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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
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, 1997
-----------------
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 February
27, 1998, in the over-the-counter market as reported by the NASDAQ National
Market, was approximately $29,978,000. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 27, 1998, Registrant had 17,129,260 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Part III of
this Form 10-K Report: Proxy Statement for Registrant's 1998 Annual Meeting
of Shareholders -- Items 10, 11, 12 and 13.
Page 1
TABLE OF CONTENTS
PART I Item 1. Business
Markets
Products
Marketing, Sales and Service
Research and Development
Competition
Manufacturing and Suppliers
Intellectual Property
Employees
Environmental Regulation
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports of
Form 8-K:
(1) Financial Statements
(2) Financial Statement Schedule
(3) Exhibits
(4) Reports on Form 8-K
Page 2
PART I
ITEM 1.
BUSINESS
Genus, Inc. ("Genus" or "the Company") designs, manufactures and markets
capital equipment and processes for advanced semiconductor manufacturing.
The Company's products, high energy millions of electron volts ("MeV") ion
implantation systems and chemical vapor deposition ("CVD") equipment, 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 high
energy MeV ion implantation and the CVD of 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.
MARKETS
MeV ION IMPLANTATION
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. Since its inception, ion implantation has
been used to create all of the active devices, such as transistors, in an IC.
Genus implanters have led the way to new applications where "wells" are
formed to isolate the active devices.
The market for ion implanters consists of three primary segments: high
current, medium current and high energy. Currently, high and medium current
ion implanters make up approximately 80% of the total ion implantation
market. However, high energy ion implantation is one of the fastest growing
segments in the entire capital equipment industry due to its use in emerging
advanced technology simplification applications. High energy MeV ion
implantation improves transistor performance and reduces overall
manufacturing costs by placing dopants deep into the silicon to create
regions that isolate transistors from one another.
THIN FILM (CVD)
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.
PRODUCTS
The primary products manufactured by Genus include four MeV ion
implantation systems and three CVD systems. Each of these products is available
with a variety of options and/or upgrades. Ion implantation systems have
accounted for 68%, 62% and 41% of total revenues for 1997, 1996 and 1995,
respectively, while CVD systems have accounted for 32%, 38% and 59%,
respectively, for the same period.
CURRENT MeV ION IMPLANT PRODUCTS
THE KESTREL-TM- FAMILY OF ION IMPLANTERS. Introduced in July 1997, Genus'
fourth-generation of implanters, the Kestrel Family, offers high productivity
manufacturing, low cost-of-ownership and
Page 3
flexibility for MeV, medium current backup, chained implants, mainstream
retrograde well and advanced well applications. The Kestrel's accelerator, a
direct current ("DC") tandem-based design, simplifies both operation and
maintenance while also providing the lowest power consumption and smallest
footprint of any high energy system currently in the market. In addition,
the system's DC tandem allows fast energy change times resulting in a
superior ability to chain multiple implants together without unloading
wafers. This enhances overall throughput as well as reducing
cost-of-ownership. The system's end station, where the ion beam meets the
wafers, is optimized for high energy applications. The large volume of the
process chamber and the design of the high vacuum pumping system minimizes a
phenomenon known as photoresist outgassing which can hamper throughput and
process quality in implanters. All-in-vacuum wafer handling generates the
fewest particles added per wafer pass of any high energy implanter. These
benefits all translate to higher yields and greater cost savings.
As the high energy market has moved from high volume production to a
bifurcated one that is application specific, the Kestrel family of products
is poised to meet the varying requirements with appropriate price and
performance.
KESTREL 750. The Kestrel 750, the most recent addition to the Kestrel
family, is best used for advanced well applications such as triple wells and
Genus developed and patented BILLI (see below). The accelerator technology
for the Kestrel 750 has been improved in several dimensions. Most
importantly, the maximum energy range has been increased 15% for each charge
state. This translates into greater beam currents at critical energies
(higher throughput and lower cost-of-ownership) to support advanced well
applications. The value of this new accelerator design, higher energy and
beam currents, is achieved while increasing the Kestrel's reliability,
serviceability and stability. These advantages have been incorporated
without expanding the system's small footprint.
KESTREL 650. The Kestrel 650 has been optimized to meet the
requirements of established retrograde well applications which require a
lower price/performance point. The accelerator design is the same as that of
the Tandetron-TM- 1520 which is used worldwide for retrograde well, research
and development ("R&D") as well as production applications.
Both the Kestrel 650 and 750 possess a multi-faceted improvement to
process chamber vacuum integrity. All three critical elements for minimizing
photoresist outgassing (process chamber volume, cryo pump location and cryo
pump size) have been improved. Both products also offer significant
improvements in the areas of gas distribution, dose control and low energy
control. Additionally, each product comes with an extended warranty on the
accelerator. This warranty covers all major accelerator components (except
the turbopump) for four years on the Kestrel 650 and five years on the
Kestrel 750.
In addition to these improvements, the Kestrel products include all of
the advantages present in the Tandetron 1520, Genus' third-generation MeV ion
implanter introduced in November 1995. The Tandetron 1520 evolved from the
highly successful Genus 1500 system, introduced in 1988, and the Genus 1510
system, introduced in 1992.
The advantages of the Kestrel products are based on an overall
philosophy of design simplicity. Modular construction improves manufacturing
cycle times, system installation times and ease of maintenance. In addition,
improved features such as a more efficient, longer lasting Bernas Ion Source,
provide significant advantages in manufacturing environments.
TANDETRON 1520. In November 1995, Genus introduced the Tandetron 1520,
a third-generation MeV ion implanter that evolved from the Genus 1500 system,
introduced in 1988, and the Genus 1510 system, introduced in 1992. Although
specifically designed for high energy applications, the Tandetron uses a wide
range of energies from 10 keV (thousands of electron volts) to three MeV for
implantation. This broad range allows the system to effectively meet high
energy applications and also serve as an alternative (back-up) for medium
current/medium energy application requirements. The system's accelerator, a
DC tandem-based design, simplifies both operation and maintenance while also
providing the lowest power consumption of any
Page 4
high energy system currently in the market. Additionally, the system's DC
tandem allows fast energy change times resulting in a superior ability to
chain multiple implants together without unloading wafers. This enhances
overall throughput as well as reducing cost-of-ownership. The system's end
station, where the ion beam meets the wafers, is optimized for high energy
applications. The large volume of the process chamber and the design of the
high vacuum pumping system minimize photoresist outgassing which can hamper
throughput and process quality in implanters of poorer design. All-in-vacuum
wafer handling generates the fewest particles added per wafer pass of any
high energy implanter. This translates to higher yields and greater cost
savings.
The improvements of the Tandetron 1520 are based on an overall
philosophy of design simplicity. Modular construction improves manufacturing
cycle times, system installation times and ease of maintenance. The system's
footprint has been reduced by 20%, making the 1520 the smallest MeV implanter
on the market. In addition, improved features such as a more efficient,
longer lasting Bernas Ion Source, provide significant advantages in
manufacturing environments.
GENUS 1510. The Company's 1510 MeV ion implantation system was designed
to meet low and medium dose requirements in the 40 keV to three MeV range.
Introduced in September 1992, the 1510 is Genus' second generation MeV ion
implanter and incorporates the basic design and field experience of its
predecessor, the 1500. It is a fully automated, highly reliable implanter
with excellent beam purity at throughput approaching 180 wafers per hour on
200mm wafers.
BILLI TECHNOLOGY FOR THE KESTREL FAMILY OF IMPLANTERS
To further advance low-cost manufacturing processes, Genus developed,
through joint development programs with its customers, a special isolation
technology called the Buried Implanted Layer for Lateral Isolation ("BILLI")
structure and process. BILLI, an advanced MeV retrograde well formation
technology, can be used for process simplification in the manufacture of
DRAM, SRAM and flash memory as well as logic. BILLI can eliminate one to two
masking steps from current standard MeV retrograde well processes and three
to four masking steps from conventional diffused well processes. An
additional benefit that BILLI brings to logic IC design is that transistors
can be placed closer together on a chip, improving packing densities. Also,
when the BILLI structure is used, latch up, a parasitic effect that degrades
Complementary Metal Oxide Semiconductor ("CMOS") IC performance, can be
improved thus delaying the introduction of complex oxide isolation schemes
such as shallow trench isolation. In some cases, use of the BILLI structure
has eliminated the need to use expensive silicon epitaxy. Presently, several
of the world's leading device makers are engaged with the Company in joint
development programs established to develop low-cost manufacturing processes
utilizing the BILLI process.
A partial list of Genus' ion implant customers include: AMD, Fujitsu,
Hyundai, LG Semicon, Mitsubishi, Newport Wafer-Fab Ltd., Philips
Semiconductor, Samsung, SGS-Thomson, Sharp, Sony, Symbios Logic and TSMC.
CURRENT 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. In July 1997, in conjunction with the introduction
of two new films, Genus changed the name of the Genus 7000 Series system to
the LYNX2. Launched in December 1994, the LYNX2 system was designed to meet
the advanced technology requirements of the 16M DRAM generation and beyond.
This single wafer, open architecture cluster tool supports silane 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
Page 5
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 0.25 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.
TUNGSTEN NITRIDE. In July 1997, Genus announced the industry's first
plasma-enhanced CVD 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 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, and can be used as
an adhesion layer for blanket tungsten.
GENUS 8700 SERIES. A batch CVD WSix product, the 8700 Series
incorporates six heated chucks in the batch chamber and six gas injection
ports, which enable individual wafer process adjustments of gas flows and
chuck temperature for superior wafer-to-wafer repeatability. The dual
cassette load-lock system provides continuous wafer loading and unloading
capability, which results in high system throughput (wafers per hour).
The cold wall reaction chamber and robotic wafer handling system are
designed to ensure highly reliable operation with a minimum of foreign
material generation. The system's through-the-wall mounted main frame design
is ideally suited for use in Class-1 or above cleanrooms. All models of the
8700 can be configured to process from 100mm (4") to 200mm (8") wafers.
GENUS 6000 SERIES. Similar in design to the 8700 Series, the 6000
Series is a third-generation product incorporating new designs to ensure
reliability and ease of maintenance. It was designed to meet the factory
automation needs of the industry. The 6000 Series consists of a closed
architecture cluster system that incorporates the 8700-style six-chuck batch
CVD chamber. This system also offers dual cassette load-lock architecture
that enables continuous batch processing. A new robotic handling system
allows mechanical set-up through computer-controlled recipes. The overall
design features component upgrades that provide production-worthy processing
of 100mm (4") to 200mm (8") wafers.
Genus' Thin Films manufacturing facility maintains and operates a
Class-1 cleanroom to demonstrate integrated applications with their
customers. The Genus technical staff includes an experienced consulting
resource for successful process integration of its products and processes.
Genus' thin film customers include: AMD, Fujitsu, Hitachi, Hyundai, IBM,
Intel, LG Semicon, Samsung, Sanyo, SGS-Thomson and Sharp.
Page 6
MARKETING, SALES AND SERVICE
Genus sells and supports its ion implantation and CVD products through
direct sales and customer support organizations in the U.S., Western Europe
and South Korea and through eight exclusive sales representatives and
distributors in the U.S., Europe, Japan, South Korea, Taiwan, Hong Kong and
Singapore. Yarbrough Southwest provides sales distribution in the
Southwestern region of the U.S. and SemiTorr in the Northwest. Genus Europa
supports and sells Genus' equipment in Europe, and Macrotron Systems GmbH
represents Genus in Germany. Genus KK provides field service and support in
Japan. Innotech Corporation serves as the Company's sales distributor and
augments Genus KK's support efforts in Japan. 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 are served by the representative organizations of
Spirox Singapore, Pte. Ltd. and Spirox Taiwan, respectively. Hong Kong and
the People's Republic of China are served by Katech International, Ltd.,
based in Hong Kong. The Asia/Pacific organizations provide sales and
service, as well as distribution assistance for spare parts. Genus
distributes spare parts from several worldwide depots including Sunnyvale,
California; Newburyport, Massachusetts; Austin, Texas; Tokyo, Japan; Seoul,
Korea; Hsin-Chu City, Taiwan; and Evry, France. To facilitate its marketing
efforts, the Company has cleanroom applications laboratories in Sunnyvale,
California, and Newburyport, Massachusetts.
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 and
Newburyport, Massachusetts. Genus has also established several foreign
subsidiaries to facilitate its sales and service activities abroad: Genus
Korea, Ltd. in Seoul, Korea; Genus KK in Tokyo, Japan; Genus Europa SARL in
Evry, France; Genus Europa Ltd. in Melbourn, Herts, England; Genus Europa
GmbH in Stuttgart, Germany; and Genus Europa Srl. in Milan, Italy. These
subsidiaries provide installation, field service and maintenance, as well as
additional technical support to assist Genus' customers in effectively
utilizing the Company's products. Such services are also provided by the
Company's distributors in Tokyo, Taipei, Singapore and Hong Kong. The
Company warrants its products against defects in material and workmanship for
12 months. In December 1997, Genus announced the industry's first extended
factory warranty program covering the accelerators of its new Kestrel 650 and
750 systems. Under this new program, the Company's accelerators are
guaranteed against failures or degradation in performance for four years on
the Kestrel 650 and five years on the Kestrel 750.
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.
BACKLOG. The Company's backlog at December 31, 1997, was approximately
$25.6 million, compared with approximately $19.8 million at December 31, 1996.
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. The Company's backlog at December 31, 1997, consisted of product
shipments of $21.6 million and non-recurring engineering revenue of $4.0
million expected to be delivered during calendar year 1998. However, 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. To maintain
Page 7
close relationships with its customers and remain responsive to their
requirements, continued investment is needed for R&D. R&D expenses may
increase in the future.
As part of its R&D program, the Company has established technical
research relationships with certain major semiconductor manufacturers and
universities to further enhance its product development and knowledge for
advanced Ultra Large Scale Integration ("ULSI") devices.
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.
In the ion implantation market, the Company's MeV ion implantation
system competes primarily with one other MeV system. The Company believes
that its high energy MeV system currently has certain technological
advantages over the competing MeV system. Genus has new applications for MeV
ion implantation technology that it believes will see widespread use in the
future since they enable significant manufacturing cost reduction and
improved IC performance. The Company faces direct competition from Eaton
Corporation. The presence of Eaton in the MeV marketplace continued to
increase during 1997. There can be no assurance that competition in the
Company's particular MeV 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.
In the CVD market, 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 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
1997. 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. Many components of the Company's MeV
ion implantation systems are also acquired as subassemblies from outside
domestic vendors. 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 and MeV ion implantation products which 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 affect on
the Company's operating results.
The Company's thin film CVD operation is located in Sunnyvale,
California, and its MeV ion implantation technology manufacturing operation
is located in Newburyport, Massachusetts.
Page 8
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's current patents include technology
relating to cold wall CVD of WSix, ion beam formation, high energy ion
acceleration, ion implant angle control, wafer cleaning, and wafer heating
and handling in vacuum.
In 1987, the Company's Ion Technology Products (formerly General Ionex)
and Eaton Corporation entered into a licensing agreement whereby the Company
uses certain ion implantation-related technology.
EMPLOYEES
As of December 31, 1997, the Company employed 301 people on a full-time
basis. Genus reduced its workforce in January 1997 by 8%. 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.
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. The California facilities are
occupied under a lease expiring in October 2002, with a current annual rental
expense of approximately $680,000. Genus' Ion Technology Product operation
is located in Newburyport, Massachusetts. This facility, totaling
approximately 70,000 square feet, is occupied under a lease expiring in May
2017, with an annual rental expense of approximately $845,000. The Company
also leases sales and support offices in Seoul, Korea; Tokyo, Japan; Evry,
France; and Austin, Texas. 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
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 9
SPART 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
1997 and 1996, set forth below are as reported by the NASDAQ National Market
System. At February 27, 1998, the Company has 479 registered shareholders.
1997 1996
-------------------- --------------------
HIGH LOW HIGH LOW
--------- ------- --------- --------
First Quarter.............. $ 6 7/8 $ 3 5/8 $ 9 $ 5 5/8
Second Quarter............. 6 7/16 3 1/8 12 5 3/4
Third Quarter.............. 7 7/8 4 1/2 9 1/2 5 3/4
Fourth Quarter............. 6 15/16 3 1/8 7 1/16 4 7/8
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. Additionally, the Company's
line of credit prohibits the payment of cash dividends. Accordingly, it is
anticipated that no cash dividends will be paid to holders of common stock in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
1997 1996 1995 1994 1993
---------- ---------- --------- -------- --------
Net sales............................................ $ 84,286 $ 82,509 $ 100,350 $ 63,616 $ 44,236
Gross profit......................................... 29,524 26,972 39,239 24,967 13,900
Gross profit as a percentage of sales................ 35% 33% 39% 39% 31%
Income (loss) from operations........................ (3,129) (11,458) 7,976 3,729 (6,974)
Net income (loss).................................... (19,336) (9,205) 19,282 4,177 (6,883)
Net income (loss) per share-basic.................... (1.15) (0.56) 1.26 0.33 (0.57)
Net income (loss) per share-diluted.................. (1.15) (0.56) 1.20 0.32 (0.57)
Cash and cash equivalents............................ 8,700 11,827 12,630 10,188 10,423
Total assets......................................... 76,738 89,132 95,247 54,997 45,205
Long-term obligations, less current portion.......... 971 1,260 1,034 523 1,042
Working capital...................................... 30,774 39,290 50,061 23,201 22,162
Shareholders' equity................................. 48,357 68,251 75,361 36,986 31,751
Backlog.............................................. 25,554 19,846 44,996 44,011 18,945
Number of employees.................................. 301 325 319 264 212
Page 10
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.
1997 COMPARED TO 1996
The components of the Company's statements of income, expressed as
percentage of total revenue, are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- ------- -------
Net sales................................. 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold...................... 65.0 67.3 60.9
Research and development................ 14.6 17.7 12.2
Selling, general and administrative..... 24.1 21.7 18.9
Special charge.......................... -- 7.2 --
------- ------- -------
Income (loss) from operations......... (3.7) (13.9) 8.0
Other income, net......................... (1.6) 0.1 0.3
------- ------- -------
Income (loss) before provision for
income taxes......................... (5.3) (13.8) 8.3
Provision for (benefit from) income taxes. 17.6 (2.7) (10.9)
------- ------- -------
Net income (loss)..................... (22.9)% (11.1)% 19.2%
------- ------- -------
------- ------- -------
Net sales for the year ended December 31, 1997 were $84.3 million,
compared to net sales of $82.5 million in 1996. While 1997 sales showed a
modest increase 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. International sales accounted for 82% of the
Company's net sales in 1997, compared to 86% 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% in 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
Page 11
shipment levels, the level of foreign sales and competitive pricing
pressures. The Company anticipates that these conditions will 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, 1997 were 15%, compared to 18% in 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. Accordingly, the Company anticipates that R&D expenses may
increase in the future.
Selling, General and Administrative ("SG&A") expenses were 24% of net
sales for the year ended December 31, 1997, compared to 22% of net sales for
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 the year.
During 1997, the Company provided a full valuation allowance for the
deferred tax assets which were recorded in 1995 and 1996 in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), resulting in a tax provision of $14.8 million.
Accordingly, the effective tax rate for the year ended December 31, 1997 was
330% compared to an effective tax rate of (19)% for the same period in 1996.
Due to the 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 and that customer's recent
announcements to reduce or delay semiconductor equipment purchases, 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 investment may adversely affect
short-term operating performance. The Company is also continuing its efforts
to implement productivity improvements for future operating performance. The
Company believes that the future economic environment could continue to
lengthen the order and sales cycles for its products, causing it to continue
to simultaneously book and ship some orders during the same quarter. There
can be no assurance that the Company's strategic efforts will be successful.
1996 COMPARED TO 1995
Net sales for the year ended December 31, 1996 were $82.5 million,
compared to net sales of $100.4 million in 1995. The 18% decrease in net
sales was due primarily to lower tungsten CVD systems sales as a result of
the overall slowdown of the DRAM market during the last 12 months
(particularly in Korea), offset by greater ion implantation MeV system and
non-system sales. Foreign sales accounted for 86% of the Company's net sales
in 1996, compared to 88% in 1995. In 1996, non-system sales increased 13%
when compared to non-system sales during same period in 1995.
Gross margin for the year ended December 31, 1996 was 33%, compared to
39% in 1995. The decline in gross margin was primarily due to the shift in
product sales mix from CVD system sales, which have higher gross margins, to
MeV system sales, which have lower gross margins, lower absorption of
manufacturing costs as a result of lower sales volumes and higher service
costs associated primarily with the opening of Genus
Page 12
Korea, Ltd. 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, 1996 were 18%, compared to 12% in 1995. On a dollar basis, R&D expenses
during 1996 increased $2.4 million when compared to the same period in 1995.
This increase was primarily due to investments in personnel, product
development material costs and engineering tools for new product development.
The increase in R&D expenses as a percentage of net sales was due to lower
net sales in addition to the increased R&D spending. The Company's R&D
expenses in 1996 and 1995 are net of software capitalization costs of
$400,000 and $900,000, respectively.
SG&A expenses were 22% of net sales for the year ended December 31,
1996, compared to 19% of net sales for 1995. The increase was primarily due
to lower net sales. On an absolute dollar basis, SG&A expenses for the year
ended December 31, 1996 decreased $1.1 million when compared to the same
period in 1995. The decrease was due to lower payroll-related costs
associated with the reduction in force during the third and fourth quarters
of 1996 and lower commission and incentive expenses.
During the year ended December 31, 1996, the Company incurred special
charges of $5.9 million, relating primarily to capacity cost reductions in
association with the Company's reduction in personnel in the third and fourth
quarters of 1996, increased inventory reserves and the write-off of property
and equipment.
In 1996, the Company had $53,000 in other income, compared to $300,000
in other income for the comparable period in 1995. This decrease was
principally due to lower interest income as a result of lower cash balances
and higher interest expense associated with lease financing. The effective
tax rate for the year ended December 31, 1996 was a 19% benefit compared to a
132% benefit for the same period in 1995. The significant change in the
effective tax rate was due primarily to the recognition of lower amounts of
deferred tax assets in accordance with SFAS 109.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, the Company's cash and cash
equivalents decreased by $3.1 million. A total of $3.7 million was used in
operating activities, primarily due to a growth in accounts receivable and
inventories, partially offset by increased accounts payable. Fourth quarter
sales grew over the similar period in 1996, resulting in increased accounts
receivable. Inventory levels increased as several customer delivery dates
were rescheduled from the fourth quarter of 1997 to early 1998.
Capital expenditures during 1997, either by cash or capital lease
obligations, were $4.4 million and related primarily to acquisition of
machinery and equipment for the Company's R&D and Applications Laboratories
and leasehold improvements and equipment for the Ion Technology facility in
Newburyport, Massachusetts. The Company financed these expenditures through
new or existing lease lines. Furthermore, the Company anticipates that
additional capital expenditures, if any, during 1998 will be funded through
existing working capital or lease financing.
Proceeds from sale of common stock was $1.2 million and net short-term
borrowings increased $4.7 million from 1996.
The Company's primary source of funds at December 31, 1997 consisted of
$8.7 million in cash and cash equivalents. The Company has a $10.0 million
revolving line of credit which is secured by substantially all of the assets
of the Company and expires in June 1998. At December 31, 1997, the Company
had $2.8 million in unused letters of credit and borrowings of $7.2 million
outstanding under the line of credit. Availability of borrowings is based on
eligible accounts receivable and inventory. Based on eligible accounts
receivable and inventory at December 31, 1997, the Company's borrowing
capacity under the revolving credit facility was in excess of $10 million. A
monthly borrowing base certificate is required by the bank.
Page 13
The Company incurred operating losses during each of the two years in
the period ended December 31, 1997 and, as of December 31, 1997, had an
accumulated deficit of $48.9 million. Additionally, the Company's bank line
of credit is scheduled to expire in June 1998. The accompanying consolidated
financial statements have been prepared assuming the Company will continue as
a going concern and do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and
liabilities that may result from the outcome of this uncertainty.
In February 1998, the Company issued equity securities through a private
placement of convertible preferred stock ("Series A Stock") for gross
proceeds of $5 million. Upon fulfillment of certain conditions, the same
investors in the Company's Series A Stock have committed to providing
additional equity financing. Assuming the Company fulfills these conditions
and receives the proceeds from this additional preferred stock financing and
assuming the Company is able to secure borrowings upon renewal of its
existing bank line of credit or under a new line of credit, the Company
believes that its existing cash resources together with funds from this
additional preferred stock financing and line of credit will be sufficient to
fund the Company's expected working capital requirements for at least the
next 12 months. However, the exact amount and timing of these working capital
requirements and the Company's ability to continue as a going concern will be
determined by numerous factors, including the level of and gross margin on
future sales, the payment terms extended to and by the Company and the timing
of capital expenditures. Furthermore, there can be no assurance that funds
will be received or become available from the additional preferred stock
financing or line of credit or that these funds, together with the Company's
existing cash resources, will be sufficient to implement the Company's
operating strategy or meet the Company's other working capital requirements.
Accordingly, the Company may be required to seek additional equity or debt
financing. There can be no assurance that the Company would be able to obtain
additional debt or equity financing, if and when needed, on terms that the
Company finds acceptable. Any additional equity or debt financing may involve
substantial dilution to the Company's shareholders, restrictive covenants or
high interest costs.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it will be forced to curtail operations, dispose of assets or
seek extended payment terms from its vendors. There can be no assurance that
the Company would be able to reduce expenses or successfully complete other
steps necessary to continue as a going concern. Such events would materially
and adversely affect the value of the Company's equity securities.
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. Although the Company had net income of $19.3
million and $4.2 million in the years ended December 31, 1995 and 1994, the
Company experienced losses of $19.3 million, $9.2 million, and $6.9 million
for the years ended December 31, 1997, 1996 and 1993, 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 sustain
consistent future revenue growth on a quarterly or annual basis, or that the
Company will be able to maintain consistent profitability on a quarterly or
annual basis.
RELIANCE ON INTERNATIONAL SALES. International sales accounted for
approximately 82%, 86% and 88% of total net sales in the years ended 1997,
1996 and 1995, respectively. In addition, net sales to South Korean
customers accounted for approximately 50%, 59% and 63%, 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. As a result of the devaluation of the won in
the fourth quarter of 1997, the Company incurred a foreign exchange loss of
$1.1 million. 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. Some of the Company's South Korean customers have
rescheduled their required delivery dates for orders
Page 14
previously placed and have announced delays in the facilitization of their
new manufacturing areas. In addition, some portion of IC fabrication plant
construction has been subsidized by Asian governments. Financial turmoil may
weaken these governments' willingness to continue such subsidies. Such
developments could have a material adverse affect on the Company's business,
financial condition and results of operations.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS. The Company continued its
efforts to expand its customer base in 1997 and was successful, with new
customers in Taiwan and North America. Historically, the Company has relied
on a limited number of customers for a substantial portion of its net sales.
In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech
Corporation accounted for 47% and 17%, respectively, of the Company's net
sales. In 1996, these same two customers accounted for 53% and 18%,
respectively, of the Company's net sales. 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.
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 MeV or CVD products similar to those
sold by the Company, it would materially adversely affect 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. In the MeV
Page 15
marketplace, the Company's MeV ion implantation systems compete with MeV
systems marketed by Eaton Corporation. 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 affect 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 MeV
ion implantation and 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 affect 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 affect 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 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 MeV ion implantation and CVD products through direct sales and
customer support organizations in the U.S., Western Europe and South Korea and
through five exclusive sales representatives and distributors in the U.S.,
Japan, Taiwan and Singapore. 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; EFFECT OF CONVERSION OF SERIES A STOCK ON THE
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 affect the market price of the Company's
Common Stock. Furthermore, trading in the stock is thin and because the
Series A Stock is convertible at a discount to the market price, the holders
of Series A Stock can convert the Series A Stock into Common Stock and sell
such Common Stock at a profit at any time, which may have a depressive effect
on the stock price. 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
Page 16
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. During
1997, the Company started the implementation of a new business system. One
criteria for the selection of the enterprise software was compliance with
Year 2000 issues. Accordingly, the Company's current estimate is that the
costs associated with the Year 2000 issue, and the consequences of incomplete
or untimely resolution of the Year 2000 issue, will not have a material
adverse affect on the result of operations or financial position of the
Company in any given year. However, despite the Company's efforts to address
the Year 2000 impact on its internal systems, there can be no assurance that
the Company has fully identified such impact or that it can resolve it
without disruption of its business and without incurring significant expense.
In addition, even if the internal systems of the Company are not materially
affected by the Year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts.
Page 17
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)
1997 1996
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 8,700 $ 11,827
Accounts receivable (net of allowance for doubtful
accounts of $1,097 in 1997 and $250 in 1996)....... 19,469 15,555
Inventories......................................... 28,986 26,464
Other current assets................................ 1,029 638
Current deferred taxes.............................. -- 4,427
--------- ---------
Total current assets.............................. 58,184 58,911
Property and equipment, net......................... 15,276 15,345
Other assets, net................................... 3,278 4,459
Noncurrent deferred taxes........................... -- 10,417
--------- ---------
$ 76,738 $ 89,132
--------- ---------
--------- ---------
LIABILITIES
Current Liabilities:
Short-term bank borrowings.......................... $ 7,200 $ 2,500
Accounts payable.................................... 8,723 5,304
Accrued expenses.................................... 10,613 10,808
Current portion of long-term debt and capital
lease obligations.................................. 874 1,009
--------- ---------
Total current liabilities......................... 27,410 19,621
Long-term debt and capital lease obligations, less
current portion...................................... 971 1,260
--------- ---------
Total liabilities................................. $ 28,381 $ 20,881
--------- ---------
Commitments (Note 8)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized, 2,000,000 shares;
Issued and outstanding, none....................... -- --
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding, 17,120,628 shares (1997)
and 16,723,927 shares (1996)....................... 99,149 97,915
Accumulated deficit................................. (48,863) (29,527)
Cumulative translation adjustment................... (1,929) (137)
--------- ---------
Total shareholders' equity........................ 48,357 68,251
--------- ---------
$ 76,738 $ 89,132
--------- ---------
--------- ---------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 18
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
--------- ---------- ---------
Net sales.................................. $ 84,286 $ 82,509 $ 100,350
Costs and expenses:
Cost of goods sold....................... 54,762 55,537 61,111
Research and development................. 12,327 14,639 12,259
Selling, general and administrative...... 20,326 17,901 19,004
Special charge........................... -- 5,890 --
--------- ---------- ---------
Income (loss) from operations.......... (3,129) (11,458) 7,976
Other income (expense), net................ (1,363) 53 327
--------- ---------- ---------
Income (loss) before provision for
(benefit from) income taxes............. (4,492) (11,405) 8,303
Provision for (benefit from) income taxes.. 14,844 (2,200) (10,979)
--------- ---------- ---------
Net income (loss)...................... $ (19,336) $ (9,205) $ 19,282
--------- ---------- ---------
--------- ---------- ---------
Net income (loss) per share-basic.......... $ (1.15) $ (0.56) $ 1.26
--------- ---------- ---------
--------- ---------- ---------
Net income (loss) per share-diluted........ $ (1.15) $ (0.56) $ 1.20
--------- ---------- ---------
--------- ---------- ---------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 19
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CUMULATIVE
COMMON ACCUMULATED TRANSLATION
STOCK DEFICIT ADJUSTMENT TOTAL
---------- ------------ ----------- ---------
Balances, January 1, 1995................................. $ 76,590 $ (39,604) $ -- $ 36,986
Issuance of 2,539,018 shares of common stock under
private placement offering............................. 16,222 -- -- 16,222
Issuance of 542,450 shares of common stock under
stock option plan...................................... 1,161 -- -- 1,161
Tax benefit on exercise of stock options................ 750 -- -- 750
Issuance of 269,043 shares of common stock under
employee stock purchase plan........................... 960 -- -- 960
Net income.............................................. -- 19,282 -- 19,282
---------- ------------ ----------- ---------
Balances, December 31, 1995............................... 95,683 (20,322) -- 75,361
Issuance of 310,471 shares of common stock under
stock option plan...................................... 1,125 -- -- 1,125
Issuance of 249,917 shares of common stock under
employee stock purchase plan........................... 1,107 -- -- 1,107
Net loss................................................ -- (9,205) -- (9,205)
Translation adjustment.................................. -- -- (137) (137)
---------- ------------ ----------- ---------
Balances, December 31, 1996............................... 97,915 (29,527) (137) 68,251
Issuance of 124,199 shares of common stock under
stock option plan...................................... 364 -- -- 364
Issuance of 272,502 shares of common stock under
employee stock purchase plan........................... 870 -- -- 870
Net loss................................................ -- (19,336) -- (19,336)
Translation adjustment.................................. -- -- (1,792) (1,792)
---------- ------------ ----------- ---------
Balances, December 31, 1997............................... $ 99,149 $ (48,863) $ (1,929) $ 48,357
---------- ------------ ----------- ---------
---------- ------------ ----------- ---------
The accompanying notes are an integral part of the
consolidated financial statements.
Page 20
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss)........................................................ $ (19,336) $ (9,205) $ 19,282
Adjustments to reconcile to net cash from operating activities:
Special charge......................................................... -- 5,890 --
Loss on disposal of leasehold improvements............................. -- -- 261
Depreciation and amortization.......................................... 5,073 6,945 4,244
Provision for doubtful accounts........................................ 2,930 -- --
Deferred taxes......................................................... 14,844 (2,534) (11,560)
Changes in assets and liabilities:
Accounts receivable.................................................. (7,181) 11,191 (11,627)
Inventories.......................................................... (2,998) (4,509) (9,760)
Other current assets................................................. (391) (865) 32
Accounts payable..................................................... 3,419 (1,825) 1,271
Accrued expenses..................................................... (543) (1,094) 4,417
Other, net........................................................... 527 (1,545) (701)
---------- ---------- ----------
Net cash provided by (used in) operating activities................ (3,656) 2,449 (4,141)
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment.................................... (3,835) (6,611) (5,594)
Capitalization of software development costs............................. -- (360) (937)
---------- ---------- ----------
Net cash used in investing activities.............................. (3,835) (6,971) (6,531)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock................................... 1,234 2,232 18,343
Proceeds from short-term bank borrowings................................. 50,290 4,000 --
Payment of short-term bank borrowings.................................... (45,590) (1,500) (3,800)
Payments of long-term debt............................................... (939) (990) (1,429)
---------- ---------- ----------
Net cash provided by financing activities.......................... 4,995 3,742 13,114
---------- ---------- ----------
Effect of exchange rate changes on cash.................................... (631) (23) --
Net increase (decrease) in cash and cash equivalents....................... (3,127) (803) 2,442
Cash and cash equivalents, beginning of year............................... 11,827 12,630 10,188
---------- ---------- ----------
Cash and cash equivalents, end of year..................................... $ 8,700 $ 11,827 $ 12,630
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................. $ 445 $ 210 $ 172
Income taxes............................................................. 94 105 209
Non-cash investing activities:
Purchase of property and equipment under long-term debt obligations...... 515 1,544 1,416
Tax benefit on exercise of stock options................................. -- -- 750
The accompanying notes are an integral part of the
consolidated financial statements.
Page 21
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. develops, manufactures, markets and services advanced thin
film deposition and high energy MeV ion implantation equipment used in the
fabrication of advanced semiconductor integrated circuits. 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. In April 1997, the Company's Japanese subsidiary commenced
significant operations, providing sales and service support to Japanese
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.
BASIS OF PRESENTATION
The Company incurred operating losses during each of the two years in
the period ended December 31, 1997 and, as of December 31, 1997, had an
accumulated deficit of $48,863. Additionally, the Company's bank line of
credit is scheduled to expire in June 1998. The accompanying consolidated
financial statements have been prepared assuming the Company will continue as
a going concern and do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and
liabilities that may result from the outcome of this uncertainty.
In February 1998, the Company issued equity securities through a private
placement of convertible preferred stock ("Series A Stock") for gross
proceeds of $5,000. Upon fulfillment of certain conditions, the same
investors in the Company's Series A Stock have committed to providing
additional equity financing. Assuming the Company fulfills these conditions
and receives the proceeds from this additional preferred stock financing and
assuming the Company is able to secure borrowings upon renewal of its
existing bank line of credit or under a new line of credit, the Company
believes that its existing cash resources together with funds from this
additional preferred stock financing and line of credit will be sufficient to
fund the Company's expected working capital requirements for at least the
next 12 months. However, the exact amount and timing of these working capital
requirements and the Company's ability to continue as a going concern will be
determined by numerous factors, including the level of and gross margin on
future sales, the payment terms extended to and by the Company and the timing
of capital expenditures. Furthermore, there can be no assurance that funds
will be received or become available from the additional preferred stock
financing or line of credit or that these funds, together with the Company's
existing cash resources, will be sufficient to implement the Company's
operating strategy or meet the Company's other working capital requirements.
Accordingly, the Company may be required to seek additional equity or debt
financing. There can be no assurance that the Company would be able to obtain
additional debt or equity financing, if and when needed, on terms that the
Company finds acceptable. Any additional equity or debt financing may involve
substantial dilution to the Company's shareholders, restrictive covenants or
high interest costs.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it will be forced to curtail operations, dispose of assets or
seek extended payment terms from its vendors. There can be no assurance that
the Company would be able to reduce expenses or successfully complete other
steps necessary to continue as a going concern. Such events would materially
and adversely affect the value of the Company's equity securities.
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.
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 75% and 71% of accounts
receivable at December 31, 1997 and 1996, respectively. South Korean and
Japanese customers accounted for an aggregate of 70% and 60% of accounts
receivable at December 31, 1997 and 1996, 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.
Page 22
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 represents the cost in excess of an acquired
business and is 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 are 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
Page 23
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY (CONTINUED)
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 adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997 and,
accordingly, has restated all prior-period net income (loss) per share data
presented. Pursuant to the requirements of SFAS 128, 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).
NOTE 2. INVENTORIES
Inventories comprise the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Raw materials and parts................................. $ 15,210 $ 14,776
Work in process......................................... 6,879 6,847
Finished goods.......................................... 6,897 4,841
-------- --------
$ 28,986 $ 26,464
-------- --------
-------- --------
Page 24
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and comprise the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Equipment............................................... $ 19,510 $ 16,145
Demonstration equipment................................. 14,352 14,047
Furniture and fixtures.................................. 2,645 2,631
Leasehold improvements.................................. 6,631 6,900
-------- --------
43,138 39,723
Less accumulated depreciation and amortization.......... (28,833) (24,669)
-------- --------
14,305 15,054
Construction in process................................. 971 291
-------- --------
$ 15,276 $ 15,345
-------- --------
-------- --------
Equipment includes $3,745 and $3,479 of assets under capital leases at
December 31, 1997 and 1996, respectively. Accumulated amortization on these
assets is $2,628 and $1,402 at December 31, 1997 and 1996, respectively.
NOTE 4. OTHER ASSETS
Other assets comprise the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Goodwill $ 3,802 $ 3,802
Software development costs.............................. 1,347 1,347
-------- --------
5,149 5,149
Accumulated amortization -- goodwill.................... (2,675) (2,421)
Accumulated amortization -- software development costs.. (980) (579)
-------- --------
1,494 2,149
Other................................................... 1,784 2,310
-------- --------
$ 3,278 $ 4,459
-------- --------
-------- --------
Amortization expense for software development costs was $401, $507 and
$376 in 1997, 1996 and 1995, respectively.
Page 25
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank that
provides for maximum borrowings of $10,000 and expires in June 1998.
Borrowings under the line of credit, which are collateralized by
substantially all of the assets of the Company, bear interest at the bank's
prime rate minus .25% (8.25% at December 31, 1997) or LIBOR plus 2% (7.625%
at December 31, 1997). The agreement requires the Company to comply with
certain financial covenants and restricts the payment of dividends. At
December 31, 1997, the Company had $2,800 in unused letters of credit and
borrowings of $7,200 outstanding under the line of credit. Availability of
borrowings is based on eligible accounts receivable and inventory. Based on
eligible accounts receivable and inventory at December 31, 1997, the
Company's borrowing capacity under the revolving credit facility was in
excess of $10,000. A monthly borrowing base certificate is required by the
bank.
NOTE 6. ACCRUED EXPENSES
Accrued expenses comprise the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
System installation and warranty........................ $ 3,741 $ 4,884
Accrued commissions and incentives...................... 2,062 1,344
Accrued payroll and related items....................... 1,264 1,003
Other................................................... 3,546 3,577
-------- --------
$ 10,613 $ 10,808
-------- --------
-------- --------
NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt comprises the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Capital lease obligations with interest rates ranging
from 4.9 - 15.6%....................................... $ 1,737 $ 2,153
Mortgage loan payable in monthly installments through
October 2000 at 9 1/4% interest per annum and
collateralized by a building........................... 108 116
-------- --------
1,845 2,269
Less amounts due within one year........................ (874) (1,009)
-------- --------
$ 971 $ 1,260
-------- --------
-------- --------
Page 26
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
The future aggregate payments of long-term debt and capital lease
obligations are as follows:
1998............................................................. $ 954
1999............................................................. 543
2000............................................................. 358
2001............................................................. 110
--------
1,965
Less amounts representing interest on long-term debt and
capital lease obligations....................................... (120)
--------
Principal payments and present value of minimum capital
lease obligations............................................... $ 1,845
--------
--------
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 2017. The Company is
responsible for property taxes, insurance and maintenance under the facility
leases. Certain of these leases contain renewal options.
At December 31, 1997, minimum lease payments required under these
operating leases are as follows:
1998............................................................. $ 1,854
1999............................................................. 1,585
2000............................................................. 1,600
2001............................................................. 1,681
2002............................................................. 1,584
Thereafter....................................................... 10,215
--------
$ 18,519
--------
--------
Rent expense for 1997, 1996 and 1995 was $2,215, $2,218 and $1,251,
respectively.
Page 27
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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,
-----------------------------------
1997 1996 1995
---------- --------- --------
Numerator-Basic:
Net income (loss)............................ $ (19,336) $ (9,205) $ 19,282
---------- --------- --------
---------- --------- --------
Denominator-Basic:
Weighted average common stock outstanding.... 16,860 16,423 15,334
---------- --------- --------
---------- --------- --------
Basic net income (loss) per share.............. $ (1.15) $ (0.56) $ 1.26
---------- --------- --------
---------- --------- --------
Numerator-Diluted:
Net income (loss)............................ $ (19,336) $ (9,205) $ 19,282
---------- --------- --------
---------- --------- --------
Denominator-Diluted:
Weighted average common stock outstanding.... 16,860 16,423 15,334
Effect of dilutive securities:
Stock options............................. -- -- 729
---------- --------- --------
16,860 16,423 16,063
---------- --------- --------
---------- --------- --------
Diluted net income (loss) per share............ $ (1.15) $ (0.56) $ 1.20
---------- --------- --------
---------- --------- --------
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.
Stock options to purchase 152,000 shares of common stock were
outstanding in 1995 on a weighted average basis, but were not included in the
computation of diluted income per share because the exercise price was
greater than the average market value of the common shares.
PRIVATE PLACEMENT OFFERING
On February 17, 1995, the Company sold 2,539,018 shares of common stock
for $16,200 through a private placement offering.
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
Page 28
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. CAPITAL STOCK (CONTINUED)
Directors has the authority to determine to whom options will be granted, the
number of shares, the term and exercise price. The options are exercisable
at times and increments as specified by the Board of Directors, and expire
five years from date of grant. These options generally vest over a
three-year period. At December 31, 1997, the Company had reserved 3,503,006
shares of common stock for issuance under the Plan. A total of 785,340
shares remained available for future grants at December 31, 1997. At
December 31, 1995, 351,866 options were exercisable at a weighted average
exercise price of $3.28. 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.
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, 1995............ 1,279 $1.25 to $ 6.88 $ 3,682 $ 2.88
Granted........................... 1,277 7.75 to 15.63 12,084 9.46
Exercised......................... (542) 1.25 to 6.88 (1,161) 2.14
Terminated........................ (428) 1.25 to 15.63 (4,658) 10.88
---------- --------------- -------- ---------
Balance, December 31, 1995.......... 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
---------- --------------- -------- ---------
---------- --------------- -------- ---------
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 required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which also requires
that the information be determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1995 under the fair
value method prescribed by SFAS 123.
Page 29
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. CAPITAL STOCK (CONTINUED)
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 1997, 1996 and 1995:
1997 1996 1995
--------- --------- ---------
Risk free interest rates.......................... 6.220% 6.070% 6.320%
Expected life..................................... 3.5 years 3.5 years 3.5 years
Expected volatility............................... 77.7% 77.7% 77.7%
Expected dividend yield........................... --% --% --%
The weighted average fair value of options granted in 1997, 1996 and
1995 was $2.92, $3.81 and $4.58, 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 1997, 1996 and 1995.
1997 1996 1995
--------- --------- ---------
Risk free interest rates.......................... 5.630% 5.340% 6.250%
Expected life..................................... 0.5 years 0.5 years 0.5 years
Expected volatility............................... 77.7% 77.7% 77.7%
Expected dividend yield........................... --% --% --%
The weighted average fair value of those purchase rights granted in
1997, 1996 and 1995 was $1.80, $3.26 and $3.88, 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:
1997 1996 1995
--------- --------- ---------
Pro forma net income (loss)....................... $(21,537) $(12,053) $17,858
Pro forma net income (loss) per share -- basic.... $ (1.28) $ (0.73) $ 1.16
Pro forma net income (loss) per share -- diluted.. $ (1.28) $ (0.73) $ 1.13
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.
Page 30
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. CAPITAL STOCK (CONTINUED)
The options outstanding and currently exercisable by exercise price
under the option plan at December 31, 1997 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE OUTSTANDING WEIGHTED AVERAGE
EXERCISE PRICES (IN 000'S) CONTRACTUAL LIFE EXERCISE PRICE (IN 000'S) EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$2.25-$5.25 538 3.12 $ 4.24 192 $ 3.66
$5.56-$6.13 580 3.67 6.01 202 5.99
$6.38-$8.38 486 2.93 7.70 229 7.77
$8.63-$8.63 247 2.95 8.55 167 8.63
----------- -----------
$2.25-$8.63 1,851 3.22 $ 6.28 790 $ 6.50
----------- -----------
----------- -----------
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved a total of 1,750,000 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, 1997, 1,625,086 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.
Page 31
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. CAPITAL STOCK (CONTINUED)
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.
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 which may not exceed 6% of the annual aggregate
salaries of those employees eligible for participation. In 1997, 1996 and
1995, the Company made $92, $87 and $61, respectively, in contributions to
the Benefit Plan.
NOTE 11. SPECIAL CHARGE
During 1996, the Company incurred special charges of $5,890 relating
primarily to payroll costs associated with the reduction in workforce and
inventory and demonstration equipment write-downs.
NOTE 12. OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprises the following:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- ------ ------
Interest income.............................. $ 156 $ 334 $ 790
Interest expense............................. (445) (210) (172)
Loss on disposal of leasehold improvements... -- -- (261)
Foreign exchange............................. (1,107) -- --
Other, net................................... 33 (71) (30)
-------- ------ ------
$ (1,363) $ 53 $ 327
-------- ------ ------
-------- ------ ------
Page 32
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1996
and 1995 consists of the following:
1997 1996 1995
-------- --------- ---------
Federal:
Current................................... $ -- $ -- $ 431
Deferred.................................. 14,004 (2,343) $ (11,036)
-------- --------- ---------
14,004 (2,343) (10,605)
-------- --------- ---------
State:
Current................................... -- -- 150
Deferred.................................. 840 (191) (524)
-------- --------- ---------
840 (191) (374)
-------- --------- ---------
Foreign:
Current................................... -- 334 --
-------- --------- ---------
$ 14,844 $ (2,200) $ (10,979)
-------- --------- ---------
-------- --------- ---------
The Company's effective tax rate for the years ended December 31, 1997,
1996 and 1995 differs from the U.S. federal statutory income tax rate as
follows:
1997 1996 1995
-------- --------- ---------
Federal income tax at statutory rate....... (34)% (35)% 34%
Change in valuation allowance.............. 372 13 (173)
Alternative minimum tax.................... -- -- 5
State income taxes......................... -- -- 2
Foreign income taxes....................... -- 3 --
Other...................................... (8) -- --
-------- --------- ---------
330% (19)% (132)%
-------- --------- ---------
-------- --------- ---------
The components of the net deferred tax asset comprise the following:
1997 1996
--------- ---------
Deferred tax assets (liabilities):
Net operating loss carryforwards.................. $ 13,097 $ 9,447
Tax credit carryforward........................... 1,867 1,288
Inventory, accounts receivable and other
reserves......................................... 401 1,835
Non-deductible accrued expenses................... 1,152 1,264
Other reserves.................................... -- 1,245
Depreciation and amortization..................... 215 (235)
Valuation allowance............................... (16,732) --
--------- ---------
Net deferred tax assets............................. $ -- $ 14,844
--------- ---------
--------- ---------
Page 33
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13. INCOME TAXES (CONTINUED)
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, 1997, the Company had the following income tax
carryforwards available:
TAX EXPIRATION
REPORTING DATES
--------- -----------
U.S. regular tax operating losses.......... $ 36,700 2005-2012
U.S. business tax credits.................. $ 1,867 2002-2009
State net operating losses................. $ 11,800 1998-2003
Based on the weight of available evidence as prescribed by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), management has determined that it is more likely than not that the net
deferred tax asset at December 31, 1997 will not be realized and has,
therefore, provided a full valuation allowance against the net deferred tax
asset. The amount of the net deferred tax asset that is realizable could be
increased in the near term if actual operating results differ significantly
from current estimates. The utilization of the Company's net operating
losses may be limited upon certain changes in ownership.
NOTE 14. SEGMENT INFORMATION
The Company is engaged in the design, manufacture, marketing and
servicing of advanced thin film deposition systems and MeV ion implantation
systems used primarily in the semiconductor manufacturing industry. The
Company's sales are primarily generated from two products, CVD WSix and MeV
ion implantation systems. The Company's CVD system is designed for the
deposition of WSix to create multiple interconnect layers on ICs. The MeV
ion implantation system drives electrically charged ions into the surface of
a silicon wafer to convert the electrical characteristics of the wafer. Both
products are primarily used in the manufacturing of DRAMs. Its business
serves the semiconductor manufacturing industry only. Net sales,
identifiable assets and the results of operations of subsidiaries in foreign
countries are not material.
INTERNATIONAL SALES
International sales (principally from sales to customers in the Far East
and Europe) for 1997, 1996 and 1995 represented 82%, 86% and 88% of net
sales, respectively.
MAJOR CUSTOMERS
In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech
Corporation, accounted for 47% and 17%, respectively, of net sales, and in
1996, these same two customers accounted for 53% and 18%, respectively, of
net sales. In 1995, one customer accounted for 63% of net sales.
Page 34
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
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)
1996 QUARTERS ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ ------------
Net sales.................... $ 26,360 $ 25,095 $ 13,892 $ 17,162
Gross profit................. 9,438 9,176 3,399 4,959
Net income (loss)............ 593 645 **(8,105) **(2,338)
Net income (loss) per share-
basic and diluted........... 0.04 0.04 (0.49) (0.14)
* 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 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 during the fourth quarter of 1997.
** During the third and fourth quarters of 1996, the Company recognized
special charges aggregating $5,890 relating primarily to payroll costs
associated with a reduction in workforce and inventory and demonstration
equipment write-downs.
NOTE 16. SUBSEQUENT EVENTS
On January 28, 1998 the Board of Directors offered employees the
opportunity to reprice outstanding stock options as of February 5, 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 5, 1998.
On February 12, 1998 the Company completed a private equity placement of
$5,000 of convertible preferred stock to a group of institutional investors.
Upon fulfillment of certain specified conditions, these same investors have
also committed to provide additional financing of up to $5,000.
Page 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Genus, Inc.
We have audited the accompanying consolidated balance sheets of Genus, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Genus, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
losses from operations during each of the past two years and has an
accumulated deficit, that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 26, 1998, except for Notes 1, 5 and 16,
as to which the date is March 2, 1998
Page 36
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 Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A relating to the Registrant's 1998 Annual Meeting of Shareholders
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and nominees for directors of the
Company is incorporated by reference to the Company's Proxy Statement.
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, and their ages at March 10, 1998, are as
follows:
NAME AGE POSITION
- ---------------------------- ---- -------------------------------------------------------
William W.R. Elder.......... 59 Chairman of the Board
James T. Healy.............. 57 President, Chief Executive Officer
John E. Aldeborgh........... 41 Executive Vice President, Customer Satisfaction Officer
Mary F. Bobel............... 48 Executive Vice President, Chief Financial Officer
Frederick E. Heslet, Ed.D... 58 Executive Vice President, Chief Quality Officer
Thomas E. Seidel, Ph.D...... 62 Executive Vice President, Chief Technical Officer
Mario M. Rosati............. 51 Secretary
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. 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.
Mr. Healy joined the Company in September 1996 as President and Chief
Executive Officer of the Company. From December 1990 to September 1996, Mr.
Healy was associated with Credence Systems Corporation, a manufacturer of
semiconductor test equipment, in various senior executive management positions,
most recently as President and a director of the Company.
Mr. Aldeborgh joined the Company in June 1989 and serves as the Executive
Vice President and Customer Satisfaction Officer. From January 1993 to January
1996, he was Vice President and General Manager, Ion Technology Products of the
Company. From June 1989 to January 1993, he was the Director of Operations of
the Ion Technology Products. From May 1983 to May 1989, Mr. Aldeborgh was with
LTX Corporation, a manufacturer of semiconductor test equipment, in various
management positions, most recently as Director of Manufacturing for the Linear
Manufacturing Division.
Page 37
Ms. Bobel joined the Company in March 1997 as Executive Vice President and
Chief Financial Officer. From October 1994 to September 1996, Ms. Bobel served
as Vice President and Chief Financial Officer at Educational Publishing
Corporation, a publisher of supplementary educational materials. From March
1990 to September 1994, she was employed at Adobe Systems, a publicly held
software company, most recently as Vice President and Corporate Controller.
Dr. Heslet joined the Company in November 1996 as Chief Quality Officer and
Executive Vice President, Human Resources. In addition, he also is employed by
California State University, Hayward, where he has been a professor of
educational psychology since 1968. From November 1990 to December 1996, he
served as Vice President of Quality and Development at Credence Systems
Corporation, a manufacturer of semiconductor test equipment.
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. Rosati has been a director of the Company since its inception in
November 1981, and has served as Secretary since June 1995. From July 1995 to
April 1996, Mr. Rosati was the Company's Assistant Secretary. He is a member of
Wilson Sonsini Goodrich & Rosati, P.C., general counsel to the Company.
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.
Page 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets -- December 31, 1997 and 1996
Consolidated Statements of Operations -- Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity -- Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Years Ended December 31, 1997,
1996 and 1995
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, 1997, 1996 and 1995 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......... 40
II-- Valuation and Qualifying Accounts......... 41
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 fiscal quarter ended December 31, 1997.
Page 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Genus, Inc.
Our report on the consolidated financial statements of Genus, Inc. is
included on page 36 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 26, 1998
Page 40
SCHEDULE II
GENUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------------- ---------- ---------- ----------- -------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ---------- ---------- ----------- -------------
1995
Allowance for doubtful accounts............. $ 250 $ -- $ -- $ 250
Inventory reserves.......................... 2,665 995 389 3,271
Product warranty and installation accruals.. 2,394 3,640 1,716 4,318
1996
Allowance for doubtful accounts............. 250 -- -- 250
Inventory reserves.......................... 3,271 4,603 1,338 6,536
Product warranty and installation accruals.. 4,318 4,022 3,456 4,884
1997
Allowance for doubtful accounts............. 250 4,589 3,742 1,097
Inventory reserves.......................... 6,536 910 2,040 5,406
Product warranty and installation accruals.. 4,884 3,620 4,754 3,750
Page 41
GENUS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Registrant as
filed June 6, 1997 (11)
3.2 By-laws of Registrant, as amended (2)
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 (14)
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)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (included on page 44)
27.1 Financial Data Schedule
27.2 Financial Data Schedule (Restated Fiscal Year Ends 1995, 1996 and
Quarters 1, 2, 3 of 1996)
27.3 Financial Data Schedule (Restated Quarters 1, 2, 3 of 1997)
Page 42
(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, 1990.
(14) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated February 12, 1998.
Page 43
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 13th day of March 1998.
GENUS, INC.
By: /s/ Mary F. Bobel
--------------------------
Mary F. Bobel
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James T. Healy and Mary F. Bobel, jointly
and severally, as his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------ ------------------------ -----------------
/s/ WILLIAM W.R. ELDER Chairman of the Board March 13, 1998
- -------------------------
William W.R. Elder
/s/ JAMES T. HEALY President, Chief Executive March 13, 1998
- ------------------------- Officer (Principal
James T. Healy Executive Officer)
/s/ MARY F. BOBEL Executive Vice President, March 13, 1998
- ------------------------- Chief Financial Officer
Mary F. Bobel (Principal Financial
Officer and Principal
Accounting Officer)
/s/ STEPHEN F. FISHER Director March 13, 1998
- -------------------------
Stephen F. Fisher
/s/ G. FREDERICK FORSYTH Director March 13, 1998
- -------------------------
G. Frederick Forsyth
/s/ TODD S. MYHRE Director March 13, 1998
- -------------------------
Todd S. Myhre
/s/ MARIO M. ROSATI Director March 13, 1998
- -------------------------
Mario M. Rosati
Page 44