss, a
$2.5 million increase in inventories, and a $11.7 decrease in accounts payable
and accrued expenses, partially offset by a $4.8 million decrease in accounts
receivable and non-cash charges for restructuring activities and depreciation
and amortization of $15.2 million. Operating activities in 1997 used cash of
$3.7 million, primarily due to a $19.3 million net loss, offset partially by
non-cash charges for deferred taxes of $14.8 million; and operating activities
in 1996 provided cash of $2.4 million, primarily due to decreases in accounts
receivable of $11.2 million, partially offset by a $9.2 million net loss and a
$4.5 million increase in inventories. The Company received $23.2 million from
the sale of its MeV ion implant product line to Varian, and used these funds to
pay certain existing obligations, including $16 million of accounts payable and
$2.8 million for the outstanding bank line of credit. Additionally, the Company
redeemed 70,000 shares of its Series A Convertible Preferred Stock and 12,000
shares of its Redeemable Series B Convertible Preferred Stock for approximately
$5.3 million. Financing activities in 1998 used cash of $4.3 million, primarily
due to the net repayments of short-term bank borrowings and the net redemptions
of preferred stock. Financing activities in 1997 and 1996 provided cash of $5.0
million and $3.7 million, primarily due to net short-term bank borrowings and
proceeds from issuance of common stock.
Capital expenditures during 1998 were $919,000, related primarily to
acquisition of machinery and equipment for the Company's R&D and applications
laboratories. These expenditures were financed by the Company's working capital.
The Company anticipates that any additional capital expenditures in 1999 will be
funded through existing working capital or lease financing.
The Company's primary source of funds at December 31, 1998 consisted of
$8.1 million in cash and cash equivalents, and $13.0 million of accounts
receivable, most of which are expected to be collected during the first half of
1999. Included in the cash balance was $4.0 million in short-term borrowings,
utilizing the Company's accounts receivable purchase agreement. This borrowing
represents the maximum amount available under that credit facility, and the $4.0
million balance was repaid in January 1999.
The Company believes that its existing working capital and cash generated
from operations, if any, will be sufficient to satisfy its cash needs through
the end of fiscal 1999. There can be no assurance that any required additional
funding, if needed, will be available on terms attractive to the Company, which
could have a material adverse effect on the Company's business, financial
condition, and results of operations. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants.
Recent Account Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities as is effective for the
Company's fiscal year 1999. The impact of the implementation of SFAS 133 on the
consolidated financial statements of the Company has not yet been determined.
In March 1998, the Accounting Standards Executive Committee ("AcSEC"),
released Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires certain
costs of computer software developed or obtained for internal use to be
capitalized, provided that those costs are not research and development. SOP
98-1 is effective for the Company's fiscal year 1999, and the impact of the
adoption of SOP 98-1 on the Company's consolidated financial statements has not
yet been determined.
In April 1998, AcSEC released Statement of Position 98-5, "Accounting for
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the costs of
start-up activities to be expensed as incurred. Start-up activities are defined
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer, initiating a new process in an existing
facility, or commencing some new operation. SOP 98-5 is effective for the
Company's fiscal year 1999, and the impact of the adoption of SOP 98-5 on the
Company's consolidated financial statements has not yet been determined.
Financial Risk Management
The Company faces exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could seriously harm the Company's financial results. All of the
Company's international sales, except spare parts and service sales made by the
Company's subsidiary in South Korea, are currently denominated in U.S. dollars.
All spare parts and service sales made by the South Korean subsidiary are won
denominated. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
reduce the demand for the Company's products. Reduced demand for the Company's
products could seriously harm the Company's financial results. Currently, the
Company does not hedge against any foreign currencies.
Risk Factors
Certain sections of Management's Discussion and Analysis contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth above in
Management's Discussion and Analysis and this Risk Factors section. The
discussion of these factors is incorporated by this reference as if said
discussion was fully set forth in Management's Discussion and Analysis.
Historical Performance. The Company has experienced losses of $29.5
million, $19.3 million, and $9.2 million for the years ended December 31, 1998,
1997 and 1996, respectively. As a result of the Company's inconsistent sales and
operating results in recent years, there can be no assurance that the Company
will be able to attain or sustain consistent future revenue growth on a
quarterly or annual basis, or that the Company will be able to attain or
maintain consistent profitability on a quarterly or annual basis.
Reliance on International Sales. Export sales accounted for approximately
56%, 74% and 84% of total net sales in the years ended 1998, 1997 and 1996,
respectively. In addition, net sales to South Korean customers accounted for
approximately 34%, 50% and 59%, respectively, of total net sales during the same
periods. The Company anticipates that international sales, including sales to
South Korea, will continue to account for a significant portion of net sales. As
a result, a significant portion of the Company's sales will be subject to
certain risks, including unexpected changes in regulatory requirements, tariffs
and other barriers, political and economic instability, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing foreign subsidiary operations and
potentially adverse tax consequences. Although the Company's foreign system
sales are primarily denominated in U.S. dollars and the Company does not engage
in hedging transactions, the Company's foreign sales are subject to the risks
associated with unexpected changes in exchange rates, which could have the
effect of making the Company's products more or less expensive. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Further, the Company has a wholly owned South Korean subsidiary providing
service and support to the installed base of customers and whose functional
currency is the won. There can be no assurance that the Company will not incur
currency losses or gains in future quarters as the currency fluctuates.
A substantial portion of the Company's sales are in Asia. Recent turmoil in
the Asian financial markets has resulted in dramatic currency devaluations,
stock market declines, restriction of available credit and general financial
weakness. In addition, DRAM prices have fallen dramatically and may continue to
do so as some Asian IC manufacturers may be selling DRAMs at less than cost in
order to raise cash. These developments may affect the Company in several ways.
Currency devaluation may make dollar-denominated goods, such as the Company's,
more expensive for Asian clients. Asian manufacturers may limit capital
spending. Furthermore, the uncertainty of the DRAM market may cause
manufacturers everywhere to delay capital spending plans. These circumstances
may also affect the ability of Company customers to meet their payment
obligations, resulting in the cancellations or deferrals of existing orders and
the limitation of additional orders. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on a Small Number of Customers and Concentration of Credit Risk.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. In 1998, three customers, Samsung
Electronics Company, Ltd., Advanced Micro Devices and Micron Technology, Inc.
accounted for 28%, 15% and 12%, respectively, of the Company's net sales. In
1998, three customers, Samsung Electronics Company, Ltd., M/A Com and SGS
Thomson accounted for 68%, 8% and 5%, respectively of the Company's CVD net
sales and three customers, Advanced Micro Devices, Micron Technology, Inc. and
Atmel accounted for 21%, 18% and 14%, respectively, of the Company's ion
implantation net sales. In 1997, Samsung Electronics Company, Ltd. and Innotech
Corporation accounted for 47% and 17%, respectively, of the Company's net sales.
Additionally, three customers, Samsung Electronics Company, Ltd., Philips
Semiconductor and Atmel accounted for an aggregate of 78% of accounts receivable
at December 31, 1998; and three customers, Samsung Electronics Company, Ltd.,
Micron Technology, Inc. and Innotech Corporation, accounted for an aggregate of
75% of accounts receivable at December 31, 1997. Because the semiconductor
manufacturing industry is concentrated in a limited number of generally larger
companies, the Company expects that a significant portion of its future product
sales will be concentrated within a limited number of customers. None of these
customers has entered into a long-term agreement requiring it to purchase the
Company's products. Furthermore, sales to certain of these customers may
decrease in the future when those customers complete their current semiconductor
equipment purchasing requirements for new or expanded fabrication facilities.
The loss of a significant customer or any reduction in orders from a significant
customer, including reductions due to customer departures from recent buying
patterns, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing ICs, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is dependent on a small number of customers. Accordingly, the
Company is subject to concentration of credit risk. If a major customer were to
encounter financial difficulties and become unable to meet its obligations, the
Company would be adversely impacted.
Cyclical Nature of the Semiconductor Industry. The Company's business
depends upon the capital expenditures of semiconductor manufacturers, which in
turn depend on the current and anticipated market demand for ICs and products
utilizing ICs. The semiconductor industry is cyclical and experiences periodic
downturns, which have an adverse effect on the semiconductor industry's demand
for semiconductor manufacturing capital equipment. Semiconductor industry
downturns have adversely affected the Company's revenues, operating margins and
results of operations. There can be no assurance that the Company's revenues and
operating results will not continue to be materially and adversely affected by
future downturns in the semiconductor industry. In addition, the need for
continued investment in R&D, substantial capital equipment requirements and
extensive ongoing worldwide customer service and support capability limits the
Company's ability to reduce expenses. Accordingly, there is no assurance that
the Company will be able to attain profitability in the future.
Fluctuations in Quarterly Operating Results. The Company's revenue and
operating results may fluctuate significantly from quarter to quarter. The
Company derives its revenue primarily from the sale of a relatively small number
of high-priced systems, many of which may be ordered and shipped during the same
quarter. The Company's results of operations for a particular quarter could be
adversely affected if anticipated orders, for even a small number of systems,
were not received in time to enable shipment during the quarter, anticipated
shipments were delayed or canceled by one or more customers or shipments were
delayed due to manufacturing difficulties. The Company's revenue and operating
results may also fluctuate due to the mix of products sold and the channel of
distribution.
Competition. The semiconductor manufacturing capital equipment industry is
highly competitive. Genus faces substantial competition throughout the world.
The Company believes that to remain competitive, it will require significant
financial resources in order to offer a broader range of products, to maintain
customer service and support centers worldwide and invest in product and process
R&D. Many of the Company's existing and potential competitors have substantially
greater financial resources, more extensive engineering, manufacturing,
marketing and customer service and support capabilities, as well as greater name
recognition than the Company. The Company expects its 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 the Company's competitors enter into strategic relationships
with leading semiconductor manufacturers covering CVD products similar to those
sold by the Company, it would materially adversely effect the Company's ability
to sell its products to these manufacturers. There can be no assurance that the
Company will continue to compete successfully in the United States or worldwide.
The Company faces direct competition in CVD WSiX from Applied Materials, Inc.
and Tokyo Electron, Ltd. There can be no assurance that these or other
competitors will not succeed in developing new technologies, offering products
at lower prices than those of the Company or obtaining market acceptance for
products more rapidly than the Company.
Dependence on New Products and Processes. The Company believes that its
future performance will depend in part upon its ability to continue to enhance
its existing products and their process capabilities and to develop and
manufacture new products with improved process capabilities. As a result, the
Company expects to continue to invest in R&D. The Company also must manage
product transitions successfully, as introductions of new products could
adversely effect sales of existing products. There can be no assurance that the
market will accept the Company's new products or that the Company will be able
to develop and introduce new products or enhancements to its existing products
and processes in a timely manner to satisfy customer needs or achieve market
acceptance. The failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
if the Company is not successful in the development of advanced processes or
equipment for manufacturers with whom it has formed strategic alliances, its
ability to sell its products to those manufacturers would be adversely affected.
Product Concentration; Rapid Technological Change. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company derives its revenue primarily from the sale of its WSiX CVD systems.
The Company estimates that the life cycle for these systems is generally
three-to-five years. The Company believes that its future prospects will depend
in part upon its ability to continue to enhance its existing products and their
process capabilities and to develop and manufacture new products with improved
process capabilities. As a result, the Company expects to continue to make
significant investments in R&D. The Company also must manage product transitions
successfully, as introductions of new products could adversely effect sales of
existing products. There can be no assurance that future technologies, processes
or product developments will not render the Company's product offerings obsolete
or that the Company will be able to develop and introduce new products or
enhancements to its existing and future processes in a timely manner to satisfy
customer needs or achieve market acceptance. The failure to do so could
adversely effect the Company's business, financial condition and results of
operations. Furthermore, if the Company is not successful in the development of
advanced processes or equipment for manufacturers with whom it currently does
business, its ability to sell its products to those manufacturers would be
adversely affected.
Dependence on Patents and Proprietary Rights. The Company's success depends
in part on its proprietary technology. While the Company attempts to protect its
proprietary technology through patents, copyrights and trade secret protection,
it believes that the success of the Company will depend on more technological
expertise, continuing the development of new systems, market penetration and
growth of its installed base and the ability to provide comprehensive support
and service to customers. There can be no assurance that the Company will be
able to protect its technology or that competitors will not be able to develop
similar technology independently. The Company currently has a number of United
States and foreign patents and patent applications. There can be no assurance
that any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.
From time-to-time, the Company has received notices from third parties
alleging infringement of such parties' patent rights by the Company's products.
In such cases, it is the policy of the Company to defend against the claims or
negotiate licenses on commercially reasonable terms where considered
appropriate. However, no assurance can be given that the Company 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 the Company's business and financial results.
Dependence on Key Suppliers. Certain of the components and sub-assemblies
included in the Company's products are obtained from a single supplier or a
limited group of suppliers. Disruption or termination of these sources could
have a temporary adverse effect on the Company's operations. The Company
believes that alternative sources could be obtained and qualified to supply
these products, if necessary. Nevertheless, a prolonged inability to obtain
certain components could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Independent Distributors. The Company currently sells and
supports its CVD products through direct sales and customer support
organizations in the U.S., Western Europe and South Korea and through seven
exclusive, independent sales representatives and distributors in the U.S.,
Europe, Japan, South Korea, Taiwan, China and Malaysia. The Company does not
have any long-term contracts with its sales representatives and distributors.
Although the Company believes that alternative sources of distribution are
available, the disruption or termination of its existing distributor
relationships could have a temporary adverse effect on the Company's business,
financial condition and results of operations.
Volatility of Stock Price. The Company's common stock has experienced
substantial price volatility, particularly as a result of quarter-to-quarter
variations in the actual or anticipated financial results of, or announcements
by, the Company, its competitors or its customers, announcements of
technological innovations or new products by the Company or its competitors,
changes in earnings estimates by securities analysts and other events or
factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which the
Company does business, may adversely effect the market price of the Company's
common stock. In addition, the occurrence of any of the events described in
these "Risk Factors" could have a material adverse effect on such market price.
Readiness for Year 2000. Many existing computer systems and applications,
and other control devices, use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
These computer systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000. The
Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, accounts payable and payroll modules), customer service,
infrastructure, embedded computer chips, networks and telecommunications
equipment and end products. The Company also relies on external systems of
business enterprises such as customers, suppliers, creditors, financial
organizations, and of governments both domestically and globally, directly for
accurate exchange of data and indirectly.
The Company is currently completing the planning process for its Year 2000
readiness project, although many mission critical issues have already been
addressed. The director of operations and facilities chairs the project team and
it includes project managers from the finance, information technology,
facilities, engineering, and customer support organizations. The team is meeting
weekly, and has conducted a thorough analysis to identify systems that will
possibly be impacted by the Year 2000 problem. These systems have been
classified into four major segments: facilities, mission critical business
operations systems, non-mission critical business operations systems and general
office equipment. The project team has assigned one of its members to be the
project manager for each segment, and each of these segment project managers is
in the process of identifying an implementation manager for each system
identified as part of their segment. Each implementation manager is responsible
for developing a detailed plan that includes an assessment of Year 2000
compliance, followed by phases to define a contingency plan, evaluate
alternatives, select a solution, design and implement the solution and, finally,
to test and verify compliance. Some of the critical systems already addressed
are discussed in the following paragraphs.
End Products. The control systems for each of the Company's products are
computer driven. Thorough testing of these products was completed during 1998.
Testing addressed not only the Company designed elements of the system, but also
the embedded controls in manufactured components integrated into the end
products. Each product requires a software upgrade, and the oldest systems in
the product line require a control system computer replacement as well. The
Company is charging a nominal amount for these upgrades on the older generation
systems, while upgrades for the current Lynx2 products are supplied at no
charge. The design and testing of each of these product upgrades have been
completed, and the upgrades have been shipped and installed at some of the
Company's customer's sites worldwide. The Company has contacted and offered this
upgrade to all of its customers, but some customers have decided not to upgrade
their systems.
Enterprise Resources Program. During 1997, the Company started
implementation of a new business system. One criterion for the selection of the
enterprise software was compliance with Year 2000 issues. The system was
installed and implemented at the Company's Newburyport, MA facility in September
1997, but implementation at the Sunnyvale, CA headquarters was postponed during
1998 due to the Asset Sale. The system hardware and software was recently
returned to Sunnyvale, and cutover from the existing system to the new system is
scheduled for August 1, 1999. Year 2000 compliance on the new system was tested
on the system while it was installed in Newburyport. The system is considered to
be the most critical internal Company resource at risk to the Year 2000 problem,
so timely implementation is essential.
Supplier Readiness. Each implementation manager is responsible for
assessing the readiness of the suppliers who support their system to ensure
there will be no lapses in service that may interrupt operations. This is in
addition to addressing readiness of the hardware and software products provided
by these suppliers. Suppliers of inventory material for the Company's products
will be surveyed during the second quarter of 1999. This is one of the projects
under the mission critical business operations systems segment. Readiness of the
supplier's products has already been established under the end product project,
but disruption of the supply pipeline due to supplier business readiness still
needs to be addressed. Preliminary discussions with some of the Company's
critical suppliers indicate that most are ahead of the Company in establishing
their own readiness.
The Company's estimated expenses incurred through December 31, 1998 are
$300,000. The 1999 projected costs are $115,000. The single largest risk element
is the business system, and implementation of the new system is adequately
budgeted in 1999. The Company believes that costs to fix the Company's products
have already been fully incurred. Several capital investments have already been
made in 1999 to replace aging equipment, and Year 2000 compliant systems were
purchased in all cases. This includes new network and electronic mail file
servers. The Company's voicemail system is not Year 2000 compliant, and
replacement is already budgeted as a 1999 capital improvement. There are a
number of hardware and software systems, both mission critical and non-mission
critical, which may require upgrades at the Company's expense over the next few
quarters, but preliminary estimates indicate these expenses will not be
material. There can be no assurance that the Company's current estimated costs
associated with the Year 2000 issue, or the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on the result of operations or financial position of the Company in any
given year.
The Company has not yet identified any specific contingency plans in the
event that projects are not completed in time or if planned fixes fail to
operate as expected. Each implementation project manager is responsible for
completing contingency plans for assigned projects as part of the planning
process.
At this time, the Company does not plan to use any outside agencies to
provide independent verification of readiness, although individual
implementation project managers may decide to include independent verification
as part of their project plans. The independent verification requirement will be
based on the risk associated with failure of the particular project/system.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,125 $ 8,700
Accounts receivable (net of allowance for doubtful
accounts of $500 in 1998 and $1,097 in 1997) 13,008 19,469
Inventories 5,338 28,986
Other current assets 379 1,029
--------- ---------
Total current assets 26,850 58,184
Property and equipment, net 4,659 15,276
Other assets, net 318 3,278
--------- ---------
$ 31,827 $ 76,738
========= =========
LIABILITIES AND REDEEMABLE PREFERRED STOCK
Current Liabilities:
Short-term bank borrowings $ 4,000 $ 7,200
Accounts payable 2,193 8,723
Accrued expenses 4,794 10,613
Current portion of long-term debt and capital
lease obligations 64 874
--------- ---------
Total current liabilities 11,051 27,410
Long-term debt and capital lease obligations, less
current portion 50 971
--------- ---------
Total liabilities 11,101 28,381
--------- ---------
Commitments (Note 8)
Redeemable Series B convertible preferred stock,
no par value:
Authorized 28,000 shares;
Issued and outstanding, 16,000 shares (1998)
and none (1997), liquidation preference, $50 per
share (1998) and none (1997) 773 0
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding, 18,113,791 shares (1998) and
17,120,628 shares (1997) 99,849 99,149
Accumulated deficit (78,255) (48,863)
Accumulated other comprehensive loss (1,641) (1,929)
--------- ---------
Total shareholders' equity 19,953 48,357
--------- ---------
$ 31,827 $ 76,738
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
--------- --------- ---------
Net sales $ 32,431 $ 84,286 $ 82,509
Costs and expenses:
Cost of goods sold 24,201 54,762 55,537
Research and development 8,921 12,327 14,639
Selling, general and administrative 14,115 20,326 17,901
Special charge 12,707 0 5,890
--------- --------- ---------
Income (loss) from operations (27,513) (3,129) (11,458)
Other income (expense), net (86) (1,363) 53
--------- --------- ---------
Income (loss) before provision for
(benefit from) income taxes (27,599) (4,492) (11,405)
Provision for (benefit from) income taxes 1 14,844 (2,200)
--------- --------- ---------
Net income (loss) (27,600) (19,336) (9,205)
Deemed dividends on preferred stock (1,903) 0 0
--------- --------- ---------
Net income (loss) available to common
shareholders (29,503) (19,336) (9,205)
Comprehensive income (loss)
Deemed dividends on preferred stock 1,903 0 0
Currency exchange adjustment 288 (1,792) (137)
--------- --------- ---------
Comprehensive income (loss) $(27,312) $(21,128) $ (9,342)
========= ========= =========
Net income (loss) per share-basic $ (1.71) $ (1.15) $ (0.56)
========= ========= =========
Net income (loss) per share-diluted $ (1.71) $ (1.15) $ (0.56)
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
PREFERRED COMMON ACCUMULATED COMPREHENSIVE
STOCK STOCK DEFICIT LOSS TOTAL
-------- ------- --------- ---------- --------
Balances, January 1, 1996 $ 0 $95,683 $(20,322) $ 0 $ 75,361
Issuance of 310,471
shares of common stock
under stock option plan 0 1,125 0 0 1,125
Issuance of 249,917 shares
of common stock under
employee stock purchase
plan 0 1,107 0 0 1,107
Net loss 0 0 (9,205) 0 (9,205)
Translation adjustment 0 0 0 (137) (137)
------- ------- --------- --------- ---------
Balances, December 31, 1996 0 97,915 (29,527) (137) 68,251
Issuance of 124,199 shares
of common stock under
stock option plan 0 364 0 0 364
Issuance of 272,502 shares
of common stock under
employee stock purchase
plan 0 870 0 0 870
Net loss 0 0 (19,336) 0 (19,336)
Translation adjustment 0 0 0 (1,792) (1,792)
------- ------- --------- --------- ---------
Balances, December 31, 1997 0 99,149 (48,863) (1,929) 48,357
Issuance of 100,000 shares
of Series A convertible
preferred stock and
warrants for 400,000
shares of common stock
(Note 9) 6,222 385 (1,792) 0 4,815
Conversion of 2,000 shares
of Series A convertible
preferred stock to common
stock (124) 124 0 0 0
Redemption of 70,000 shares
of Series A convertible
preferred stock (4,725) 0 0 0 (4,725)
Exchange of 28,000 shares
of Series A convertible
preferred stock for
28,000 shares of Series B
convertible preferred
stock (1,373) 0 0 0 (1,373)
Issuance of 5,000 shares
of common stock under
stock option plan 0 14 0 0 14
Issuance of 237,522 shares
of common stock under
employee stock purchase plan 0 177 0 0 177
Net loss 0 0 (27,600) 0 (27,600)
Translation adjustment 0 0 0 288 288
-------- ------- --------- --------- ---------
Balances, December 31, 1998 $ 0 $99,849 $(78,255) $ (1,641) $ 19,953
======== ======= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
--------- --------- --------
Cash flows from operating activities:
Net income (loss) $(27,600) $(19,336) $(9,205)
Adjustments to reconcile to net cash
from operating activities:
Depreciation and amortization 2,480 5,073 6,945
Provision for doubtful accounts 1,670 2,930 0
Deferred taxes 0 14,844 (2,534)
Special charge 12,707 0 5,890
Changes in assets and liabilities:
Accounts receivable 4,781 (7,181) 11,191
Inventories (2,461) (2,998) (4,509)
Other current assets 650 (391) (865)
Accounts payable (6,530) 3,419 (1,825)
Accrued expenses (5,153) (543) (1,094)
Other, net 626 527 (1,545)
--------- --------- --------
Net cash provided by (used in)
operating activities (18,830) (3,656) 2,449
--------- --------- --------
Cash flows from investing activities:
Acquisition of property and equipment (919) (3,835) (6,611)
Sale of MeV ion implantation products 23,151 0 0
Capitalization of software development costs 0 0 (360)
--------- --------- --------
Net cash provided by (used in)
investing activities 22,232 (3,835) (6,971)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 191 1,234 2,232
Proceeds from issuance of preferred stock
and warrants 4,815 0 0
Redemption of preferred stock (5,325) 0 0
Proceeds from short-term bank borrowings 4,000 50,290 4,000
Payments of short-term bank borrowings (7,200) (45,590) (1,500)
Payments of long-term debt and capital leases (761) (939) (990)
--------- --------- --------
Net cash provided by (used in)
financing activities (4,280) 4,995 3,742
--------- --------- --------
Effect of exchange rate changes on cash 303 (631) (23)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents (575) (3,127) (803)
Cash and cash equivalents, beginning of year 8,700 11,827 12,630
--------- --------- --------
Cash and cash equivalents, end of year $ 8,125 $ 8,700 $11,827
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 186 $ 445 $ 210
Cash paid for income taxes 6 94 105
Non-cash investing and financing activities:
Purchase of property and equipment
under long-term debt obligations 0 515 1,544
Deemed dividends on preferred stock 1,792 0 0
Conversion of Series A Stock to common stock 124 0 0
The accompanying notes are an integral part of the consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Genus, Inc. 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. Genus conducts its business within one industry segment.
The following is a summary of Genus' significant accounting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Genus, Inc.
and its wholly owned subsidiaries after elimination of significant intercompany
accounts and transactions.
Sale of Assets
In July 1998, the Company sold selected assets and transferred selected
liabilities related to the Millions of Electron Volts ("MeV") ion implantation
equipment product line to Varian Associates, Inc. for approximately $24,150
("Asset Sale"). As a result of the Asset Sale, the Company no longer engages in
the ion implant business and has refocused its efforts on thin film deposition.
In connection with the Asset Sale and the refocusing of the Company's business
on thin film products, the Company significantly reduced the workforce at its
Sunnyvale, California location.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents approximate estimated
fair value because of the short maturity of those financial instruments. Based
on rates currently available to the Company for debt with similar terms and
remaining maturities, the carrying amounts of debt approximate estimated fair
values.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high credit quality financial
institutions located in the United States. The Company does not require
collateral from its customers and maintains an allowance for credit losses.
Three customers accounted for an aggregate of 78% and 75% of accounts
receivable at December 31, 1998 and 1997, respectively. South Korean and
Japanese customers accounted for an aggregate of 61% and 70% of accounts
receivable at December 31, 1998 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost or market, using standard costs
that approximate actual costs, under the first-in, first-out method.
Long-Lived Assets
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives, which range from three
to ten years. Leasehold improvements are amortized using the straight-line
method over their estimated useful lives or the remaining lease term, whichever
is less.
Other assets include goodwill and software development costs and are stated
at cost. Goodwill represented the cost in excess of the fair market value of net
assets of an acquired business and was amortized on a straight-line basis over
15 years. Software development costs represent costs incurred subsequent to
establishing the technological feasibility of software products and were
amortized over the expected life of the products, estimated to be three years.
Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than the
carrying amounts of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amounts over the fair values of the assets.
Revenue Recognition
Revenue related to systems is recognized upon shipment or, prior to
shipment, upon completion of customer source inspection and factory acceptance
of the system where risk of loss and title to the system passes to the customer.
A provision for the estimated future cost of system installation, warranty and
commissions is recorded when revenue is recognized.
Use of Estimates
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.
Income Taxes
The Company accounts for income taxes using a method that requires deferred
tax assets to be computed annually on an asset and liability method and adjusted
when new tax laws or rates are enacted. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. Income tax expense (benefit) is the tax payable (refundable) for the
period plus or minus the change in deferred tax assets and liabilities during
the period.
Foreign Currency
The Company has foreign sales and service operations. With respect to all
foreign subsidiaries excluding South Korea and Japan, the functional currency is
the U.S. dollar, and transaction and translation gains and losses are included
in net income (loss) and have not been material in any year presented. 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 a separate component of stockholders' equity. Gains or losses
resulting from foreign currency transactions, including intercompany
transactions, are included in the results of operations.
Net Income (Loss) Per Share
The Company has computed and presented net income (loss) per share under
two methods, basic and diluted. Basic net income (loss) per share is computed by
dividing income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted net income (loss)
per share is computed by dividing income (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).
Recent Account Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities as is effective for the
Company's fiscal year 1999. The impact of the implementation of SFAS 133 on the
consolidated financial statements of the Company has not yet been determined.
In March 1998, the Accounting Standards Executive Committee ("AcSEC"),
released Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires certain
costs of computer software developed or obtained for internal use to be
capitalized, provided that those costs are not research and development. SOP
98-1 is effective for the Company's fiscal year 1999, and the impact of the
adoption of SOP 98-1 on the Company's consolidated financial statements has not
yet been determined.
In April 1998, AcSEC released Statement of Position 98-5, "Accounting for
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the costs of
start-up activities to be expensed as incurred. Start-up activities are defined
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer, initiating a new process in an existing
facility, or commencing some new operation. SOP 98-5 is effective for the
Company's fiscal year 1999, and the impact of the adoption of SOP 98-5 on the
Company's consolidated financial statements has not yet been determined.
NOTE 2. INVENTORIES
Inventories comprise the following:
DECEMBER 31,
---------------
1998 1997
------ -------
Raw materials and parts $4,796 $15,210
Work in process 244 6,879
Finished goods 298 6,897
------ -------
$5,338 $28,986
====== =======
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and comprise the following:
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Equipment (useful life is 3 years) $ 7,227 $ 19,510
Demonstration equipment (useful life ranges
from 3-5 years) 14,345 14,352
Furniture and fixtures (useful life is 3 years) 1,015 2,645
Leasehold improvements (useful life ranges
from 4-10 years) 3,003 6,631
--------- ---------
25,590 43,138
Less accumulated depreciation and amortization (21,243) (28,833)
--------- ---------
4,347 14,305
Construction in process 312 971
--------- ---------
$ 4,659 $ 15,276
========= =========
Equipment includes $584 and $3,745 of assets under capital leases at
December 31, 1998 and 1997, respectively. Accumulated amortization on these
assets is $584 and $2,628 at December 31, 1998 and 1997, respectively.
NOTE 4. OTHER ASSETS
Other assets comprise the following:
DECEMBER 31,
---------------
1998 1997
----- --------
Goodwill $ 0 $ 3,802
Software development costs 0 1,347
----- --------
0 5,159
Accumulated amortization-goodwill 0 (2,675)
Accumulated amortization-software development costs 0 (980)
----- --------
0 1,494
Other 318 1,784
----- --------
$ 318 $ 3,278
===== ========
Amortization expense for software development costs was $128, $401 and $507
in 1998, 1997 and 1996, respectively.
NOTE 5. LINE OF CREDIT
The Company secured an Accounts Receivable Purchase Agreement with a bank
on September 30, 1998. This agreement allows the Company to sell qualified
receivables to the bank for a transaction fee of .1875%, and pay interest at the
rate of 1% per month on the average outstanding balance. The bank will advance
80% of the qualified receivables ($4,000 maximum outstanding at any one time).
This agreement expires September 30, 1999. On December 31, 1998, the Company had
$4,000 in outstanding borrowings under the Accounts Receivable Purchase
Agreement, which was repaid in January 1999.
NOTE 6. ACCRUED EXPENSES
Accrued expenses comprise the following:
DECEMBER 31,
--------------
1998 1997
------ -------
System installation and warranty $ 583 $ 3,741
Accrued commissions and incentives 538 2,062
Accrued payroll and related items 536 1,264
Restructuring reserves (Note 11) 1,240 0
Other 1,897 3,546
------ -------
$4,794 $10,613
====== =======
NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations comprise the following:
DECEMBER 31,
----------------
1998 1997
------- -------
Capital lease obligations with interest rates ranging from
4.5-15.6% $ 114 $1,737
Mortgage loan payable in monthly installments through
October 2000 at 9.25% interest per annum and
collateralized by a building 0 108
------- -------
114 1,845
Less amounts due within one year (64) (874)
------- -------
$ 50 $ 971
====== =======
The future aggregate payments of capital lease obligations are as follows:
1999 $ 68
2000 51
-----
119
Less amounts representing interest on capital lease obligations (5)
-----
Principal payments and present value of minimum capital lease
obligations $114
=====
Certain of the capital lease agreements require the Company to comply with
specific financial covenants and to pay stipulated amounts upon default or
termination prior to the expiration of the basic lease terms.
NOTE 8. LEASE COMMITMENTS
The Company leases certain of its facilities and various office equipment
under operating leases expiring through 2002. The Company is responsible for
property taxes, insurance and maintenance under the facility leases. Certain of
these leases contain renewal options. The Company subleases approximately 40,000
square feet of its facility to two other companies. One company began subleasing
in April 1998 and the other company began subleasing in December 1998.
At December 31, 1998, minimum lease payments required under these operating
leases are as follows:
1999 $ 714
2000 757
2001 772
2002 579
-------
$ 2,822
=======
Rent expense for 1998, 1997 and 1996 was $1,169 (net of sublease income
of $146), $2,215 and $2,218 respectively. There was no sublease income in 1997
and 1996.
At December 31, 1998, sublease receipts are expected as follows:
1999 $ 793
2000 625
2001 625
2002 521
-------
$ 2,564
=======
NOTE 9. CAPITAL STOCK
Net Income (Loss) Per Share
A reconciliation of the numerator and denominator of basic and diluted
income (loss) per share is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
--------- --------- --------
Numerator-Basic:
Net income (loss) $(27,600) $(19,336) $(9,205)
Deemed dividends on preferred stock (1,903) 0 0
--------- --------- --------
Net income (loss) available to common
shareholders $(29,503) $(19,336) $(9,205)
========= ========= ========
Denominator-Basic:
Weighted average common stock outstanding 17,248 16,860 16,423
========= ========= ========
Basic net income (loss) per share $ (1.71) $ (1.15) $ (0.56)
========= ========= ========
Numerator-Diluted:
Net income (loss) $(27,600) $(19,336) $(9,205)
Deemed dividends on preferred stock (1,903) 0 0
--------- --------- --------
Net income (loss) available to common
shareholders $(29,503) $(19,336) $(9,205)
========= ========= ========
Denominator-Diluted:
Weighted average common stock outstanding 17,248 16,860 16,423
========= ========= ========
Diluted net income (loss) per share $ (1.71) $ (1.15) $ (0.56)
========= ========= ========
Stock options to purchase 2,289,000 shares of common stock were outstanding
in 1998 on a weighted average basis, but were not included in the computation of
diluted loss per share because the Company has a net loss for 1998. A total of
16,000 shares of Series B Convertible Preferred Stock and warrants for the
purchase of 400,000 shares of common stock were outstanding at December 31, 1998
but were not included in the computation of diluted loss per share because the
Company has a net loss for 1998.
Stock options to purchase 1,979,000 shares of common stock were outstanding
in 1997 on a weighted average basis, but were not included in the computation of
diluted loss per share because the Company has a net loss for 1997.
Stock options to purchase 1,838,000 shares of common stock were outstanding
in 1996 on a weighted average basis, but were not included in the computation of
diluted loss per share because the Company has a net loss for 1996.
Private Placement of Convertible Preferred Stock
In February 1998, the Company issued an aggregate of 100,000 shares of 6%
Series A Convertible Preferred Stock (the "Series A Stock") and warrants to
purchase an aggregate of up to 400,000 shares of its common stock, all for an
aggregate purchase price of $5,000 in cash. In 1998, the Company recorded deemed
dividends on preferred stock of approximately $1,903, reflecting the beneficial
conversion feature, which is the difference between the proceeds allocated to
the Series A Stock and the fair value of the Series A Stock (assuming immediate
conversion) upon issuance, and the accrual of the 6% dividends thereon.
In June 1998, 2,000 shares of the Series A Stock were converted into common
stock of the Company. This conversion was accounted for at book value. In July
1998, the Company redeemed 70,000 shares of the outstanding Series A Stock for
$4,725 in cash (the "Redemption"), and the remaining 28,000 shares of Series A
Stock were exchanged for 28,000 shares of Redeemable Series B Convertible
Preferred Stock (the "Series B Stock") by the existing holders of the Series A
Stock (the "Exchange"). The Redemption and Exchange were accounted for by
comparing the fair value of the Series B Stock and the $4,725 in cash with the
carrying amount of the Series A Stock redeemed and with the fair value of the
Series A Stock converted (pursuant to the original conversion terms of the
Series A Stock); there was no material difference between these amounts.
In November 1998, the Company redeemed 12,000 shares of the Series B Stock
for approximately $600 in cash. As of December 31, 1998, there were 16,000
shares of Series B Stock outstanding, all of which were converted into common
stock of the Company in February 1999.
Warrants
In connection with the issuance of the Series A Stock, the Company issued
warrants for 400,000 shares of the Company's common stock to the holders of the
Series A Stock. The warrants are exercisable at any time until February 2001 for
300,000 shares of common stock at a price of $3.67 per share and for 100,000
shares at a price of $4.50 per share.
Rights and Privileges of Series B Convertible Preferred Stock
Conversion Rights. Each share of the Series B Stock was issued with a
stated value of $50 (the "Stated Value"). Each holder of shares of Series B
Stock has the right at any time, and from time-to-time, to convert some or all
such shares into cash at the Stated Value or common stock at a conversion price
of $1.25 per share.
Dividends. Series B Stock accrues a dividend at a rate per share (as a
percentage of the Stated Value per share) of 6% per annum, payable in cash or
shares of common stock at the option of the Company. The shares must be held
until February 12, 1999 to receive this dividend.
Redemption. The Series B Stock may be redeemed at the option of the Company
on or after July 30, 2003 at a redemption price equal to the product of (i) the
average of the closing bid prices for the five trading days immediately
preceding (a) July 30, 2003 or (b) the date of payment by the Company of the
redemption price, which ever is greater, and (ii) the conversion ratio
applicable to the Series B Stock calculated on July 30, 2003. Each selling
security holder may require the Company at any time to redeem all of its shares
of the Series B Stock at a redemption price equal to the stated value per share.
In addition, the Series B Stock may be redeemed at the option of the selling
security holder upon the occurrence of certain triggering events at a price per
share equal to the product of (i) the average closing bid prices of the
Company's common stock for the five trading days immediately preceding (a) the
date of the triggering event or (b) the date of payment in full of such
redemption price, which ever is greater, and (ii) the conversion ratio on the
date of the triggering event.
Liquidation Rights. In the event of the dissolution, liquidation or
winding-up of the Company, whether voluntary or involuntary, the holders of the
Series B Stock will be entitled to receive before any payment or distribution
will be made on the common stock of the Company, out of the assets of the
Company available for distribution to shareholders, the Stated Value per share
of Series B Stock and all accrued and unpaid dividends to and including the date
of payment thereof. Upon the payment in full of all amounts due to holders of
the Series B Stock, then the holders of the common stock of the Company will
receive, ratably, all remaining assets of the Company legally available for
distribution. If the assets of the Company available for distribution to the
holders of the Series B Stock are insufficient to permit payment in full of the
amounts payable as aforesaid to the holders of Series B Stock upon such
liquidation, dissolution or winding-up, whether voluntary or involuntary, then
all such assets of the Company will be distributed to the exclusion of the
holders of shares of common stock ratably among the holders of Series B Stock.
A sale, conveyance or disposition of all or substantially all of the assets
of the Company or the effectuation by the Company of a transaction or series of
related transactions in which more than 50% of the voting power of the Company
is disposed of, or a consolidation or merger of the Company with or into any
other company or companies shall not be deemed to be a liquidation, dissolution
or winding-up of the Company for the purposes of the liquidation rights that
would be available to the holders of Series B Stock, but instead will be subject
to the conversion provisions outlined above.
Stock Option Plan
The Company has a 1991 Incentive Stock Option Plan (the "Plan") under which
the Board of Directors may issue incentive and nonstatutory stock options. The
Plan expires ten years after adoption and the Board of Directors have the
authority to determine to whom options will be granted, the number of shares,
the term and exercise price. The options are exercisable at times and increments
as specified by the Board of Directors, and expire five years from date of
grant. These options generally vest over a three-year period. At December 31,
1998, the Company had reserved 3,653,006 shares of common stock for issuance
under the Plan. A total of 329,006 shares remained available for future grants
at December 31, 1998. At December 31, 1996, 492,729 options were exercisable at
a weighted average exercise price of $5.56. At December 31, 1997, 789,670
options were exercisable at a weighted average exercise price of $6.50. At
December 31, 1998, 573,484 options were exercisable at a weighted average
exercise price of $3.094.
Activity under the Plan is set forth in the table below:
WEIGHTED
OUTSTANDING AVERAGE
SHARES OPTIONS PRICE EXERCISE
(IN 000's) PER SHARE TOTAL PRICE
--------- ---------------- --------- ------
Balance, January 1, 1996 1,586 $ 1.75 to $15.63 $ 9,947 $ 6.27
Granted 1,027 5.94 to 8.38 6,705 6.53
Exercised (310) 1.75 to 8.63 (1,125) 3.63
Terminated (213) 2.75 to 15.63 (1,776) 8.34
-------- ---------------- --------- ------
Balance, December 31, 1996 2,090 1.75 to 8.63 13,751 6.58
Granted 537 3.88 to 6.94 2,707 5.04
Exercised (124) 1.75 to 6.13 (364) 2.94
Terminated (652) 2.25 to 8.63 (4,473) 6.86
-------- ---------------- --------- ------
Balance, December 31, 1997 1,851 2.25 to 8.63 11,621 6.28
Granted 3,764 0.88 to 3.21 8,500 2.26
Exercised (5) 2.87 to 2.87 (14) 2.87
Terminated (3,309) 1.63 to 8.63 (15,600) 4.71
-------- ---------------- --------- ------
Balance, December 31, 1998 2,301 $ 0.88 to $ 8.00 $ 4,507 $ 1.96
======== ================ ========= ======
Employee Stock Purchase Plan
The Company has reserved a total of 2,050,000 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. Under the plan, the Company's employees, subject to
certain restrictions, may purchase shares of common stock at the lesser of 85%
of fair market value at either the beginning of each two-year offering period or
the end of each six-month purchase period within the two-year offering period.
At December 31, 1998, 1,889,608 shares have been issued under the plan.
Common Stock Purchase Rights
In July 1990, the Company distributed a dividend to shareholders comprised
of a right to purchase one share of common stock (a "Right") for each
outstanding share of common stock of the Company they hold. These rights do not
become exercisable or transferable apart from the common stock until the
Distribution Date which is either the tenth day after a person or group (a)
acquires beneficial ownership of 20% or more of the Company's common stock or
(b) announces a tender or exchange offer, the consummation of which would result
in ownership by a person or group of 30% or more of the Company's common stock.
After the Distribution Date, each Right will entitle the holder to purchase from
the Company one share of common stock at a price of $28.00 per share.
If the Company is acquired in a merger or other business combination
transaction, or if 50% or more of its consolidated assets or earnings power is
sold, each Right will entitle the holder to purchase at the exercise price that
number of shares of the acquiring company having a then current market value of
two times the exercise price of the Right. In the event that the Company is the
surviving corporation in a merger and the Company's common stock remains
outstanding, or in the event that an acquiring party engages in certain
self-dealing transactions, each Right not owned by the acquiring party will
entitle the holder to purchase at the exercise price that number of shares of
the Company's common stock having a then current market value of two times the
exercise price of the Right. The Rights are redeemable at the Company's option
for $.01 per Right prior to becoming exercisable, may be amended at the
Company's option on or prior to the Distribution Date and expire on July 3,
2000.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is presented in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
requires that the information be determined as if the Company had accounted for
its employee stock-based compensation plans under the fair value method
prescribed by SFAS 123.
The fair value of these options was estimated at the date of grant using a
Black-Scholes single option pricing model with the following weighted average
assumptions for 1998, 1997 and 1996:
1998 1997 1996
--------- --------- ---------
Risk free interest rates 5.335% 6.220% 6.070%
Expected life 3.3 years 3.5 years 3.5 years
Expected volatility 61.4% 77.7% 77.7%
Expected dividend yield 0% 0% 0%
The weighted average fair value of options granted in 1998, 1997 and 1996
was $1.60, $2.92 and $3.81, respectively.
Under the 1989 Employee Stock Purchase Plan, the Company does not recognize
compensation cost related to employee purchase rights under the 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
1998, 1997 and 1996.
1998 1997 1996
--------- --------- ---------
Risk free interest rates 5.415% 5.630% 5.340%
Expected life 0.5 years 0.5 years 0.5 years
Expected volatility 61.4% 77.7% 77.7%
Expected dividend yield 0% 0% 0%
The weighted average fair value of those purchase rights granted in 1998,
1997 and 1996 was $0.48, $1.80 and $3.26, 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 income (loss)
and basic and diluted net income (loss) per share would have been the pro forma
amounts indicated below:
1998 1997 1996
--------- --------- ---------
Pro forma net income (loss) available to
common shareholders $(32,830) $(21,537) $(12,053)
Pro forma net income (loss) per share-basic $ (1.88) $ (1.28) $ (0.73)
Pro forma net income (loss) per share-diluted $ (1.88) $ (1.28) $ (0.73)
The above pro forma effects on net income (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.
The options outstanding and currently exercisable by exercise price under
the option plan at December 31, 1998 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------------
WEIGHTED
RANGE OF AVG. REMAINING WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVG. EXERCISE NUMBER WEIGHTED AVG.
PRICES OUTSTANDING LIFE PRICE OUTSTANDING EXERCISE PRICE
- - ---------- ----------- ------------- ----------- ---------- ---------------
0.88-$1.25 729,500 4.45 $ 0.93 12,500 $ 0.88
1.31-$1.63 741,500 4.27 $ 1.62 0 $ 0.00
2.03-$3.03 778,140 3.25 $ 2.98 523,816 $ 3.03
3.22-$8.00 52,250 2.91 $ 4.84 37,168 $ 4.73
--------- -------
0.88-$8.00 2,301,390 3.95 $ 1.94 573,484 $ 3.09
========= =======
Option Repricing
On January 28, 1998 the Board of Directors offered employees the
opportunity to reprice outstanding stock options as of February 9, 1998. The
repriced options, both vested and unvested, are precluded from exercise for a
period of one year from the repricing date. Approximately 1,544,750 options with
original exercise prices ranging from $3.88 to $8.63 were repriced at $3.03, the
fair market value as of February 9, 1998.
NOTE 10. 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 1998, 1997 and 1996, the Company made
$62, $92 and $87, respectively, in contributions to the Benefit Plan.
NOTE 11. SPECIAL CHARGE
In 1998, the Company recorded a special charge of approximately $12,707
(Note 15). Included in this special charge are personnel charges of $1,746
associated with the Company's reduction in workforce as well as $5,400 in
inventory write-downs, and $1,113 in leasehold improvement write-offs. In
addition, this charge included $1,402 for expenses associated with the closing
of several sales offices and transaction losses as a result of the sale of the
ion implant products to Varian and $1,053 for legal, accounting, and banking
fees associated with the Varian transaction. Finally, the special charge
included a $1,993 write-off of ion implant inventory that is currently a matter
of dispute with Varian in connection with the Asset Sale. The Company and Varian
are in the process of resolving the dispute through arbitration to determine
whether the Company or Varian has rights to the one ion implant sale and
related inventory. If and when the Company prevails in the arbitration, any
adjustments to the Company's financial statements as a result of this gain
contingency will be made in the quarter in which the decision is rendered and
the collection from the end customer of the amount in question is probable.
The Company is not conceding any rights to the disputed sale.
At December 31, 1998, the following cash components of the special charge
remain unpaid: $300 in payroll costs associated with the reduction in force,
$220 in foreign subsidiary closing costs, and $720 in transaction costs. The
Company expects these amounts to be paid by the end of the second quarter of
1999.
During 1996, the Company incurred special charges of $5,890 relating to
$860 in payroll costs associated with two reductions in workforce, $3,332 in
inventory write-downs, $1,253 in demonstration equipment write-downs and $445 in
capitalized software and other write-downs.
NOTE 12. OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprises the following:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ -------- ------
Interest income $ 77 $ 156 $ 334
Interest expense (186) (445) (210)
Foreign exchange 301 (1,107) 0
Other, net (278) 33 (71)
------ -------- ------
$ (86) $(1,363) $ 53
====== ======== ======
NOTE 13. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 consists of the following:
1998 1997 1996
----- ------- --------
Federal:
Current $ 0 $ 0 $ 0
Deferred 0 14,004 (2,343)
----- ------- --------
0 14,004 (2,343)
State:
Current 1 0 0
Deferred 0 840 (191)
----- ------- --------
1 840 (191)
Foreign:
Current 0 0 334
----- ------- --------
$ 1 $14,844 $(2,200)
===== ======= ========
The Company's effective tax rate for the years ended December 31, 1998,
1997 and 1996 differs from the U.S. federal statutory income tax rate as
follows:
1998 1997 1996
----- ----- -----
Federal income tax at statutory rate (35)% (34)% (35)%
Change in valuation allowance 0 372 13
Foreign income taxes 0 0 3
Other 0 (8) 0
Net operating loss not benefited 35 0 0
----- ----- -----
0% 330% (19)%
===== ===== =====
The components of the net deferred tax asset comprise the following:
1998 1997 1996
--------- --------- --------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 26,079 $ 13,097 $ 9,447
Tax credit carryforwards 1,950 1,867 1,288
Inventory, accounts receivable and other
reserves 2,100 401 1,835
Non-deductible accrued expenses 1,100 1,152 1,264
Other reserves 0 0 1,245
Depreciation and amortization 1,411 215 (235)
Valuation allowance (32,640) (16,732) 0
--------- --------- --------
Net deferred tax assets $ 0 $ 0 $14,844
========= ========= ========
Temporary differences represent the cumulative taxable or deductible
amounts recorded in the financial statements in different years than recognized
in the tax returns.
At December 31, 1998, the Company had the following income tax
carryforwards available:
TAX REPORTING EXPIRATION DATES
-------------- ----------------
U.S. regular tax operating losses $ 74,287 2006-2013
U.S. business tax credits $ 1,953 2003-2010
State net operating losses $ 21,981 1999-2004
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of net operating loss carryforwards and credits before
utilization.
NOTE 14. SEGMENT INFORMATION
Effective for 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information."
Management of the Company has identified its operating segments based on
differences in products and services. The Company's operations have consisted
of thin film and MeV ion implantation product lines. The Company sold its MeV
ion implantation product line to Varian in July 1998. The Company has aggregated
its two operating segments for financial reporting purposes because its
operating segments have similar long-term economic characteristics and because
the products and services, production processes, types of customers, and the
methods used to distribute the products and provide the services of the
operating segments are similar. All reportable segment information is equal to
the financial information reported in the Company's consolidated financial
statements and notes thereto.
The Company is engaged in the design, manufacture, marketing and servicing
of advanced thin film deposition systems used in the semiconductor manufacturing
industry. The Company's sales are primarily generated from CVD WSiX systems. The
Company's CVD system is designed for the deposition of WSiX to create multiple
interconnect layers on ICs. This product is primarily used in the manufacturing
of DRAMs.
Net sales from thin film products and services accounted for 35%, 32% and
38% of the Company's net sales for 1998, 1997 and 1996. Net sales from MeV ion
implantation products and services accounted for 65%, 68%, and 62 % of the
Company's net sales in 1998, 1997 and 1996.
Export Sales
For reporting purposes, export sales are determined by the location of the
parent company of the Company's customer, regardless of where the delivery was
made by the Company.
Export sales for 1998, 1997 and 1996 represented 56%, 74% and 84% of net
sales, respectively. Sales to South Korea for 1998, 1997 and 1996 represented
30%, 50% and 59% of net sales, respectively. Sales to Japan for 1998, 1997 and
1996 represented 14%, 21% and 19% of net sales, respectively.
Domestic and Foreign Operations
Revenues, for the Company's foreign and domestic operations for 1998, 1997
and 1996 are as follows:
1998 1997 1996
--------- -------- ---------
Sales to unaffiliated customers:
Domestic operations $ 27,303 $73,182 $ 80,827
Foreign operations 5,128 11,104 1,682
--------- -------- ---------
$ 32,431 $84,286 $ 82,509
========= ======== =========
The Company did not hold any material long-lived assets in countries other
than the United States at December 31, 1998, 1997 or 1996.
Major Customers
In 1998, three customers, Samsung Electronics Company, Ltd., Advanced Micro
Devices and Micron Technology, Inc., accounted for 28%, 15% and 12%,
respectively, of net sales. In 1998, three customers, Samsung Electronics
Company, Ltd., M/A Com and SGS Thomson accounted for 68%, 8% and 5%,
respectively of the Company's CVD net sales and three customers, Advanced Micro
Devices, Micron Technology, Inc. and Atmel accounted for 21%, 18% and 14%,
respectively, of the Company's ion implantation net sales. In 1997, Samsung
Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%,
respectively, of net sales. In 1996, these same two customers accounted for 53%
and 18%, respectively, of net sales.
NOTE 15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
1998 QUARTERS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 * DECEMBER 31
--------- --------- ------------- -------------
Net sales $ 7,238 $ 10,270 $ 9,804 $ 5,119
Gross profit 297 546 3,915 3,472
Net income (loss) available
to common shareholders (9,243) (21,603) 40 1,301
Net income (loss) per
share-basic and diluted (0.54) (1.26) 0.00 0.07
1997 QUARTERS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 ** DECEMBER 31
--------- --------- ------------- -------------
Net sales $ 19,681 $ 19,351 $ 24,375 $ 20,879
Gross profit 7,368 7,811 8,351 5,994
Net income (loss) 181 296 512 (20,325)
Net income (loss) per
share-basic and diluted 0.01 0.02 0.03 (1.20)
* The fourth quarter of 1998 was the first quarter that was entirely thin
film business. Sales were lower than the previous quarter, which included
shipments from the ion implant product line that was sold to Varian in July
1998. Gross profit of $3,472 included inventory reserve reversals of $1,423 and
warranty reserve reversals of $200. The Company also reversed excess
restructuring reserves of $509, resulting in a net profit of $1,301. Exclusive
of these non-recurring adjustments, the Company incurred an operating loss of
$831.
** During the fourth quarter of 1997, delays in shipments to Asian
customers resulted in lower sales. In addition, the Company incurred a net
charge of $2,930 for bad debt expense. The lower sales, coupled with this
write-off, resulted in an operating loss of $4,930 for the fourth quarter. Other
income (loss) for the quarter included $1,107 in foreign exchange losses as a
result of the effect of the devaluation of the Korean won on intercompany
transactions. In addition, based on the weight of available evidence as
prescribed by SFAS 109, management determined that it was more likely than not
that the net deferred tax asset at December 31, 1997 would not be realized and,
therefore, provided a full valuation allowance against the net deferred tax
asset during the fourth quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss),
shareholders' equity and cash flows, present fairly, in all material respects,
the financial position of Genus, Inc. and its subsidiaries (the "Company") at
December 31, 1998 and December 31, 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
- - --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 3, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file a definitive proxy statement
within 120 days after the end of the fiscal year covered by this Report pursuant
to Regulation 14A relating to the Registrant's 1999 Annual Meeting of
Shareholders (the "Proxy Statement") to be held on May 19, 1999, and certain
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, who are elected by and
serve at the discretion of the Board of Directors, and their ages at March 31,
1999, are as follows:
NAME AGE POSITION
- - ----------------------- --- --------------------------------------------------
William W.R. Elder 60 Chairman of the Board, President and Chief
Executive Officer
Thomas E. Seidel, Ph.D. 63 Executive Vice President, Chief Technical Officer
Kenneth Schwanda 41 Vice President, Finance, Chief Financial Officer
Jeff Farrell 51 Vice President, Engineering
Michael Mitchell 36 Director, Operations and Facilities
Mario M. Rosati 52 Secretary and Director
Todd S. Myhre 53 Director
G. Frederick Forsyth 55 Director
Except as set forth below, all of the executive officers have been
associated with the Company 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
executive officers of the Company.
Mr. Elder, a founder of the Company, is the Chairman of the Board,
President and Chief Executive Officer of the Company. From October 1996 to April
1998, he served only as Chairman of the Board. From April 1990 to September
1996, he was Chairman of the Board, President and Chief Executive Officer of the
Company. From November 1981 to April 1990, he was President and a director of
the Company.
Dr. Seidel joined the Company in January 1996 and is the Executive Vice
President and Chief Technical Officer of the Company. 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.
Mr. Schwanda has been Vice President of Finance and Chief Financial Officer
of the Company since February 1999. Mr. Schwanda joined the Company in December
1992 and has held various financial management positions, most currently as Vice
President of Finance. Mr. Schwanda began his professional career in 1979 at
Harris Corporation, a global communications company, where he held accounting
and finance positions.
Mr. Farrell joined the Company in March 1996 and is the Vice President of
Engineering for the Company. From August 1979 to March 1996, Mr. Farrell was
employed by Advanced Micro Devices, a semiconductor manufacturer in Sunnyvale,
California.
Mr. Mitchell has been Director of Operations and Facilities for the Company
since November 1997. Mr. Mitchell joined the Company in June 1995 and has held
various management positions, most currently as Operations Manager. From 1985 to
1995, Mr. Mitchell was a Second Lieutenant in the United States Air Force.
Mr. Rosati has been Secretary of the Company since May 1996 and a director
of the Company since the Company's inception in November 1981. He is also a
director of Aehr Test Systems, a manufacturer of semiconductor test equipment;
CATS Software Inc., a supplier of client/server software products for financial
risk management; Meridian Data, Inc., a developer of compact disc-read only
memory (CD-ROM) and compact disc-recordable (CD-R) systems and related software
for both networks and personal computers; Ross Systems, Inc., a supplier of
enterprise-wide business systems and related services to companies installing
open systems/client server software products; and Sanmina Corporation, an
electronics manufacturer of multilayered printed circuit boards, backplane
assemblies, subassemblies, and printed circuit board assemblies. He is a member
of Wilson Sonsini Goodrich & Rosati, P.C., general counsel to the Company.
Mr. Myhre has served as a director of the Company since January 1994. Since
April 1998, and from September 1995 to January 1996, Mr. Myhre has served as
President and Chief Executive Officer of GameTech International, an electronic
gaming manufacturer. From September 1995 to March 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 of the Company and as President and a
director of the Company, respectively.
Mr. Forsyth has been a director of the Company since February 1996. Since
August 1997, Mr. Forsyth has 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
Consolidated Balance Sheets-December 31, 1998 and 1997
Consolidated Statements of Operations and Comprehensive Income (Loss)-Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity-Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows-Years Ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule. The following financial statement schedule
of Genus, Inc. for the years ended December 31, 1998, 1997 and 1996 is
filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Genus, Inc.
PAGE
----
Report of Independent Accountants 43
II- Valuation and Qualifying Accounts 44
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or Notes
thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Report.
4. Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter ended December 31, 1998.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Genus, Inc. and Subsidiary:
Our audits of the consolidated financial statements referred to in our
report dated February 3, 1999 appearing on page 39 of the 1998 Annual Report on
Form 10-K of Genus, Inc. and Subsidiaries 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 3, 1999
SCHEDULE II
GENUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- - --------------------------- ---------- ----------- ---------- ---------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - --------------------------- ---------- ----------- ---------- ---------
1996
Allowance for doubtful accounts $ 250 $ 0 $ 0 $ 250
Inventory reserves 3,271 4,603 1,338 6,536
Product warranty and
installation accruals 4,318 4,022 3,456 4,884
Valuation allowance on deferred
taxes 0 0 0 0
1997
Allowance for doubtful accounts 250 2,930 2,083 1,097
Inventory reserves 6,536 910 2,040 5,406
Product warranty and installation
accruals 4,884 3,620 4,754 3,750
Valuation allowance on deferred
taxes 0 16,732 0 16,732
1998
Allowance for doubtful accounts 1,097 1,670 2,267 500
Inventory reserves 5,406 5,150 6,787 3,770
Product warranty and installation
accruals 3,750 (143) 3,024 583
Valuation allowance on deferred
taxes 16,732 15,908 0 32,640
GENUS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- - --- -----------
2.1 Asset Purchase Agreement, dated April 15, 1998, by and between
Varian Associates, Inc. and Registrant and exhibits thereto (15)
3.1 Amended and Restated Articles of Incorporation of Registrant as
filed June 6, 1997 (11)
3.2 By-laws of Registrant, as amended (13)
4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between
Registrant and Bank of America, N.T. and S.A., as Rights Agent (4)
4.2 Convertible Preferred Stock Purchase Agreement, dated February 2,
1998, among the Registrant and the Investors (14)
4.3 Registration Rights Agreement, dated February 2, 1998, among the
Registrant and the Investors (14)
4.4 Certificate of Determination of Rights, Preferences and Privileges
of Series A Convertible Preferred Stock (14)
4.5 Certificate of Determination of Rights, Preferences and Privileges
of Series B Convertible Preferred Stock (17)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the
Registrant and the Investors (17)
10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4
Mulliken Way, Newburyport, Massachusetts, and amendment and extension
of lease, dated March 17, 1987 (1)
10.2 Assignment of Lease, dated April 1986, for Registrant's facilities
at Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1)
10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10)
10.5 International Distributor Agreement, dated November 23, 1987,
between General Ionex Corporation and Innotech Corporation (1)
10.6 Distributor/Representative Agreement, dated August 1, 1984,
between Registrant and Aju Exim (formerly Spirox Holding Co./You One
Co. Ltd.) (1)
10.7 Exclusive Sales and Service Representative Agreement, dated
October 1, 1989, between Registrant and AVBA Engineering Ltd. (3)
10.8 Exclusive Sales and Service Representative Agreement, dated as of
April 1, 1990, between Registrant and Indosale PVT Ltd. (3)
10.9 License Agreement, dated November 23, 1987, between Registrant and
Eaton Corporation (1)
10.10 Exclusive Sales and Service Representative Agreement, dated May 1,
1989, between Registrant and Spirox Taiwan, Ltd. (2)
10.11 Lease, dated April 7, 1992, between Registrant and The John A.
and Susan R. Sobrato 1979 Revocable Trust for property at 1139
Karlstad Drive, Sunnyvale, California (6)
10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.13 License and Distribution Agreement, dated September 8, 1992,
between the Registrant and Sumitomo Mutual Industries, Ltd. (8)
10.14 Lease Agreement, dated October 1995, for Registrant's facilities
at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9)
10.15 International Distributor Agreement, dated July 18, 1997, between
Registrant and Macrotron Systems GmbH (12)
10.16 Credit Agreement, dated August 18, 1997, between Registrant and
Sumitomo Bank of California (12)
10.17 Settlement Agreement and Mutual Release, dated April 20, 1998,
between Registrant and James T. Healy (16)
10.18 Form of Change of Control Severance Agreement (16)
10.19 Settlement Agreement and Mutual Release, dated January 1998, between
the Registrant and John Aldeborgh (18)
10.20 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Mary Bobel (18)
10.21 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Fred Heslet
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and
amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10,
1988, and December 15, 1988, which Registration Statement became effective
November 10, 1988.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and
amended May 24, 1989, which Registration Statement became effective May 24,
1989.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Report on Form 8-K dated June 12, 1992.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 21, 1992.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
(10) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(12) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(13) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(14) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated February 12, 1998.
(15) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated April 15, 1998.
(16) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K/A for the year ended December 31, 1997.
(17) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated July 29, 1998.
(18) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on the 29th day of March 1999.
GENUS, INC.
By: /s/Kenneth Schwanda
--------------------
Kenneth Schwanda
Vice President, Finance
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- - ----------------------- -------------------------------- ---------------
/s/William W.R. Elder Chairman of the Board, President March 29, 1999
- - ----------------------- and Chief Executive Officer
William W.R. Elder
/s/Kenneth Schwanda Vice President, Finance March 29, 1999
- - -------------------- Chief Financial Officer
Kenneth Schwanda
/s/G. Frederick Forsyth Director March 29, 1999
- - -------------------------
G. Frederick Forsyth
/s/Todd S. Myhre Director March 29, 1999
- - ------------------
Todd S. Myhre
/s/Mario M. Rosati Director March 29, 1999
- - --------------------
Mario M. Rosati