-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KswUKGJdu7sgEHkGLWBrlQ8K21pVOFLT/XgXZWXXZvcIx/NAJIj3zU+dLwFl9ON1 W71hSzzniekIanaWCautow== 0000837913-99-000013.txt : 19990817 0000837913-99-000013.hdr.sgml : 19990817 ACCESSION NUMBER: 0000837913-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENUS INC CENTRAL INDEX KEY: 0000837913 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942790804 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17139 FILM NUMBER: 99690688 BUSINESS ADDRESS: STREET 1: 1139 KARLSTAD DR CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 BUSINESS PHONE: 4087477120 MAIL ADDRESS: STREET 2: 1139 KARLSTAD DR CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___ COMMISSION FILE NUMBER 0-17139 GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-279080 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1139 KARLSTAD DRIVE, SUNNYVALE, CALIFORNIA 94089 (Address of principal executive offices) (Zip code) (408) 747-7120 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common shares outstanding at August 9, 1999: 18,258,096 ---------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ -------------------- 1999 1998 1999 1998 ---------- ------------ --------- --------- Net sales $ 7,966 $ 10,270 $ 13,918 $ 17,508 Costs and expenses: Cost of goods sold 4,495 9,724 8,099 16,665 Research and development 1,341 2,939 2,544 6,271 Selling, general and administrative 2,017 5,683 3,882 9,906 Special charge 0 13,216 0 13,216 ---------- ------------- --------- --------- Income (loss) from operations 113 (21,292) (607) (28,550) Other, net 66 (237) 175 (393) ---------- ------------- --------- --------- Net income (loss) 179 (21,529) (432) (28,943) Deemed dividends on preferred stock 0 (74) 0 (1,903) ---------- ------------- --------- --------- Net income (loss) available to common shareholders $ 179 $ (21,603) $ (432) $(30,846) ========== ============= ========= ========= Basic and diluted net income (loss) available to common shareholders per common share and per common share assuming dilution 0.01 (1.26) (0.02) (1.80) ========== ============= ========= ========= Shares used in per share calculation Basic shares 18,117 17,160 17,991 17,143 ========== ============= ========= ========= Diluted shares 18,624 17,160 17,991 17,143 ========== ============= ========= ========= The accompanying notes are an integral part of these financial statements.
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 1999 DECEMBER 31, 1998 --------------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 7,397 $ 8,125 Accounts receivable (net of allowance for doubtful accounts of $499 in 1999 and $500 in 1998) 9,940 13,008 Inventories 4,362 5,338 Other current assets 398 379 --------------- ----------------- Total current assets 22,097 26,850 Property and equipment, net 4,343 4,659 Other assets, net 318 318 --------------- ----------------- Total assets $ 26,758 $ 31,827 =============== ================= LIABILITIES Current liabilities: Short-term bank borrowings $ 0 $ 4,000 Accounts payable 2,537 2,193 Accrued expenses 3,858 4,908 --------------- ----------------- Total current liabilities 6,395 11,101 --------------- ----------------- Redeemable Series B Convertible Preferred Stock, no par value: Authorized 28,000 shares; Issued and outstanding, none (1999) and 16,000 shares (1998), liquidation preference, none (1999) and $50 per share (1998) 0 773 --------------- ----------------- SHAREHOLDERS' EQUITY Common stock, no par value: Authorized 50,000,000 shares; Issued and outstanding 18,257,762 shares at June 30, 1999 and 17,361,162 shares at December 31, 1998 100,730 99,849 Accumulated deficit (78,687) (78,255) Accumulated other comprehensive loss (1,680) (1,641) --------------- ----------------- Total shareholders' equity 20,363 19,953 --------------- ----------------- Total liabilities, redeemable preferred stock, and shareholders' equity $ 26,758 $ 31,827 =============== ================= The accompanying notes are an integral part of these financial statements.
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) SIX MONTHS ENDED JUNE 30, --------------------- 1999 1998 ---------- --------- Cash flows from operating activities: Net income (loss) $ (432) $(28,943) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 831 1,863 Special charge 0 13,216 Changes in assets and liabilities: Accounts receivable 3,068 10,402 Inventories 976 (2,656) Other current assets (19) 251 Accounts payable 344 2,804 Accrued expenses (1,050) (620) Other, net 0 (817) ---------- --------- Net cash used in operating activities 3,718 (4,500) ---------- --------- Cash flows from investing activities: Acquisition of property and equipment (515) (373) ---------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 108 121 Proceeds from issuance of preferred stock and warrants, net 0 4,815 Payments of short-term bank borrowings (4,000) (4,400) Payments of long-term debt 0 (739) ---------- --------- Net cash provided by financing activities (3,892) (203) ---------- --------- Effect of exchange rate changes on cash (39) 130 ---------- --------- Net decrease in cash and cash equivalents (728) (4,946) Cash and cash equivalents, beginning of period 8,125 8,700 ---------- --------- Cash and cash equivalents, end of period $ 7,397 $ 3,754 ========== ========= The accompanying notes are an integral part of these financial statements.
GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with SEC requirements for interim financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report on Form 10-K. The information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of financial position, results of operations and cash flows for the interim periods. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year. Net Income (Loss) Per Share 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). GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) A reconciliation of the numerator and denominator of basic and diluted net income (loss) per share is as follows:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------ 1999 1998 1999 1998 ----------- ------------- -------- --------- Numerator-basic: Net income (loss) $ 179 $ (21,529) $ (432) $(28,943) Deemed dividends on preferred stock 0 (74) 0 (1,903) ----------- ------------- -------- --------- Net income (loss) available to common shareholders $ 179 $ (21,603) (432) (30,846) =========== ============= ======== ========= Denominator-basic: Weighted average common shares outstanding 18,117 17,160 17,991 17,143 =========== ============= ======== ========= Basic net income (loss) per share $ 0.01 $ (1.26) $ (0.02) $ (1.80) =========== ============= ======== ========= Numerator-diluted: Net income (loss) $ 179 $ (21,529) $ (432) $(28,943) Deemed dividends on preferred stock 0 (74) 0 (1,903) ----------- ------------- -------- --------- Net income (loss) available to common shareholders $ 179 $ (21,603) $ (432) $(30,846) =========== ============= ======== ========= Denominator-diluted: Weighted average common shares outstanding 18,117 17,160 17,991 17,143 Effect of dilutive securities: stock options 507 0 0 0 ----------- ------------- -------- --------- 18,624 17,160 17,991 17,143 =========== ============= ======== ========= Diluted net income (loss) per share $ 0.01 $ (1.26) $ (0.02) $ (1.80) =========== ============= ======== =========
GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) Stock options to purchase approximately 2,255,000 shares of common stock were outstanding during the six months ended June 30, 1999 but were not included in the computation of diluted income per share because the Company has a net loss for the six months ended June 30, 1999. Stock options to purchase approximately 2,502,000 shares of common stock were outstanding during the six months ended June 30, 1998 but were not included in the computation of diluted loss per share because the Company has a net loss for the six months ended June 30, 1998. The outstanding warrants of 400,000 shares of common stock were outstanding during the six months ended June 30, 1999 but were not included in the computation of diluted income per share because the Company has a net loss for the six months ended June 30, 1998.
Statement of Cash Flow Information (AMOUNTS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ----------------- 1999 1998 -------- ------- Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 2 $ 177 Non-cash financing activities: Deemed dividends on preferred stock related to beneficial conversion feature $ 0 $ 1,792 Net assets held for sale 0 25,130 Conversion of Series A Convertible Preferred Stock to common stock 0 124
Line of Credit The Company secured an Accounts Receivable Purchase Agreement with a bank on September 30, 1998. This agreement allows the Company to sell qualified receivables to the bank for a transaction fee of .1875%, and pay interest at the rate of 1% per month on the average outstanding balance. The bank will advance 80% of the qualified receivables ($4,000,000 maximum outstanding at any one time). This agreement expires September 30, 1999. At June 30, 1999, the Company had no outstanding borrowings under the Accounts Receivable Purchase Agreement. GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED)
INVENTORIES Inventories comprise the following: (AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31, 1999 1998 ------------- ------------- Raw materials and parts $ 3,484 $ 5,094 Work in process 878 244 ------------- ------------- $ 4,362 $ 5,338 ============= =============
ACCRUED EXPENSES Accrued expenses comprise the following: (AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31, 1999 1998 ------------- ------------- System installation and warranty $ 743 $ 583 Accrued commissions and incentives 303 538 Accrued payroll and related items 571 536 Restructuring reserves 598 1,240 Income taxes 456 456 Other 1,187 1,555 ------------- ------------- $ 3,858 $ 4,908 ============= =============
In 1998, the Company recorded a special charge of approximately $12,707. Included in this special charge were personnel charges of $1,746 associated with the Company's reduction in workforce as well as $5,400 in inventory write-downs, and $1,113 in leasehold improvement write-offs. In addition, this charge included $1,402 for expenses associated with the closing of several sales offices and transaction losses as a result of the sale of the ion implant products to Varian Associates, Inc. ("Varian") and $1,053 for legal, accounting, and banking fees associated with the Varian transaction. Finally, the special charge included a $1,993 write-off of ion implant inventory that is currently a matter of dispute with Varian in connection with the Asset Sale. The Company and Varian are in the process of resolving the dispute through arbitration to determine whether the Company or Varian has rights to this ion implant sale and related inventory. If the Company prevails in the arbitration, any adjustments to the Company's financial statements will be made in the quarter in which the decision is rendered and the collection of the amount in question is probable. The Company is not conceding any rights to the disputed sale. During the second quarter of 1999, $135 of transaction and foreign subsidiary costs were charged against the restructuring reserve. At June 30, 1999, the following components of the restructuring reserve associated with the special charge remain unpaid: $160 in payroll costs associated with the reduction in force, $50 in foreign subsidiary closing costs, and $388 in transaction costs. The Company expects these amounts to be paid by the end of the third quarter of 1999. GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) ISSUANCE OF PREFERRED STOCK AND WARRANTS Warrants In connection with the issuance of the Series A Convertible Preferred Stock ("Series A Stock"), the Company issued warrants for 400,000 shares of the Company's common stock to the holders of the Series A Stock. The warrants are exercisable at any time until February 2001 for 300,000 shares of common stock at a price of $3.67 per share and for 100,000 shares at a price of $4.50 per share. LEGAL PROCEEDINGS The Company and Varian Associates, Inc. ("Varian") are in the process of resolving a dispute through arbitration as required by the Asset Purchase Agreement. The original dispute was in regard to whether Genus or Varian has rights to one ion implant sale and inventory. Subsequently, Genus also made claims against Varian with respect to the earnout provision in the Asset Purchase Agreement, which requires Varian to pay Genus one-third of all revenue recorded in excess of $30 million during calendar year 1998. Varian then expanded its claim to include two other ion implant shipments that Varian claims did not meet revenue recognition requirements. These two systems, valued at $7 million, were recorded as revenue by Genus prior to the closing of the Asset Purchase Agreement. If the Company prevails in the arbitration, any adjustments to the Company's financial statements will be made in the quarter in which the decision is rendered and the collection of the amount in question is probable. The Company is not conceding any rights to the disputed sales and believes that it will prevail in the arbitration. The Company received notice that it has been named as a defendant in a claim involving an automobile accident by a former employee of the Company, which resulted in the death of an individual. General, punitive, and exemplary damages are being sought by the plaintiffs. The Company believes it is not at fault in this matter, and has appointed legal council to defend the claim. GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" establishes rules for the reporting and display of comprehensive income and its components. The following are the components of comprehensive loss:
(AMOUNTS IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ -------------------- 1999 1998 1999 1998 --------- ------------- --------- --------- Net income (loss) $ 179 $ (21,603) $ (432) $(30,846) Foreign currency translation adjustments (58) 247 (39) 2,337 --------- ------------- --------- --------- Comprehensive loss $ 121 $ (21,356) (471) (28,509) ========= ============= ========= =========
The components of accumulated other comprehensive income, net of related tax are as follows:
(AMOUNTS IN THOUSANDS) JUNE 30 DECEMBER 31 1999 1998 ------------- ------------- Cumulative translation adjustments $ (1,680) $ (1,641) ============= =============
ITEM 2. 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 in this report. Results of Operations Net sales for the three and six months ended June 30, 1999 were $8 million and $13.9 million, respectively, compared to net sales of $10.3 million and $17.5 million for the corresponding periods in 1998 when Genus was a two-product line company. Included in the second quarter sales was a system to a new major U.S. customer in a new thin film market segment. The Company has now shipped systems into two of its three targeted markets. Gross margin for the three and six months ended June 30, 1999 was 44% and 42%, respectively, compared to 5% and 5% for the same periods in 1998. In 1998, the Company was structured to support much higher revenue levels than were achieved. This resulted in a severe underabsorption of fixed operations and service overhead expenses. During the second quarter of 1998, the Company implemented cost reduction measures which significantly decreased these fixed overhead expenses. The Company believes that the current organization is more properly sized to achieve reasonable gross margins going forward, assuming revenue targets are met. Research and development expenses (R&D) for the second quarter of 1999 were $1.3 million, or 17% of sales, a decrease of $1.6 million compared to the $2.9 million reported in the second quarter of 1998. R&D spending for the first half of 1999 was $2.5 million, compared to $6.3 million during the first half of 1998. These reductions were primarily attributed to R&D expenses associated with the ion implant product line which was sold to Varian in July of 1998. The Company expects spending levels to remain in the 17-20% range for 1999. In July of 1999, the Company introduced its RInG (Rapidly Integrated Gate) product, which increases the access speed of the DRAM, and ALD (Atomic Layer Deposition) which can deposit films an order of magnitude thinner than current technology. Selling, General and Administrative expenses (SG&A) were $2 million for the second quarter of 1999, a decrease of $3.7 million from the $5.7 million of SG&A for the second quarter of 1998. Year-to-date SG&A expenses were $3.9 million, compared to $9.9 million for 1998. The expense reductions were related to costs associated with the ion implant product line, and a $1.4 million write-off of a receivable from Innotech Corporation, formerly the Company's Japanese distributor, during the second quarter of 1998. For the second quarter of 1999, other income was $66,000, compared to other expense of $237,000 in the second quarter of 1998. For the first half of 1999, other income was $175,000, while other expense for the first half of 1998 was $393,000. Other income consists mainly of interest income, while other expense for 1998 included interest expenses associated with capital leases and short-term borrowings, and foreign exchange losses. The net income for the quarter ended June 30, 1999 was $179,000. This compares with net loss of $21.5 million for the second quarter of 1998, which included a $13.2 million special charge for costs associated with the selling of the ion implant product line to Varian and reorganizing the thin film operation to be profitable at lower revenue levels. The net loss for the first six months of 1999 was $432,000, compared to net loss of $28.9 million for the same period in 1998, which also included deemed dividends of $1.9 million on the $5 million worth of Series A Convertible Preferred Stock, all of which has been retired. Liquidity and Capital Resources During the three months ended June 30, 1999, the Company's cash and cash equivalents were $7.4 million compared to $8.1 million at December 31, 1998. The Company collected $7.5 million of outstanding receivables during the second quarter, including most of the remaining ion implant receivables. Total cash collected in 1999 was $14.5 million. Accounts receivable was $9.9 million at June 30, 1999, compared to $13 million on December 31, 1998. Several systems which shipped with extended payment terms in 1998 were collected during the first half of 1999. The current balance is mainly comprised of second quarter shipments of $8 million and remaining ion implant receivables, of which $935,000 has been collected since the close of the second quarter. The Company believes that its existing working capital and cash generated from operations will be sufficient to satisfy its cash needs through the end of fiscal 1999. Currently, cash not required for operating purposes is invested in short-term money market funds. The Company has an Accounts Receivable Purchase Agreement in place, which can provide a maximum of $4 million of borrowings against qualified receivables. This agreement expires on September 30, 1999. There can be no assurance that any required additional funding, if needed, will be available on terms attractive to the Company, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Risk Factors Certain sections of Management's Discussion and Analysis contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth above in Management's Discussion and Analysis and this Risk Factors section. The discussion of these factors is incorporated by this reference as if said discussion was fully set forth in Management's Discussion and Analysis. Historical Performance. The Company has experienced losses of $29.5 million, $19.3 million, and $9.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, the Company experienced a net loss of $432,000 in the first six months of 1999. As a result of the Company's volatile sales and operating results in recent years, there can be no assurance that the Company will be able to attain or sustain consistent future revenue growth on a quarterly or annual basis, or that the Company will be able to attain or maintain consistent profitability on a quarterly or annual basis. Reliance on International Sales. Export sales accounted for approximately 56%, 74% and 84% of total net sales in the years ended 1998, 1997 and 1996, respectively. In addition, net sales to South Korean customers accounted for approximately 34%, 50% and 59%, respectively, of total net sales during the same periods. In 1999, export sales to South Korea accounted for approximately 80% of total sales, including 98% in the first quarter and 70% in the second quarter. The Company anticipates that sales to one customer in Korea will continue to account for a significant portion of net sales. As a result, a significant portion of the Company's sales will be subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Although the Company's foreign system sales are primarily denominated in U.S. dollars and the Company does not engage in hedging transactions, the Company's foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could have the effect of making the Company's products more or less expensive. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company has a wholly owned South Korean subsidiary providing service and support to the installed base of customers and whose functional currency is the won. There can be no assurance that the Company will not incur currency losses or gains in future quarters as the currency fluctuates. A substantial portion of the Company's sales are in Asia. Recent turmoil in the Asian financial markets has resulted in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM prices have fallen dramatically and may continue to do so as some Asian IC manufacturers may be selling DRAMs at less than cost in order to raise cash. These developments may affect the Company in several ways. Currency devaluation may make dollar-denominated goods, such as the Company's, more expensive for Asian clients. Asian manufacturers may limit capital spending. Furthermore, the uncertainty of the DRAM market may cause manufacturers everywhere to delay capital spending plans. These circumstances may also affect the ability of Company customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. Reliance on a Small Number of Customers and Concentration of Credit Risk. Historically, the Company has relied on a limited number of customers for a substantial portion of its net sales. In 1998, three customers, Samsung Electronics Company, Ltd., M/A Com and SGS Thomson, accounted for 68%, 8% and 5%, respectively, of the Company's thin films net sales. During the first half of 1999, two customers accounted for 95% of sales. For the first quarter of 1999, Samsung accounted for 98% of total sales, and during the second quarter, Samsung and a new U.S. customer accounted for 95% of total sales. Additionally, one customer accounted for an aggregate of 90% of thin films accounts receivable at December 31, 1998. Because the semiconductor manufacturing industry is concentrated in a limited number of generally larger companies, the Company expects that a significant portion of its future product sales will be concentrated within a limited number of customers. None of these customers has entered into a long-term agreement requiring it to purchase the Company's products. Furthermore, sales to certain of these customers may decrease in the future when those customers complete their current semiconductor equipment purchasing requirements for new or expanded fabrication facilities. The loss of a significant customer or any reduction in orders from a significant customer, including reductions due to customer departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing ICs, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is dependent on a small number of customers. Accordingly, the Company is subject to concentration of credit risk. If a major customer were to encounter financial difficulties and become unable to meet its obligations, the Company would be adversely impacted. Cyclical Nature of the Semiconductor Industry. The Company's business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for ICs and products utilizing ICs. The semiconductor industry is cyclical and experiences periodic downturns, which have an adverse effect on the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have adversely affected the Company's revenues, operating margins and results of operations. There can be no assurance that the Company's revenues and operating results will not continue to be materially and adversely affected by future downturns in the semiconductor industry. In addition, the need for continued investment in R&D, substantial capital equipment requirements and extensive ongoing worldwide customer service and support capability limits the Company's ability to reduce expenses. Accordingly, there is no assurance that the Company will be able to attain profitability in the future. Fluctuations in Quarterly Operating Results. The Company's revenue and operating results may fluctuate significantly from quarter-to-quarter. The Company derives its revenue primarily from the sale of a relatively small number of high-priced systems, many of which may be ordered and shipped during the same quarter. The Company's results of operations for a particular quarter could be adversely affected if anticipated orders, for even a small number of systems, were not received in time to enable shipment during the quarter, anticipated shipments were delayed or canceled by one or more customers or shipments were delayed due to manufacturing difficulties. The Company's revenue and operating results may also fluctuate due to the mix of products sold and the channel of distribution. Competition. The semiconductor manufacturing capital equipment industry is highly competitive. Genus faces substantial competition throughout the world. The Company believes that to remain competitive, it will require significant financial resources in order to offer a broader range of products, to maintain customer service and support centers worldwide and invest in product and process R&D. Many of the Company's existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing and customer service and support capabilities, as well as greater name recognition than the Company. The Company expects its competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. If the Company's competitors enter into strategic relationships with leading semiconductor manufacturers covering thin film products similar to those sold by the Company, it would materially adversely effect the Company's ability to sell its products to these manufacturers. There can be no assurance that the Company will continue to compete successfully in the United States or worldwide. The Company faces direct competition in Chemical Vapor Deposition ("CVD") tungsten silicide ("WSiX") from Applied Materials, Inc. and Tokyo Electron, Ltd. There can be no assurance that these or other competitors will not succeed in developing new technologies, offering products at lower prices than those of the Company or obtaining market acceptance for products more rapidly than the Company. Dependence on New Products and Processes. The Company believes that its future performance will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to invest in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely effect sales of existing products. There can be no assurance that the market will accept the Company's new products or that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it has formed strategic alliances, its ability to sell its products to those manufacturers would be adversely affected. Product Concentration; Rapid Technological Change. Semiconductor manufacturing equipment and processes are subject to rapid technological change. The Company derives its revenue primarily from the sale of its WSiX CVD systems. The Company estimates that the life cycle for these systems is generally three-to-five years. The Company believes that its future prospects will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to make significant investments in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely effect sales of existing products. There can be no assurance that future technologies, processes or product developments will not render the Company's product offerings obsolete or that the Company will be able to develop and introduce new products or enhancements to its existing and future processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could adversely effect the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it currently does business, its ability to sell its products to those manufacturers would be adversely affected. Dependence on Patents and Proprietary Rights. The Company's success depends in part on its proprietary technology. While the Company attempts to protect its proprietary technology through patents, copyrights and trade secret protection, it believes that the success of the Company will depend on more technological expertise, continuing the development of new systems, market penetration and growth of its installed base and the ability to provide comprehensive support and service to customers. There can be no assurance that the Company will be able to protect its technology or that competitors will not be able to develop similar technology independently. The Company currently has a number of United States and foreign patents and patent applications. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. From time-to-time, the Company has received notices from third parties alleging infringement of such parties' patent rights by the Company's products. In such cases, it is the policy of the Company to defend against the claims or negotiate licenses on commercially reasonable terms where considered appropriate. However, no assurance can be given that the Company will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on the Company's business and financial results. Dependence on Key Suppliers. Certain of the components and sub-assemblies included in the Company's products are obtained from a single supplier or a limited group of suppliers. Disruption or termination of these sources could have a temporary adverse effect on the Company's operations. The Company believes that alternative sources could be obtained and qualified to supply these products, if necessary. Nevertheless, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Independent Distributors. The Company currently sells and supports its thin film products through direct sales and customer support organizations in the U.S., Western Europe and South Korea and through seven exclusive, independent sales representatives and distributors in the U.S., Europe, Japan, South Korea, Taiwan, China and Malaysia. The Company does not have any long-term contracts with its sales representatives and distributors. Although the Company believes that alternative sources of distribution are available, the disruption or termination of its existing distributor relationships could have a temporary adverse effect on the Company's business, financial condition and results of operations. Volatility of Stock Price. The Company's common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of, or announcements by, the Company, its competitors or its customers, announcements of technological innovations or new products by the Company or its competitors, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which the Company does business, may adversely effect the market price of the Company's Common Stock. In addition, the occurrence of any of the events described in these "Risk Factors" could have a material adverse effect on such market price. Readiness for Year 2000. Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. These computer systems and applications could fail or create erroneous results unless corrected so that they can process data related to the year 2000. The Company relies on its systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll modules), customer service, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company also relies on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governments both domestically and globally, directly for accurate exchange of data and indirectly. The Company is well into execution of its Year 2000 readiness project, and many mission critical issues have already been addressed. The director of operations and facilities chairs the project team and it includes project managers from the finance, information technology, facilities, engineering, and customer support organizations. The team is meeting weekly, and has conducted a thorough analysis to identify systems that will possibly be impacted by the Year 2000 problem. These systems have been classified into four major segments: facilities, mission critical business operations systems, non-mission critical business operations systems and general office equipment. The project team has assigned one of its members to be the project manager for each segment, and each of these segment project managers is in the process of identifying an implementation manager for each system identified as part of their segment. Each implementation manager is responsible for developing a detailed plan that includes an assessment of Year 2000 compliance, followed by phases to define a contingency plan, evaluate alternatives, select a solution, design and implement the solution and, finally, to test and verify compliance. Some of the critical systems already addressed are discussed in the following paragraphs. End Products. The control systems for each of the Company's products are computer driven. Thorough testing of these products was completed during 1998. Testing addressed not only the Company designed elements of the system, but also the embedded controls in manufactured components integrated into the end products. Each product requires a software upgrade, and the oldest systems in the product line require a control system computer replacement as well. The Company is charging a nominal amount for these upgrades on the older generation systems, while upgrades for the current Lynx2 products are supplied at no charge. The design and testing of each of these product upgrades have been completed, and the upgrades have been shipped and installed at some of the Company's customer's sites worldwide. The Company has contacted and offered this upgrade to all of its customers, but some customers have decided not to upgrade their systems. The Company intends to secure a written release from customers who have decided not to purchase the upgrade for their installed systems. Enterprise Resources Program. During the second quarter of 1999, the Company decided to pursue the installation of Baan instead of Dataworks product that was planned for implementation by August 1, 1999. The cutover from the existing system to the new system is now scheduled for October 1, 1999. The Baan product has been certified as Y2K compliant, and this product is running at many major manufacturing companies worldwide. The system is considered to be the most critical internal Company resource at risk to the Year 2000 problem, so timely implementation is essential. Supplier Readiness. Each implementation manager is responsible for assessing the readiness of the suppliers who support their systems to ensure there will be no lapses in service that may interrupt operations. This is in addition to addressing readiness of the hardware and software products provided by these suppliers. The Company started surveying suppliers of inventory material for the Company's products during the second quarter of 1999. This is one of the projects under the mission critical business operations systems segment. Readiness of the supplier's products has already been established under the end product project, but addressing potential disruptions of the supply pipeline due to supplier business readiness is on-going. Preliminary discussions with some of the Company's critical suppliers indicate that most are ahead of the Company in establishing their own readiness. The Company's estimated expenses incurred through December 31, 1998 are $300,000. The 1999 projected costs are $300,000. The single largest risk element is the business system, and implementation of the new system is adequately budgeted in 1999. The Company believes that costs to fix the Company's products have already been fully incurred. Several capital investments have already been made in 1999 to replace aging equipment, and Year 2000 compliant systems were purchased in all cases. This includes new network and electronic mail file servers. The Company's voicemail system is not Year 2000 compliant, and replacement is underway and budgeted as a 1999 capital improvement. There are a number of hardware and software systems, both mission critical and non-mission critical, which may require upgrades at the Company's expense over the next few quarters, but preliminary estimates indicate these expenses will not be material. There can be no assurance that the Company's current estimated costs associated with the Year 2000 issue, or the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse effect on the result of operations or financial position of the Company in any given year. The Company has not yet identified any specific contingency plans in the event that projects are not completed in time or if planned fixes fail to operate as expected. Each implementation project manager is responsible for completing contingency plans for assigned projects as part of the planning process. At this time, the Company does not plan to use any outside agencies to provide independent verification of readiness, although individual implementation project managers may decide to include independent verification as part of their project plans. The independent verification requirement will be based on the risk associated with failure of the particular project/system. The Company is setting up a program to use in-house quality system auditors to perform audits of some of the critical projects to provide some independent assessment of readiness. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 19, 1999 in Santa Clara, California. Proxies for the meeting were solicited pursuant to Regulation 14A. At the Company's Annual Meeting, the shareholders approved the following resolutions:
(1) Election of the following persons as directors. Director In Favor Withheld - ------------------------ ---------- -------- William W.R. Elder 14,502,405 407,805 Todd S. Myhre 14,515,805 394,405 G. Frederick Forsyth 14,586,205 324,005 Mario M. Rosati 14,586,055 324,155
(2) Amendment to the 1991 Incentive Stock Option Plan increasing the number of shares reserved for issuance thereunder by 500,000 additional shares. For: 13,190,244 Against: 1,637,383 Abstain: 75,925 Broker Non-Vote: 3,210,239
(3) Amendment to the 1989 Employee Stock Purchase Plan increasing the number of shares reserved for issuance thereunder by 300,000 additional shares. For: 13,733,257 Against: 1,102,420 Abstain: 67,875 Broker Non-Vote: 3,210,239
(4) Ratification and appointment of PricewaterhouseCoopers LLP as independent accountants. For: 14,659,888 Against: 174,686 Abstain: 73,978 Broker Non-Vote: 3,205,239
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The Exhibits listed on the accompanying "Index to Exhibits" are filed as part hereof, or incorporated by reference into, the report. GENUS, INC. SIGNATURES Pursuant to the requirements 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. Date: August 13, 1999 GENUS, INC. /s/ William W.R. Elder --------------------------------------- William W.R. Elder, President, Chief Executive Officer and Chairman /s/ Kenneth Schwanda --------------------------------------- Kenneth Schwanda Chief Financial Officer (Principal Financial and Principal Accounting Officer) GENUS, INC. INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ------------ ----------- 27.1 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0000837913 GENUS, INC. 1000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 7397 0 10439 (499) 4362 22097 26418 (22075) 26758 6395 0 100730 0 0 (80367) 26758 13918 13918 8099 14525 175 0 0 (432) 0 (432) 0 0 0 (432) (.02) (.02)
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