-----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, NR2vkLnyJ5eW4JJxkIi7G0AchpmNrKV12L0sE4nlLPZB693HATxac0gHJESRqGxe tAftcnzxCIaQzKRd7ofmCg== 0001015402-04-001012.txt : 20040315 0001015402-04-001012.hdr.sgml : 20040315 20040315164027 ACCESSION NUMBER: 0001015402-04-001012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17139 FILM NUMBER: 04670022 BUSINESS ADDRESS: STREET 1: 1139 KARLSTAD DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 BUSINESS PHONE: 4087477120 MAIL ADDRESS: STREET 1: 1139 KARLSTAD DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 10-K 1 doc1.txt ================================================================================ ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2003 ----------------- OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-17139 ------- GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2790804 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1139 KARLSTAD DRIVE, SUNNYVALE, CA 94089 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 747-7120 --------------- 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. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the average bid and asked price as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2003) as reported by the Nasdaq National Market, was approximately $84 million. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 27, 2004, Registrant had 39,625,284 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Part III of this Form 10-K Report: Proxy Statement for Registrant's 2004 Annual Meeting of Shareholders - Items 10, 11, 12 and 13. ================================================================================
GENUS, INC. 2003 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PAGE PART I. Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceeding 14 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II. Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters 16 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34 Item 8. Consolidated Financial Statements and Supplementary Data 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 Item 9A Controls and Procedures 36 PART III. Item 10. Directors and Executive Officers of the Registrant 37 Item 11. Executive Compensation 37 Item 12. Security Ownership of Certain Beneficial Owners and Management 37 Item 13. Certain Relationships and Related Transactions 37 Item 14. Principal Accountant Fees and Services 37 PART IV. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38 SIGNATURES 68 EXHIBITS 69
PART I ITEM 1. BUSINESS - ------------------ OVERVIEW Since 1982, we have been supplying advanced manufacturing systems to the semiconductor industry worldwide. Major semiconductor manufacturers use our leading-edge thin film deposition equipment and process technology to produce integrated circuits, commonly called chips, that are incorporated into a variety of products, including personal computers, communications equipment and consumer electronics. We pioneered the development of chemical vapor deposition (CVD) tungsten silicide, which is used in certain critical steps in the manufacture of integrated circuits. In addition, today we are leading the commercialization of atomic layer deposition, also known as ALD technology. This technology is designed to enable a wide spectrum of thin film applications such as aluminum oxide, hafnium oxide and other advanced insulating and conducting materials for advanced integrated circuit manufacturing. We have also implemented a strategy of targeting non-semiconductor markets, as we are confident that our developed films can serve multiple applications in both semiconductors and non-semiconductor segments. In addition to expanding our total available market, this strategy of diversifying our customer base is intended to provide some protection against cyclical downturns in the semiconductor industry. We believe our emerging ALD technology will prove effective in expanding and diversifying our customer base. We continue to develop enabling thin film technology that addresses the scaling challenges facing the semiconductor industry relating to gate and capacitor materials. The International Technology Roadmap for Semiconductors (ITRS) has labeled these challenges as "red zones" because there are no known solutions that allow for further reduction in feature sizes and improved performance. Our innovative thin film technology solutions are designed to enable chip manufacturers to simplify and advance their integrated circuit production processes and lower their total cost of manufacturing per chip, known as cost of ownership. As it is in the semiconductor industry, non-semiconductor business segments have scaling initiatives as well. For example, the making of thin film magnetic heads in the data storage industry has scaling requirements analogous to the scaling trends in semiconductors. A key part of our business strategy includes providing enabling thin film solutions for non-semiconductor applications. We provide a production-proven platform that is used for both the development and volume production of new thin films in integrated circuit manufacturing. This platform is based on a common architecture and a high percentage of common parts that are designed to provide manufacturers with high reliability and low cost of ownership across a wide range of thin film deposition applications. The modular design of our system permits manufacturers to add capacity and to service their manufacturing systems easily. In addition to the modular platform architecture, our systems operate on standardized software that is designed to support a wide range of thin film deposition processes. Our global customer base consists of semiconductor and non-semiconductor manufacturers in the United States, Europe and Asia. Our current customers include semiconductor manufacturers such as Infineon Technologies, NEC and Samsung Electronics Company, Ltd. and non-semiconductor customers such as HGST, Western Digital, Fujitsu, and Seagate Technologies. INDUSTRY BACKGROUND The manufacture of an integrated circuit requires a number of complex steps and processes. Most integrated circuits are built on a base of silicon, called a wafer, and consist of two main structures. The lower structure is made up of components, typically transistors or capacitors, and the upper structure consists of the circuitry that 3 connects the components. Building an integrated circuit requires the deposition of a series of film layers, which may be conductors, dielectrics (insulators), or semiconductors. The overall growth of the semiconductor industry and the increasing complexity of integrated circuits have led to increasing demand for advanced semiconductor equipment. Although the semiconductor industry has grown over 30 years with an average annual growth rate (CAGR) of 14.0%, it is prone to cyclic variations, including significant downturns. Typically there are periods of high demand followed by periods of low demand. Each cycle is one to three years of high growth and one to three years of low growth. During 2003, we continued to experience the biggest recession in the history of the semiconductor and semiconductor equipment industries. VLSI Research, Inc. an independent research company specializing in the high technology industry, estimates that industry shipments in 2002 were down 69% compared to 2001 and grew by around 5% in 2003 from 2002. VLSI expects a growth in industry shipments in 2004 of approximately 40% when compared to 2003. INDUSTRY DRIVERS: LOWERING THE COST PER FUNCTION AND INCREASING PERFORMANCE The growth of computer markets and the emergence and growth of new markets such as wireless communications and digital consumer electronics have contributed to growth in the semiconductor industry. This increase also has been fueled by the semiconductor industry's ability to supply increasingly complex, higher performance integrated circuits, while continuing to reduce cost. The increasing complexity of integrated circuits and the accompanying reductions in feature size require more advanced and expensive wafer fabrication equipment, which can increase the average cost of advanced wafer fabrication facilities. Technological advances in semiconductor manufacturing equipment have historically enabled integrated circuit manufacturers to lower cost per function and improve performance dramatically by: - - reducing feature size of integrated circuits and the introduction of new materials with scaled dimensions; - - increasing the wafer size; - - increasing manufacturing yields; and - - improving the utilization of wafer fabrication equipment. REDUCING FEATURE SIZES AND ADDING NEW ENABLING THIN FILMS Smaller feature sizes allow more circuits to fit on one wafer. These reductions have contributed significantly to reducing the manufacturing cost per chip. The semiconductor industry is driven by performance (mainly the increased speed for logic and memory signals) and increased chip density (mainly the increased density of memory and logic capacity). In addition to the continued reduction in feature sizes, there is a paradigm shift for the use of new materials to improve performance of integrated circuits. New materials are required for gate, capacitor and interconnect application segments within the semiconductor manufacturing process. The adoption of new types of thin film conducting and insulating materials will accelerate the trend toward higher levels of semiconductor performance and integration while maintaining the historic trend of reduction of cost per function. 4 LARGER WAFER SIZES By increasing the wafer size, integrated circuit manufacturers can produce more circuits per wafer, thus reducing the overall manufacturing costs per chip. Leading-edge wafer fabrication lines are currently using 300-millimeter (mm) wafers, in addition to the 200mm wafers that they have been using for the last ten to fifteen years. We believe that most major manufacturers will add 300mm production capabilities within the next one to four years. HIGHER MANUFACTURING YIELDS In the last fifteen years, manufacturing yields, or the percentage of good integrated circuits per wafer, have increased substantially, while the time to reach maximum yield levels during a production lifecycle has decreased significantly. As the complexity of chips increases, manufacturers must continually reduce defect density to obtain higher yields. IMPROVED EQUIPMENT UTILIZATION AND INTRODUCING NEW EQUIPMENT ARCHITECTURES The utilization of semiconductor manufacturing lines has improved in the last ten years. Manufacturing lines now operate continuously. In addition, new architectures of production equipment are being explored that allow for higher throughputs, better reliability, high quality, and low overall cost-of-ownership as measured by the total cost to process each wafer through the equipment. While these production techniques are important for reducing the cost per function of chips, we believe that the most beneficial production solution is likely to combine feature size reduction and the use of new thin film materials. "RED ZONE" CHALLENGES FACING THE SEMICONDUCTOR INDUSTRY The semiconductor industry is driven by the need for higher performance and greater chip density as measured by an increasing number of functions on the chip. The semiconductor industry has historically been able to double the number of transistors on a given space of silicon every 18 to 24 months by reducing feature sizes. However, as the industry approaches feature size dimensions of 100nm and below, the industry continues to face significant challenges and roadblocks pertaining to improving device performance and feature size reduction. The International Technology Roadmap (2003) has labeled these challenges "red zones" for semiconductors because there are no known solutions to allow for further reduction in feature sizes and improved performance. It is estimated that semiconductor manufacturers need approximately two to four years to research, develop and commercially produce a new type of integrated circuit. 5 As part of its strategy to solve the challenges posed by the red zones, the semiconductor industry is moving towards the use of ultra-thin dielectrics with high insulating capabilities for gate dielectrics and capacitors as well as ultra-thin metal barriers for copper-based interconnect processes. Emerging thin films with high dielectric capabilities for gate and capacitor applications include metal oxides such as aluminum oxide. THE GENUS SOLUTION We are an innovative supplier of thin film deposition equipment to semiconductor and non-semiconductor manufacturers and are focused on developing enabling thin film technology to solve the challenges posed by the red zones. Our patented multi-purpose process chamber serves as the foundation for all of our current products. Our products are designed to deliver high throughput, low cost of ownership and quick time to market, enhancing the ability of manufacturers to achieve productivity gains. INNOVATIVE THIN FILM SOLUTIONS Our systems and processes are designed to provide innovative thin film solutions that address technical and manufacturing problems experienced by the semiconductor industry. We provide our customers with advanced systems and processes for depositing thin films such as CVD tungsten silicide, tungsten nitride, and blanket tungsten, and ALD films such as aluminum oxide, zirconium oxide and hafnium oxide. These innovative thin films solve certain key device and interconnect problems faced by semiconductor manufacturers as they scale their device geometries below 0.10 micron. VERSATILE PRODUCTION PLATFORM Our LYNX series and StrataGem family of systems are based on a common outsourced, reliable wafer-handling robotic platform. The systems are designed to be flexible and can be configured for multiple deposition processes, such as CVD, plasma enhanced CVD and ALD. Our systems offer the following advantages: - A production-proven platform that allows for easier and faster migration from research and development to production; - A platform based upon a large number of standardized parts used across our systems to enhance reliability; - A modular design that allows for simplified service. In addition, all of our systems are designed with a graphical user interface that automates tasks and allows for comprehensive viewing of the real-time status of the systems. Our software supports our customers' process development needs with the ability to run a different set of processes for each wafer. 6 LOW COST OF OWNERSHIP Our LYNX series and StrataGem family of equipment offer low cost of ownership by featuring multiple deposition processes capabilities, production-proven process chamber design, advanced software architecture and reliable wafer handling. Based on feedback from our installed customer base, we estimate that our production systems consistently achieve greater than 90% availability, and that the mean time between failures of our system is greater than 300 hours. In addition, our customers have confirmed that we offer among the lowest costs of operation. We are committed to improving these results and achieving these same levels of performance or better with our new thin film products. CUSTOMER SUPPORT We believe we deliver superior customer support and service to enhance our long-term customer relationships. We maintain an international customer support infrastructure with fully staffed customer support capabilities in United States, Korea, Japan and Europe. We provide training to customer engineers with all of our equipment installations as well as 24 hours a day, seven days a week product support. We offer warranties consisting of a one to two year parts warranty and a one-year labor warranty. MARKETS AND APPLICATIONS In 2003, we continued to expand our CVD product line with new films and applications that allow us to serve broader markets. In 1999, Genus had CVD tungsten silicide and tungsten nitride for gate and barrier applications and we were just introducing ALD technology. In 2003, we have developed films using tungsten silicide, tungsten nitride and blanket tungsten by conventional CVD, and aluminum oxide, hafnium oxide and zirconium oxide by ALD. In addition, Genus has the demonstrated capability to integrate these ALD films as alloys and nanolaminates (layered structures) for the engineering of specialized capabilities on its platforms. These films serve the Company for applications in semiconductors for gate and capacitor, as well as for non-semiconductor applications (thin film magnetic heads used in the hard disk drive industry). By focusing on a broader set of film markets, we believe we can reduce our dependence on the volatile dynamic-random-access memory (DRAM) market, as well as benefit from participation in the logic segment and non-semiconductor market opportunities. We are now participating in semiconductor memory with gate and capacitor films, in semiconductor logic with advanced gate films, and in non-semiconductor gap dielectrics for thin film magnetic heads. We have moved from solely memory applications to this level of diversification in the last three years. We focus on the following thin film market segments: CVD SILICIDE AND METAL, AND ALD DIELECTRICS AND METAL BARRIERS FOR GATE STACK FILMS CVD tungsten silicide is used to reduce the electrical resistance of the gate material in a transistor device structure. Our tungsten silicide gate thin films are used in DRAM integrated circuit production. 7 Capacitor films Genus is commercializing its ALD technology with the application to advanced capacitors, including cylinder ("stacked"), trench, embedded, rf and decoupling capacitor applications. Two semiconductor customers have selected ALD technology for volume production. The state of the art has been advanced due to high conformality and high quality Genus ALD films. Non-semiconductor films Genus has developed a market for its ALD films in the thin film magnetic head market. This market developed because of a production ready-made solution that the Genus ALD dielectrics provide for the scaling of the gap dielectrics. Three data storage customers have selected Genus ALD technology for volume production. The market is scaling to thinner films, ideally suited to the ALD approach. Other non-semiconductor markets are targeted, these include: Magnetic Random Access Memory (MRAM), Optical interconnects / filters, Organic Light Emiting Diodes (OLEDs), Microelectromechanical Systems (MEMS), and photo masks, in fact anywhere that film uniformity and conformality are enabling. However, it is too early to predict our ability to penetrate in these markets. PRODUCTS AND TECHNOLOGY We have developed our product strategy around the LYNX and StrataGem platforms concept. The LYNX system refers specifically to the vacuum robotic wafer handler and its wafer controlling software. The LYNX process modules are generically appropriate for CVD and plasma enhanced CVD, and is used for depositing the following films: - Tungsten silicide-monosilane - Tungsten silicide-dichlorosilane - Tungsten nitride - Tungsten Our ALD family of products called, StrataGem, serve the semiconductor and storage technology markets. StrataGem 200 , StrataGem 300 and StrataGem TFH are used for depositing the following films: - Aluminum oxide - Advanced metal oxides (e.g., tantalum oxide, titanium oxide, zirconium oxide, hafnium oxide, lanthanmoxide) - Metal films (e.g., titanium nitride and tungsten nitride) - Nanolaminates and alloys LYNX Series LYNX2(R). Manufacturers of advanced DRAM devices of 0.35 to 0.10 micron currently use the LYNX2 system in production. LYNX2 systems support over 200 process modules in high volume production. Production availability for the LYNX2 system runs from 90-95%. LYNX platforms are also used for customer development and pilot manufacturing for more advanced semiconductor applications below 0.10 micron. The LYNX2 features a wafer-handling platform that is compatible with the Modular Equipment Standards Committee (MESC). This platform uses a centrally located, dual-end robot for high throughput operation. The system is controlled by a graphical user interface that provides the operator with real-time information such as recipe, set points, and hardware status and service features. The modular design of the LYNX2 allows the addition of up to four process modules, which can be run serially or in parallel. The LYNX2 process module design also offers a multi-zone resistive heater for more uniform wafer heating, two-zone showerheads for improved film composition uniformity and a state-of-the-art gas delivery system that minimizes chamber-to-chamber variance. 8 LYNX3(TM). We introduced the LYNX3 in January 1999 as our first 300mm low pressure CVD process module in a beta system. The LYNX3 process module is based on a newly developed and patented process chamber concept that results in exceptional uniformity. The LYNX3 is designed to run all films currently supported by the LYNX2, as well as all films currently in development. The LYNX3 system supports up to four process modules, which can be run serially or in parallel. Also, we have developed an advanced version of the LYNX3, which is designed to be a "bridge tool", capable of running either 200 or 300mm wafers. StrataGem Family (StrataGem 200, StrataGem 300 and StrataGem TFH) The ranges of thin films that can be deposited using the StrataGem family products include: - ALD Dielectrics. In July 1999, we announced the availability of ALD aluminum oxide. ALD has many possible applications in the semiconductor market including as a high dielectric constant oxide for either capacitors or for gate dielectrics, as an etch stop for advanced structures, or for hard mask applications. We made other advanced ALD dielectrics available during 2000 and 2001. We believe that our ALD aluminum oxide-based technology will find near-term opportunities in the DRAM capacitor application. Other ALD dielectrics will find longer-term applications in both capacitor and gate dielectric structures. - ALD Metal Films. Metal films have been developed and offer application for metal gate (work function control as well as barrier), capacitor electrodes, contact and interconnect barriers. The applications are current in the case of capacitor electrodes and contact barrier. For interconnects they will likely come to be needed below the 90nm feature size, where barrier film thickness decrease below 100 angstroms. Somewhat beyond 2005, there will be an interest in these barriers for metal gate electrodes. - Metal Oxide Alloys and Nanolaminates. With the development of Genus ALD, the Company has been able to demonstrate a film flexibility otherwise not known. For example, Genus ALD system can provide the flexibility to deposit up to 3 compound films in alloy and / or nanolaminate form. The capability has become enabling for the "engineering" of composite films for optimal performance in next generation semiconductor devices. Composites of both dielectrics and metals can be achieved. Genus 8700 Series and 6000 Series. While we no longer actively sell these thin film products, we continue to sell spare parts and provide service for the installed base worldwide. 9 FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS Currently, the Company operates in one industry segment. The Company is engaged in the design, manufacturing, marketing and servicing of advanced thin film deposition systems used in the semiconductor manufacturing industry and the Thin Film Head segment of the Data Storage Industry. Please refer to Item 6, Selected Financial Data, and Item 8, Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K for geographic financial information. CUSTOMER SUPPORT We believe that our customer support organization is critical to establishing and maintaining the long-term customer relationships that often are the basis upon which semiconductor manufacturers select their equipment vendor. Our customer support organization is headquartered in Sunnyvale, California with additional employees located in Japan, South Korea and Europe. Our support personnel are available on a 24-hour a day, seven days a week basis with a maximum one-hour response time. All support personnel have technical backgrounds, most with process, mechanical and electronics training, and are supported by our engineering and applications personnel. Support personnel install systems, perform warranty and out-of-warranty service and provide sales support. Generally, we offer a 12-month labor warranty and a 12 to 24-month parts warranty. We also offer training to our customers at our headquarters and on-site support as an enhancement to our standard warranty program. SALES AND MARKETING We maintain direct sales and service offices in the United States, Japan, and South Korea. From these offices and other locations, we provide customer support directly and maintain, "spares depots" for our products. We also have sales representatives in the United States, and Taiwan. CUSTOMERS We rely on a limited number of customers for a substantial portion of our net sales. Our major customers in 2003 included Samsung, Hitachi Global Storage Systems (HGST) and Seagate Technologies. As of December 31, 2003 we had 10 active customers serving three market segments - Memory, Logic, and Data Storage. BACKLOG We schedule production of our systems based on both backlog and regular sales forecasts. We include in backlog only those systems for which we have accepted purchase orders or a letter of intent and assigned shipment dates within the next 12 months. All orders are subject to cancellation or delay by the customer with limited or no penalty. Our backlog was approximately $13.0 million as of December 31, 2003 compared to a backlog of $24.7 million as of December 31, 2002. The year-to-year fluctuation is due primarily to the cyclical nature of the semiconductor industry. Because of possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily representative of actual sales for any succeeding period. In particular, during periods of industry downturns we have experienced significant delays relating to orders that were previously booked and included in backlog. 10 RESEARCH AND DEVELOPMENT We focus our research and development efforts on developing innovative thin film products. During recent periods, we have devoted a significant amount of resources to the StrataGem200 and StrataGem300 systems and CVD systems. We expect to focus our future efforts on our StrataGem system for 200 and 300mm applications and StrataGem TFH for advanced film technologies. We maintain a Class 1 applications laboratory and a separate thin films development area in California. By basing our products on the Lynx and StrataGem systems, we believe that we can focus our development activities on the process chamber and develop new products quickly and at relatively low cost. Our research and development expenses were $7.6 million for 2003, $8.0 million for 2002, and $12.1 million for 2001, representing 13%, 20%, and 25% of revenues, respectively. The worldwide semiconductor industry is characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual changes in these markets, we believe that our future success will depend upon our ability to continue to improve our existing systems and process technologies, and to develop systems and new technologies that compete effectively. We must adapt our systems and processes to technological changes and to support emerging industry standards for target markets. We cannot be sure that we will complete our existing and future development efforts within our anticipated schedule or that our new or enhanced products will have the features to make them successful. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new or improved systems or process technologies. These new and improved systems and process technologies may not meet the requirements of the marketplace and achieve market acceptance. Furthermore, despite testing by us, difficulties could be encountered with our products after shipment, resulting in loss of revenue or delay in market acceptance and sales, diversion of development resources, injury to our reputation or increased service and warranty costs. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs and market acceptance. If we are unable to improve our existing systems and process technologies or to develop new technologies or systems, we may lose sales and customers. COMPETITION The global semiconductor fabrication equipment industry is intensely competitive and is characterized by rapid technological change and demanding customer service requirements. Our ability to compete depends upon our ability to continually improve our products, processes and services and our ability to develop new products that meet constantly evolving customer requirements. A substantial capital investment is required by semiconductor manufacturers to install and integrate new fabrication equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected a particular supplier's products, the manufacturer often relies for a significant period of time upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same supplier. It is difficult for us to sell to a particular customer for a significant period of time after that customer has selected a competitor's product, and it may be difficult for us to unseat an existing relationship that a potential customer has with one of our competitors in order to increase sales of our products to that customer. Each of our product lines competes in markets defined by the particular wafer fabrication process it performs. In each of these markets we have multiple competitors. At present, however, no single competitor competes with us in all of the same market segments in which we compete. Competitors in a given technology tend to have different degrees of market presence in the various regional geographic markets. Competition is based on many factors, primarily technological innovation, productivity, total cost of ownership of the systems, including yield, price, product performance and throughput capability, quality, contamination control, reliability and customer support. We 11 believe that our competitive position in each of our markets is based on the ability of our products and services to address customer requirements related to these competitive factors. Our direct competitors in the CVD tungsten silicide market include Applied Materials, Inc. and Tokyo Electron, Ltd. Our direct competitors in the ALD market include ASM International, Veeco Instruments and two private companies; Aviza Technology, based in Silicon Valley and IPS, based in South Korea. Competition from these competitors increased in 2002 and 2003, and we expect that this competition will continue to intensify. We believe that we compete favorably on each of the competitive elements in this market. We may not be able to maintain our competitive position against current and potential competition. New products, pricing pressures, rapid changes in technology and other competitive actions from both new and existing competitors could materially affect our market position. Some of our competitors have substantially greater installed customer bases and greater financial, marketing, production, technical and other resources than we do and may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Our competitors may introduce or acquire competitive products that offer enhanced technologies and improvements. In addition, some of our competitors or potential competitors have greater name recognition and more extensive customer bases that could be leveraged to gain market share to our detriment. We believe that the semiconductor equipment industry will continue to be subject to increased consolidation, which will increase the number of larger, more powerful companies and increase competition. MANUFACTURING AND SUPPLIERS Our manufacturing operations are based in our Sunnyvale, California facility and consist of procurement, subassembly, final assembly, test and reliability engineering. Our manufacturing facility maintains and operates a Class-1 clean room to demonstrate integrated applications with its customers. The LYNX and StrataGem family systems are based on an outsourced wafer-handling platform, enabling us to use a large number of common subassemblies and components. Many of the major assemblies are procured completely from outside sources. We focus our internal manufacturing efforts on those precision mechanical and electro-mechanical assemblies that differentiate our systems from those of our competitors. Most of the components for our thin film systems are produced in subassemblies by independent domestic suppliers according to our design and procurement specifications. We anticipate that the use of such subassemblies will continue to increase to achieve additional manufacturing efficiencies. Many of these components are obtained from a limited group of suppliers. In addition, a limited number of these components are available from only one supplier. We generally acquire these components on a purchase order basis and not under long-term supply contracts. Our reliance on outside vendors generally, and a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. Because the manufacture of certain of these components and subassemblies is an extremely complex process and can require long lead times, we could experience delays or shortages caused by suppliers. We are not currently aware of any specific problems regarding the availability of components that might significantly delay the manufacturing of our systems in the future. However, the inability to develop alternate sources or to obtain sufficient source components as required in the future, could result in delays of product shipments that would have a material adverse effect on our business, results of operations and financial condition. We are subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our sales demonstrations and research and development. Failure to comply with present or future regulations could result in substantial liability to us, suspension or cessation of our operations, restrictions on our ability to expand at our present locations or requirements for the acquisition of significant equipment or other significant expense. To date, we have adequately complied with environmental rules and regulations. Such compliance has not materially affected our operations. 12 In December 2002 we received ISO 9001-2000 and ISO 14001 Certification by NSAI, a qualified examiner for ISO Certification. INTELLECTUAL PROPERTY We believe that because of the rapid technological change in the semiconductor industry, our future prospects will depend primarily upon the expertise and creative skills of our personnel in process technology, new product development, marketing, application engineering and product engineering, rather than on patent protection. Nevertheless, we have a policy to actively pursue domestic and foreign patent protection to cover technology developed by us. We hold 45 United States patents with 17 patent applications pending in the United States as well as several foreign patents and patent applications covering various aspects of our products and processes. Where appropriate, we intend to file additional patent applications to strengthen our intellectual property rights. Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we cannot be sure that we will be able to protect our technology adequately, and our competitors could independently develop similar technology, duplicate our products or design around our patents. To the extent we wish to assert our patent rights, we cannot be sure that any claims of our patents will be sufficiently broad to protect our technology or that our pending patent applications will be approved. In addition, litigation is uncertain, expensive and time consuming and there can be no assurance that we will prevail in any litigation. Regardless of the results of any such litigation, the related costs could have a material adverse effect on our business and financial condition. Moreover, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, that any rights granted under these patents will provide adequate protection to us, or that we will have sufficient resources to protect and enforce our rights. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States. From time to time, we may receive notices from third parties alleging infringement of patents or intellectual property rights. It is our policy to respect all parties' legitimate intellectual property rights, and we will defend against such claims or negotiate licenses on commercially reasonable terms where appropriate. However, no assurance can be given that, if we are required to obtain licenses to third party intellectual property, we will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from third party claims would not have a material adverse effect on our business and financial results. EMPLOYEES As of December 31, 2003, we employed 156 full-time and temporary employees Worldwide. The success of our future operations depends in large part on our ability to recruit and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing systems and the development of new systems and processes. The competition for such personnel is intense, particularly in the San Francisco bay area, where our headquarters are located. At times we have experienced difficulty in attracting new personnel, and we may not be successful in retaining or recruiting sufficient key personnel in the future. None of our employees is represented by a labor union, and we have never experienced a work stoppage, slowdown or strike. We consider our relationships with our employees to be good. Information regarding our foreign and domestic operations and export revenues is included in Note 13 of the Notes to the Consolidated Financial Statements. Genus' financial statements are available at the Company's website at www.Genus.com and the SEC's website at www.sec.gov. - ------------- ----------- 13 ITEM 2. PROPERTIES - -------------------- We maintain our headquarters, manufacturing and research and development operations in Sunnyvale, California. We have a lease for a facility totaling approximately 100,000 square feet. Our lease for the Sunnyvale facility expires in October 2012. Commencing in 2004, our annual rental expense will be approximately $1.8 million. Our monthly cash rent payments start at a lower rate in the first few years and then increase periodically during the term of the lease. We also have leases for our sales and support offices in Seoul, South Korea and Tokyo, Japan. The rent expense increase between 2002 and 2003 was primarily due to increased monthly rent amounts in the United States. We believe that our existing facilities are adequate to meet our current requirements and that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS - ---------------------------- On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's Complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASMA claims to own or exclusively license. The Complaint seeks monetary and injunctive relief. Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are invalid, unenforceable, and not infringed by Genus; and (3) antitrust violations. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the Court issued an order granting ASMA leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASMA claims to own. The Court also severed and stayed discovery and trial of Genus' antitrust claims until after the trial of the patent claims. On February 4, 2002, Genus served its Amended Answer to ASMA's amended complaint and counterclaimed against ASMA for declaratory judgment that the '165 Patent is invalid, unenforceable, and not infringed by Genus. On August 15, 2002, the Court issued a claim construction order regarding the '590, '365, and 598' Patents. A claim construction hearing regarding the '165 Patent was held on September 26, 2002, and the Court issued a claim construction ruling regarding this patent on November 13, 2002. On September 23, 2002 Genus filed motions for summary judgment on noninfringement regarding the '590 and '365 Patents. On November 20, 2002, the Court granted the Genus motion for summary judgment of noninfringement of the '365 Patent. On January 10, 2003, the Court granted Genus' motion for summary judgment of non-infringement the '590 Patent. On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement"). Under the terms of the Settlement, Genus gained a royalty-free license to each of the patents ASMI asserted in the litigation, including both ALD patents as well as Patent '165. By specific agreement of the parties, these licenses are applicable to Genus' successors and affiliates. Genus has likewise obtained a covenant from ASMI that it will not sue Genus for patent infringement or antitrust violations for the next five years. In return, Genus has granted ASMI and its successors and affiliates a royalty-free license to the patent Genus asserted in the litigation, Patent '568, and has agreed to dismiss its antitrust claims against ASMI. Genus has also agreed not to sue ASMI for patent infringement or antitrust violations for the next five years. No payments have been made by either Genus or ASMI in exchange for these licenses and the covenant not to sue. However, under the terms of the Settlement, ASMI has the right to pursue an appeal of the District Court's judgments of non-infringement regarding the ALD patents. The agreement specifies that if the Federal Circuit vacates either of the existing judgments related to the ALD patents based on a change in the District Court's claim construction, Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents it has been granted under the agreement. 14 We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------------- None. EXECUTIVE OFFICERS OF THE REGISTRANT As of December 31, 2003, the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, are as follows:
NAME AGE POSITION - ----------------------- --- -------------------------------------------------------------- William W.R. Elder. . . 65 Chairman and Chief Executive Officer Thomas E. Seidel, Ph.D. 68 Executive Vice President, Chief Technical Officer Shum Mukherjee. . . . . 53 Executive Vice President, Finance and Operations, and Chief Financial Officer Eddie Lee . . . . . . . 52 Executive Vice President, Advanced Engineering
Except for Mr. Mukherjee, and Mr. Lee, all of the officers have been associated with us in their present or other capacities for more than the past five years. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships among our executive officers. WILLIAM W.R. ELDER was a founder of Genus and is our Chairman of the Board, President and our Chief Executive Officer. From October 1996 to April 1998, Dr. Elder served only as Chairman of the Board. From April 1990 to September 1996, Dr. Elder was Chairman of the Board, President and Chief Executive Officer of the Company. From November 1981 to April 1990, Dr. Elder was President and a director of the Company. THOMAS E. SEIDEL has served as our Executive Vice President and Chief Technical Officer since January 1996. From July 1988 to January 1996, Dr. Seidel was associated with SEMATECH, a semiconductor-industry consortium, in various senior management positions, most recently as Chief Technologist and Director of Strategic Technology. SHUM MUKHERJEE has served as our Executive Vice President of Finance and Chief Financial Officer since October 2001. Mr. Mukherjee has broad financial management experience. From 1978 to 1984, Mr. Mukherjee was with Ford of Europe, Raychem Corporation (now a division of Tyco International) from 1984 to 1998 and with E*TRADE Group from 1998 to 2001. Mr. Mukherjee earned a Masters Degree in Management from the Sloan School of Management at Massachusetts Institute of Technology. EDDIE LEE has served as our Executive Vice President, Advanced Technology, Engineering and Strategic Marketing since February 2001. Mr. Lee joined the Company in August 2000, as Vice President of New Technology Business Development. Prior to joining the Company, Mr. Lee was Vice President of Technology at Silicon Valley Group. Working in the thin film industry since 1974, Mr. Lee has held managerial positions at Honeywell, Advanced Micro Devices and Varian. He is currently on the technical advisory board of two other privately held companies in a non-competing field with Genus. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER - -------------------------------------------------------------------------------- MATTERS - ------- Common Stock Information Our common stock is traded in the over-the-counter market under the NASDAQ symbol GGNS. The only class of Genus securities that is traded is Genus common stock. The high and low closing sales prices for 2003 and 2002 set forth below are as reported by the NASDAQ National Market System. At February 27, 2004, we had 416 registered shareholders as reported by Mellon Investor Services. The closing sales price of Genus common stock on December 31, 2003, the last trading day in 2003, was $ 6.00.
2003 2002 ------------------ ------------------ HIGH LOW HIGH LOW -------- -------- -------- -------- First Quarter. . . . $ 3.38 $ 1.51 $ 3.35 $ 2.26 Second Quarter . . . 3.25 1.56 4.40 1.93 Third Quarter. . . . 4.82 2.40 1.95 1.00 Fourth Quarter . . . $ 7.50 $ 3.85 $ 2.81 $ 1.00
We have not paid cash dividends on our common stock since inception, and our Board of Directors presently intends to reinvest our earnings, if any, in our business. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future. 16 ITEM 6. SELECTED FINANCIAL DATA - -----------------------------------
YEAR ENDED DECEMBER 31, -------------------------------------------------- 2003 2002 2001 2000(1) 1999 -------- --------- -------- --------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues . . . . . . . . . . . . . . . . . . . $56,861 $ 39,767 $48,739 $ 40,638 $28,360 Costs and expenses: Costs of goods sold. . . . . . . . . . . . 39,249 29,143 32,500 24,385 16,628 Research and development . . . . . . . . . 7,597 8,011 12,118 8,659 5,368 Selling, general and administrative. . . . 11,741 12,621 10,381 10,093 7,930 Restructuring and other. . . . . . . . . . 0 0 0 0 543 -------------------------------------------------- Loss from operations . . . . . . . . . . . . . (1,726) (10,008) (6,260) (2,499) (2,109) Other income (expense), net. . . . . . . . . . (1,565) (1,074) (336) 108 669 -------------------------------------------------- Loss before provision for income taxes and cumulative effect of change in accounting principle. . . . . . . . . . . . . . . . . . (3,291) (11,082) (6,596) (2,391) (1,440) Provision for income taxes . . . . . . . . . . 228 538 70 490 177 -------------------------------------------------- Loss before cumulative effect of change in accounting principle . . . . . . . . . . . . (3,519) (11,620) (6,666) (2,881) (1,617) Cumulative effect of change in accounting principle. . . . . . . . . . . . . . . . . . 0 0 0 (6,770) 0 -------------------------------------------------- Net loss . . . . . . . . . . . . . . . . . . . $(3,519) $(11,620) $(6,666) $ (9,651) $(1,617) ================================================== Net loss per share before cumulative effect of change in accounting principle Basic and diluted. . . . . . . . . . . . . (0.11) (0.43) (0.31) (0.15) (0.09) Cumulative effect of change in accounting principle (1) Basic and diluted (0.36) Net loss per share: Basic and diluted. . . . . . . . . . . . . (0.11) (0.43) (0.31) (0.51) (0.09) Shares used in computing net loss per share: 17 Basic and diluted. . . . . . . . . . . . . 31,303 26,934 21,163 18,937 18,134
The following are pro forma amounts with the change in accounting principle related to revenue recognition applied retroactively to the years ended December 31, 2000 and 1999, respectively.
YEAR ENDED DECEMBER 31, ------------------------------------- 2000(1) 1999 ------------------ ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues. . . . . . . . $ 40,638 $ 27,992 Net loss. . . . . . . . (2,881) (3,232) Net loss per share: Basic . . . . . . . . $ (0.15) $ (0.18) Diluted . . . . . . . $ (0.15) $ (0.18)
(1) In 2000, the Company changed its accounting method for recognizing revenue to comply with Staff Accounting Bulletin number 101.
YEAR ENDED DECEMBER 31, -------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents . . . . . . . . . $41,608 $11,546 $ 3,043 $ 3,136 $ 6,739 Working capital . . . . . . . . . . . . . . 45,313 9,650 (2,600) 896 14,151 Total assets. . . . . . . . . . . . . . . . 71,768 41,510 35,902 44,535 27,744 Convertible notes and long term liabilities 5,806 5,571 0 0 0 Total shareholders' equity. . . . . . . . . $49,424 $13,797 $12,128 $11,292 $19,378
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - -------------- The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the discussion in this Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements about trends and uncertainties in our business, such as projected level of future expenses, revenues etc. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors, including but not limited to, those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K. 18 OVERVIEW Since 1982, we have been supplying advanced manufacturing systems to the semiconductor industry worldwide. Major semiconductor manufacturers use our leading-edge thin film deposition equipment and process technology to produce integrated circuits, commonly called chips, that are incorporated into a variety of products including personal computers, communications, equipment and consumer electronics. We pioneered the development of chemical vapor deposition (CVD) tungsten silicide, which is used in certain critical steps in the manufacture of integrated circuits. In addition, today we are leading the commercialization of atomic layer deposition, also known as ALD technology and of our StrataGem family of products. This technology is designed to enable a wide spectrum of thin film applications such as aluminum oxide, hafnium oxide and other advanced dielectric insulating and conducting metal barrier materials for advanced integrated circuit manufacturing. Genus' consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On a quarterly basis, management reevaluates its estimates and judgments based on historical experience and relevant current conditions and adjusts the financial statements as required. Our global customer base consists of semiconductor and non-semiconductor manufacturers in the United States, Europe and Asia. Over the past few years we were dependent on one customer, Samsung, for a majority of our thin film product revenue. In 2003, Samsung accounted for 69% of our revenue, 58% in 2002 and 73% in 2001. There is no long-term agreement between Genus and Samsung. Over the past three years, we have gradually expanded our customer base and at the end of 2003, we had ten customers. During the fiscal year 2003, Genus increased efforts to generate revenue from service activities by providing on-site services and support for fees based on the time spent by our engineers. Currently, revenues from such services are not material, but the Company hopes to expand service revenues in the future. International revenue accounted for 77% of revenue in 2003, 72% of revenue in 2002 and 93% of revenue in 2001. We anticipate that international sales, and, in particular, sales from South Korea, will continue to account for a significant portion of our total revenue. The local currency is the functional currency for our foreign operations in South Korea and Japan. All other foreign operations are dollar denominated. Gains or losses from translation of assets and liabilities of foreign operations where the local currencies are the functional currency are included as a component of shareholders' equity and comprehensive loss. Foreign currency transaction gains and losses are recognized in the statement of operations. To date, these gains and losses have not been material. Business activity in the semiconductor and semiconductor manufacturing equipment industries has been cyclical; for this and other reasons, Genus' results of operations for the twelve months ended December 31, 2003, may not necessarily be indicative of future operating results. In order to support our business strategy and maintain our competitiveness, we will be required to make significant investments in research and development. In addition, we will need to divert additional resources to administration to comply with our reporting requirement under the Sarbanes-Oxley Act of 2002. Based on our cost structure, we believe selling, general and administrative expenses will increase slightly as sales volumes increase. We depend on increases in sales in order to attain profitability. If our sales do not increase, we may need to reduce our operating costs, which could impair our competitiveness and our future viability. 19 CRITICAL ACCOUNTING POLICIES The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and require management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which the Company believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Revenue recognition The Company derives revenue from the sale and installation of semiconductor manufacturing systems and from engineering services and the sale of spare parts to support such systems. Equipment selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. In the third quarter of 2002, the Company established verifiable objective evidence of fair value of installation services, one of the requirements for Genus to recognize revenue for multiple-element arrangements prior to completion of installation services. If a product delivered to a customer has met defined customer acceptance experience levels with both the customer and the specific type of equipment, then the Company recognizes equipment revenue upon shipment and transfer of title. A portion of revenue associated with undelivered elements such as installation and on-site support related tasks is recognized for installation when the installation is completed and the customer accepts the product and for on-site support as the support service is provided. For products that have not been demonstrated to meet product specifications for the customer prior to shipment, or where objective and reliable evidence of the fair value of the undelivered elements, such as installation is not available, revenue is recognized when installation is complete and the customer accepts the product. Revenues can fluctuate significantly as a result of the timing of customer acceptances and the applicability of multiple element accounting to products shipped in any particular period. At December 31, 2003 and 2002, the Company had deferred revenue of $331,000 and $2.7 million, respectively. Revenues from sale of spare parts are recognized when title and risk of loss passes to the customers, generally upon shipment. Revenues from engineering services are recognized as the services are completed over the duration of the contract. Accrual for warranty expenses In general, the Company's warranty period terminates for material coverage in twelve to twenty-four months and for labor coverage in twelve months after the warranty period begins, but in any event no later then twenty seven months from the product shipment date for material coverage and fifteen months for labor coverage, unless otherwise stated in the quotation. The Company provides labor for all product repairs and replacement parts, excluding consumable items, free of charge during the warranty period. Warranty expenses are accrued at the time that revenue is recognized from the sale of products. At present, based upon historical experience, the Company accrues material warranty equal to 2% and 5% of shipment value for its 200mm and 300mm products, respectively, and labor warranty equal to $20,000 per system for both its 200mm and 300mm products. At the end of every quarter, the Company reviews its actual spending on warranty and reassesses if its accrual is adequate to cover warranty expenses on the systems in the field which are still under warranty. Differences between the required accrual and recorded accrual are charged or credited to warranty expenses for the period in which such difference is determined. At December 31, 2003 and 2002, the Company had accrued $1,451,000 and $970,000, respectively, for material and labor warranty obligations. Actual results could differ from estimates. In the unlikely event that a problem is identified that would result in the need to replace components on a large scale, we would experience significantly higher expenses and our results of operations and financial condition could be materially and adversely effected. 20 Valuation of Inventories Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. We write down inventories to net realizable value based on forecasted demand and market conditions. Raw material and purchased parts include spare parts inventory for systems and was $4.6 million at December 31, 2003 and $4.5 million at December 31, 2002. The forecasted demand for spare parts takes into account the Company's obligations to support systems for periods that are as long as five years. Actual demand and market conditions may be different from those projected by the Company. This could have a material effect on operating results and financial position. At December 31, 2003 and 2002, the Company had cumulative inventory write downs of $4.8 million and $4.3 million, respectively. Valuation of research and demonstration equipment Equipment includes research and demonstration equipment, which is located in our Applications Laboratory and is used to demonstrate to our customers the capabilities of our equipment to process wafers and deposit films. The gross value of demonstration equipment is based on the cost of materials and actual factory labor and overhead expenses incurred in manufacturing the equipment. Costs related to refurbishing or maintaining existing demonstration equipment, which do not add to the capabilities or useful life of the equipment, are not capitalized and are expensed as incurred. Demonstration equipment is stated at cost and depreciated over a period of three to five years. If the Company sells the equipment, it may experience gross margins that are different from the gross margins achieved on equipment manufactured specifically for customers. RESULTS OF OPERATIONS Net Sales Revenues were $56.9 million, $39.8 million and $48.7 million in 2003, 2002, and 2001 respectively. Revenues were up 43% in 2003 from 2002 and down 18% in 2002 from 2001. Revenues in 2003 included four 300mm CVD systems, and thirteen Stratagem ALD systems of which four were for 300mm wafers and nine for 200mm wafers. Revenues in 2002 included four 200mm systems using CVD technology, four StrataGem 200mm systems, one StrataGem 200mm upgrade, two 300mm systems using CVD technology and one StrataGem 300mm system. Revenues in 2001 included seven 200mm systems using CVD technology, one 300mm system using CVD technology and four StrataGem 200mm systems. Revenues from the sale of spares, upgrades and services were $10.2 million in 2003 compared to $6.9 million in 2002 and $7.0 million in 2001. In 2003, spares revenues accounted for $4.9 million, or 9% of total revenues, upgrades revenues accounted for $4.6 million, or 8% of total revenues and service revenue accounted for $726,000, or 1% of total revenues. Export sales were 77%, 72% and 93% of total revenues in 2003, 2002 and 2001 respectively. Based on our long production cycle, our quarter-to-quarter revenues could vary significantly depending on the timing of our bookings. Gross Profit Margin Gross profit margin in 2003 was $17.6 million or 31 percent of revenues compared to gross profit margin of $10.6 million or 27 percent of revenues in 2002 and gross profit margin of $16.2 million or 33 percent of revenues in 2001. The increase in gross margins in 2003 compared to 2002 was primarily due to the following factors: - Increased manufacturing efficiencies and overall lower material costs to manufacture our CVD and ALD systems was achieved - Our revenues were higher in 2003 compared with 2002 and our fixed cost did not increase at the same rate. As a result a higher absorption was achieved from our manufacturing department's costs. - In fiscal year 2003, we recorded $466,000 in inventory provisions for spare parts compared to 2002, when we recorded $2.2 million in provisions related to inventory write-downs. The reduction in inventory write-downs in fiscal year 2003 as compared to fiscal year 2002 primarily resulted from improved inventory purchasing processes implement in fiscal year 2003. 21 The reduction in gross profit margin in 2002 compared to 2001 was due to the following factors: - Our revenues were lower in 2002 due to customer delays in purchases. Our manufacturing overheads did not decline at the rate that revenues declined. - We incurred manufacturing inefficiencies of $626,000 related to expediting components supplies and compressing processing schedules to help our customers meet their production commitments in the fourth quarter of 2002. - We recorded provisions related to inventory reserves for spare parts for our CVD equipment of $2.2 million and $317,000 in 2002 and 2001, respectively. Research and Development Research and Development (R&D) expenses were $7.6 million, $8.0 million, and $12.1 million in 2003, 2002, and 2001 respectively. As a percentage of total revenues, R&D expenses were 13 %, 20%, and 25% of total revenues in 2003, 2002, and 2001 respectively. The decrease in R&D expenses in 2003 compared to 2002 and 2001 were primarily due to tighter cost controls and lower investments in new R&D projects in 2003 as compared to 2002 and 2001. Going forward, we expect our R&D expenses to be slightly higher in 2004 due primarily to continued investment in new R&D projects. In 2004, we will continue to invest in development of new films for our advanced application in gate, DRAM and thin film head market segments. Selling, General and Administrative Selling, general and administrative (SG&A) expenses were $11.7 million, $12.6 million and $10.4 million in 2003, 2002, and 2001 respectively. As a percentage of sales, SG&A expenses were 21%, 32%, and 21% in 2003, 2002, and 2001 respectively. The reduction in the absolute level of SG&A expenses in 2003 compared to 2002 was primarily due to tighter cost controls and lower legal expenses which declined from $2.9 million in 2002 to $1.2 million in 2003. The Company incurred legal expenses related to the ASMI lawsuit, of approximately $800,000, $2.2 million and $0 in 2003, 2002 and 2001, respectively. In addition, the Company received sub-leasing revenue of $5,000, $1,000 and $596,000 in 2003, 2002, and 2001 respectively, and these were offset against the SG&A expenses in 2003, 2002, and 2001, respectively. Going forward, we expect our SG&A expenses to be higher in 2004 due primarily to increased sales commissions as well as increased administrative expenses associated with enhanced reporting requirements under the Sarbanes-Oxley Act. Interest Expense Interest expense was $1.7 million, $1.2 million and $496,000 in 2003, 2002, and 2001, respectively. The increase in 2003 was mainly due to an increase in net interest charges on bank loans of approximately $285,000, and a full year of interest cost of $1.4 million relating to the convertible notes, which were issued in August of 2002. In connection with the convertible notes, the Company expects to incur interest expense of $1.4 million in 2004. The expected interest expense includes $493,000 in interest expense related to convertibles notes interest and $943,000 related to the accretion of the value of the beneficial conversion feature and amortization of issuance costs related to the convertible notes. The increase in 2002 as compared with 2001 was due to increased levels of debt including convertible debt outstanding in 2002, as compared to 2001. In 2004, we expect to see a slight drop in interest expense due to lower debt balances. 22 Provision for Income Taxes We recorded a provision for income taxes of $228,000, $538,000 and $70,000 in 2003, 2002 and 2001, respectively, for our South Korean subsidiary. We did not record any provision for income taxes in the United States and Japan, as we incurred losses in these entities. We have provided a full valuation allowance against any future tax benefit associated with these losses given the uncertainty related to the timing and amounts of any future taxable income. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003, our cash and cash equivalents were $41.6 million, compared to $11.5 million as of December 31, 2002. At December 31, 2003, accounts receivable were $9.6 million, an increase of $2.1 million from $7.5 million as of December 31, 2002. Cash used in operating activities was $4.5 million, $11.9 million and $1.9 million in 2003, 2002 and 2001 respectively. Cash used in operating activities in 2003 consisted primarily of net loss of $3.5 million, decrease in deferred revenue of $2.4 million, decrease in customer advance of $1.4 million, decrease in accounts payable of $1.5 million and increase in accounts receivable of $2.1 million, partially offset by increase in accrued expenses of $1.1 million and depreciation of $3.3 million. Cash used in operating activities in 2002 consisted primarily of net loss of $11.6 million, decreases in deferred revenues of $4.7 million and accounts payable of $1.9 million, and an increase in accounts receivable of $3.2 million, partially offset by depreciation of $3.7 million, provision for excess and obsolete inventory at $2.2 million and an increase in customer advances of $1.8 million. Cash used by operating activities totaled $1.9 million 2001, and consisted primarily of net loss of $6.7 million and decreases in deferred revenues of $11.2 million, partially offset by depreciation of $3.0 million and reductions in receivables of $4.2 million and reductions in inventories of $9.2 million. Inventory reductions were primarily related to improved supply chain management decreases in inventory held at customer sites from $9.5 million to $5.1 million and to reductions in shipment backlog, which reduced from $8.4 million at the end of December 2000 to $3.2 million on December 31, 2001. Financing activities provided cash of $37.4 million, $21.0 million, and $9.4 million in 2003 2002, and 2001 respectively. In November 2003, the Company issued 6.4 million shares of common stock under a private placement and received proceeds, net of issuance costs, of $31.8 million. In addition, the Company received $4.9 million from warrants exercises and $2.2 million from stock option exercises and the issuance of shares under the Genus Employee Stock Purchase Plan which was partially offset by payment of debt of $1.6 million. In January 2002, the Company received net proceeds of $7.8 million in a private placement. In August 2002, the Company received $7.0 million, net of issuance costs, from the sale of subordinated convertible notes and warrants. In addition, the Company received $1.8 million from warrant exercises and $654,000 from stock option exercises and the employee stock purchase plan. Financing activities provided cash of $9.4 million for 2001. In May 2001, we received approximately $6.9 million of net proceeds from the sale of 2.5 million shares of our common stock and warrants for 1.3 million additional shares of our common stock. Additionally, we increased our net short-term borrowings by $1.8 million. 23 We had capital expenditures of approximately $2.8 million, $786,000,and $7.4 million in 2003, 2002 and 2001 respectively. These were primarily related to the continuing program of upgrading existing equipment in our development and applications laboratories to meet our most advanced system capabilities and specifications, especially for our ALD processes. This has improved our product and film development capabilities, and increased our customer demonstration capabilities, which is critical in the sales process. Our primary source of funds at December 31, 2003 consisted of $41.6 million in cash and cash equivalents, and $9.6 million of accounts receivable, most of which we have collected or expect to collect during the three months ending March 31, 2004. Significant financing transactions completed since December 31, 2001 include the following: On December 20, 2001 and as amended on March 27, 2002 and March 20, 2003, we maintained line of credit facilities from Silicon Valley bank for $15.0 million, secured against eligible receivables and inventory. The interest rate is prime plus 1.75% per annum and the facility expires on June 29, 2004. The loan is collateralized by a first priority perfected security interest in our assets and has a covenant requiring us to maintain a minimum tangible net worth (calculated as the excess of total assets over total liabilities adjusted to exclude intangible assets and balances receivable from officers or affiliates and to exclude debt subordinated to Silicon Valley Bank) of $15 million. As of December 31, 2003, there was $6.5 million outstanding under this credit facility which has been classified as a current liability in our accompanying balance sheet. On January 4, 2002, we received gross proceeds of $1.2 million under a secured loan with CitiCapital, a division of Citigroup. The loan is payable over 36 months, accrues interest of 8.75% per annum and is secured by two systems in our demonstration lab. There was a $249,000 outstanding balance under this agreement at December 31, 2003. A summary of our contractual obligations as of December 31, 2003 is as follows (amounts in thousands):
Less than After 5 Total Revolving 1 year 1-3 years 4-5 years years ------- ---------- ---------- ---------- ---------- -------- Silicon Valley Bank $ 6,500 $ 6,500 $ 0 $ 0 $ 0 $ 0 Citicapital 249 0 249 0 0 0 Convertible Notes* 6,975 0 0 6,975 0 0 Operating Leases 16,774 N/A 1,700 3,525 3,729 7,820 ------- ---------- ---------- ---------- ---------- -------- $30,498 $ 6,500 $ 1,949 $ 10,500 $ 3,729 $ 7,820 ======= ========== ========== ========== ========== ======== *In the event of a change of control in the Company, the note holder may elect to receive repayment of the notes at a premium of 10%
At December 31, 2003, the Company had approximately $ 5.5 million in open purchase order obligations. 24 We believe that our existing working capital, credit lines and cash from operations will be sufficient to satisfy our cash needs for the next 12 months. Accordingly, these financial statements have been prepared on a going concern basis. We are actively marketing our existing and new products, which we believe will ultimately lead to profitable operations. Management believes that the cash resources and borrowing capacity will be sufficient to meet projected working capital, capital expenditures and other cash requirements for the next twelve months. However, there can be no assurance the currently available funds will meet the company's cash requirements in the future, or, that any required additional funding will be available on terms attractive to us or at all, which could have a material adverse affect on our business, financial condition and results of operations. Any additional equity financing may be dilutive to shareholders, and any additional debt financing, if available, may involve restrictive covenants. RELATED PARTY TRANSACTIONS Mario Rosati, a director of the Company, is also a partner of Wilson Sonsini Goodrich & Rosati, the general counsel of the Company. In 2003, 2002 and 2001, the Company incurred $259,000, $630,000 and $781,000 in legal costs, respectively, and paid approximately $490,000, $1.1 million and $57,000, respectively, to Wilson Sonsini Goodrich & Rosati. At December 31, 2003, the Company owed approximately $67,000 to Wilson Sonsini Goodrich & Rosati. Our business activities with Wilson Sonsini Goodrich & Rosati are at arms length. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21(EITF 00-21), Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The consensus mandates how to identify whether goods or services or both which are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are "separate units of accounting." The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or patterns of revenue recognition of individual items accounted for separately. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. Additionally, companies are permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. The Company adopted EITF 00-21 during the third quarter of 2003 and the adoption did not result in any material impact on our financial position, cash flows or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting of derivative instruments and hedging activities under SFAS No. 133. The amendments pertain to decisions made: (i) as part of the Derivatives Implementation Group process that require amendment to SFAS 133, (ii) in connection with other FASB projects dealing with financial instruments, and (iii) in connection with the implementation issues raised related to the application of the definition of a derivative. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for designated hedging relationships after June 30, 2003. SFAS 149 will be applied prospectively. The Company adopted SFAS 149 during the third quarter of 2003 and the adoption did not result in any material impact on our financial position, cash flows or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes standards for how an issuer classifies and measures certain 25 financial instruments with characteristics of both liabilities and equity and further requires that an issuer classify as a liability (or an asset in some circumstances) financial instruments that fall within its scope because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments as they relate to minority interest in consolidated finite-lived entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company adopted SFAS 150 during the third quarter of 2003 and the adoption did not result in any material impact on our financial position, cash flows or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities - an interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first reporting period beginning after June 15, 2004. The Company believes that the adoption of this standard will have no material effect on our consolidated financial statements. RISK FACTORS You should carefully consider the following risks before making an investment decision in our common stock. The risks described below are not the only risks that we face. Additional risks and uncertainties not presently known to us, or that are currently deemed immaterial may also impair our business operations. Our business, operating results or financial condition could be harmed by, and the trading price of our common stock could decline due to any of those risks and you may lose all or part of your investment. You should also refer to the other information and our financial statements included in this Annual Report on Form 10K and the related information incorporated by reference into this Annual Report on Form 10K. WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY We have experienced losses of $3.5 million, $11.6 million and $6.7 million for 2003, 2002 and 2001, respectively. While we believe our cash position, anticipated cash from operations, and our available credit facilities are sufficient for the next twelve months, we cannot provide assurances that future cash flows from operations will be sufficient to meet operating requirements and allow us to service debt and repay any underlying indebtedness at maturity. If we do not achieve the cash flows that we anticipate, we may not be able to meet our planned product release schedules and our forecast sales objectives. In such event we will require additional financing to fund on-going and planned operations and may need to implement further expense reduction measures, including, but not limited to, the sale of assets, the consolidation of operations, workforce reductions, and/or the delay, cancellation or reduction of certain product development, marketing, licensing, or other operational programs. Some of these measures would require third-party consents or approvals, including that of our bank, and we cannot provide assurances that these consents or approvals will be obtained. There can be no assurance that we will be able to make additional financing arrangements on satisfactory terms, if at all, and our operations and liquidity would be materially adversely affected. We cannot assure our shareholders and investors that we will achieve profitability in fiscal 2004 and beyond, nor can we provide assurances that we will achieve the sales necessary to avoid further expense reductions in the future. 26 SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE COMPANIES In 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies, Inc., HGST (formerly IBM), and Western Digital (formerly Read-Rite Corporation) accounted for 69%, 8%, 7%, 7%, and 4% of revenues, respectively. In 2002, Samsung Electronics Company, Ltd., Seagate Technologies, Inc., IBM, and Asuka Project accounted for 58%, 24%, 7%, and 6% of revenues, respectively. In 2001, Samsung Electronics Company, Ltd, Read-Rite Corporation, NEC, Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. The semiconductor manufacturing industry generally consists of a limited number of larger companies. Consequently, we expect that a significant portion of our future product sales will continue to be concentrated within a limited number of customers, even though we are making progress in reducing the concentration of our reliance on these customers through our strategy of product and customer diversification. None of our customers have entered into a long-term agreement with us requiring them to purchase our products. In addition, sales to these customers may decrease in the future when they complete their current semiconductor equipment purchasing requirements. If any of our customers were to encounter financial difficulties or become unable to continue to do business with us at or near current levels, our business, results of operations and financial condition could be materially harmed. Customers may delay or cancel orders or may stop doing business with us for a number of reasons including: - customer departures from historical buying patterns; - general market conditions; - economic conditions; or - Competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing integrated circuits. WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS. We rely on third parties to manufacture the components used in our products. Some of our suppliers are sole or limited source. In addition, some of these suppliers are relatively small-undercapitalized companies that may have difficulties in raising sufficient funding to continue operations. There are risks associated with the use of independent suppliers, including unavailability of or delays in obtaining adequate supplies of components and potentially reduced control of quality, production costs and timing of delivery. We may experience difficulty identifying alternative sources of supply for certain components used in our products. In addition, the use of alternate components may require design alterations, which may delay installation and increase product costs. These components may not be available in the quantities required, on reasonable terms, or at all. Financial or other difficulties faced by our suppliers or significant changes in demand for these components or materials could limit their availability. Any failures by these third parties to adequately perform may impair our ability to offer our existing products, delay the submission of products for regulatory approval, and impair our ability to deliver products on a timely basis or otherwise impair our competitive position. Establishing our own capabilities to manufacture these components would be expensive and could significantly decrease our profit margins. Our business, results of operations and financial condition would be adversely affected if we were unable to continue to obtain components in the quantity and quality desired and at the prices we have budgeted. WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES Export sales accounted for approximately 77%, 72% and 93% of our total net sales in 2003, 2002 and 2001, respectively. Net sales to our South Korean-based customers accounted for approximately 68%, 56% and 73% of total net sales in 2003, 2002 and 2001, respectively. We anticipate that international sales, including sales to South 27 Korea, will continue to account for a significant portion of our net sales. As a result, a significant portion of our net sales will be subject to risks, including: - unexpected changes in foreign law or regulatory requirements; - exchange rate volatility; - tariffs and other barriers; - political and economic instability; - military confrontation; - difficulties in accounts receivable collection; - difficulties in managing distributors or representatives; - difficulties in staffing our subsidiaries; - difficulties in managing foreign subsidiary operations; and - potentially adverse tax consequences. Our foreign sales are primarily denominated in U.S. dollars and we do not engage in hedging transactions. As a result, our foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could increase the cost of our products to our customers and could lead these customers to delay or defer their purchasing decisions. Wherever currency devaluations occur abroad, our goods become more expensive for our customers in that country. In addition, difficult economic conditions may limit capital spending by our customers. These circumstances may also affect the ability of our customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO FAIL TO ACHIEVE ANTICIPATED SALES Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. Although we are marketing our atomic layer deposition technology to non-semiconductor markets such as markets in magnetic thin film heads, flat panel displays, micro-electromechanical systems and inkjet printers, we are still dependent on sales to semiconductor manufacturers. The semiconductor industry is cyclical which impacts the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have significantly decreased our revenues, operating margins and results of operations in the past. During the industry downturn in 1998, several of our customers delayed or cancelled investments in new manufacturing facilities and equipment due to declining DRAM prices, the Asian economic downturn, and general softening of the semiconductor market. This caused our sales in 1998 to be significantly lower than in the prior three years. After the dramatic industry boom for semiconductor equipment that peaked early in the year 2000, another cyclical downturn occurred from year 2000 to around year 2003. The sharp and severe industry downturn in 2001 was the largest in the industry's history. Almost all previous downturns have been solely due to pricing declines. However, the 2001 downturn in the industry marked a corresponding decline in unit production, as well as price reduction. OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW PRODUCTS AND MARKET ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE PRODUCTS We believe that our future growth will depend in large part upon the acceptance of our new thin films and processes, especially our atomic layer deposition technology. As a result, we expect to continue to invest in research 28 and development in these new thin films and the systems that use these films. There can be no assurance that the market will accept our new products or that we will be able to develop and introduce new products or enhancements to our existing products and processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so, or even a delay in our introduction of new products or enhancements, could harm our business, financial condition and results of operations. We must manage product transitions successfully, as introductions of new products could harm sales of existing products. We derive our revenue primarily from the sale of equipment used to chemically deposit tungsten silicide in the manufacture of memory chips. We estimate that the life cycle for these tungsten silicide deposition systems is three-to-ten years. There is a risk that future technologies, processes or product developments may render our product offerings obsolete and we may not be able to develop and introduce new products or enhancements to our existing products in a timely manner or at all. WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES The semiconductor manufacturing capital equipment industry is highly competitive. We face substantial competition throughout the world. We believe that to remain competitive, we will require significant financial resources to develop new products, offer a broader range of products, establish and maintain customer service centers and invest in research and development. Many of our existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing, customer service capabilities and greater name recognition. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. If our competitors enter into strategic relationships with leading semiconductor manufacturers covering thin film products similar to those sold by us, it would materially adversely affect our ability to sell our products to such manufacturers. In addition, to expand our sales we must often replace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that will offer price or performance features that are superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their product lines. We may not be able to maintain or expand our sales if our resources do not allow us to respond effectively to such competitive forces. WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven system performance. Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this vendor of choice for the specific production line application. To do otherwise creates risk for the manufacturer because the manufacture of a semiconductor requires many process steps and a fabrication facility will contain many different types of machines that must work cohesively to produce products that meet the customers' specifications. If any piece of equipment fails to perform as expected, the customer could incur significant costs related to defective products, production line downtime, or low production yields. 29 Since most new fabrication facilities are similar to existing ones, semiconductor manufacturers tend to continue using equipment that has a proven track record. Based on our experience with major customers like Samsung, we have observed that once a particular piece of equipment is selected from a vendor, the customer is likely to continue purchasing that same piece of equipment from the vendor for similar applications in the future. Our customer list, though limited, has expanded in recent months. Yet our broadening market share remains at risk due to choices made by customers that continue to be influenced by pre-existing installed bases by competing vendors. Consequently, our penetrating these markets and our ability to get additional orders may be limited. A semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, we may face narrow windows of opportunity to be selected as the "vendor of choice" by potential new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are not able to achieve broader market acceptance of our systems and technology, we may be unable to grow our business and our operating results and financial condition will be harmed. OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF OUR REVENUE Sales of our systems depend upon the decision of a prospective customer to increase manufacturing capacity. That decision typically involves a significant capital commitment by our customers. Accordingly, the purchase of our systems typically involves time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers' manufacturing facilities. For many potential customers, an evaluation as to whether new semiconductor manufacturing equipment is needed typically occurs infrequently. Following an evaluation by the customer as to whether our systems meet its qualification criteria, we have experienced in the past and expect to experience in the future delays in finalizing system sales while the customer evaluates and receives approval for the purchase of our systems and constructs a new facility or expands an existing facility. Due to these factors, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort. The time between our first contact with a customer and the customer placing its first order typically lasts from nine to twelve months and is often longer. This lengthy sales cycle makes it difficult to accurately forecast future sales and may cause our quarterly and annual revenue and operating results to fluctuate significantly from period to period. If anticipated sales from a particular customer are not realized in a particular period due to this lengthy sales cycle, our operating results may be adversely affected for that period. IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED. From time to time, we may receive notices from third parties alleging infringement of patents or intellectual property rights. It is our policy to respect all parties' legitimate intellectual property rights, and we will defend against such claims or negotiate licenses on commercially reasonable terms where appropriate. However, no assurance can be given that we will be able to negotiate any such necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our business and financial results. Litigation is time consuming, expensive and its outcome is uncertain. We may not prevail in any litigation in which we are involved. Should we be found to infringe any of the patents asserted or any other intellectual property rights of others, in addition to potential monetary damages and any injunctive relief granted, we may need either to obtain a license to commercialize our products or redesign our products so they do not infringe any third party's 30 intellectual property. If we are unable to obtain a license or adopt a non-infringing product design, we may not be able to proceed with development, manufacture and sale or our atomic layer products. In this case our business may not develop as planned, and our results could materially suffer. On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's Complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASMA claims to own or exclusively license. The Complaint seeks monetary and injunctive relief. Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are invalid, unenforceable, and not infringed by Genus; and (3) antitrust violations. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the Court issued an order granting ASMA leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASMA claims to own. The Court also severed and stayed discovery and trail of Genus' antitrust claims until after the trial of the patent claims. On February 4, 2002, Genus served its Amended Answer to ASMA's amended complaint and counterclaimed against ASMA for declaratory judgment that the '165 Patent is invalid, unenforceable, and not infringed by Genus. On August 15, 2002, the Court issued a claim construction order regarding the '590, '365, and 598' Patents. A claim construction hearing regarding the '165 Patent was held on September 26, 2002, and the Court issued a claim construction ruling regarding this patent on November 13, 2002. On September 23, 2002 Genus filed motions for summary judgment on noninfringement regarding the '590 and '365 Patents. On November 20, 2002, the Court granted the Genus motion for summary judgment on noninfringement of the '365 Patent. On January 10, 2003, the Court granted Genus' motion for summary judgment on the '590 Patent. On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement"). Under the terms of the Settlement, Genus gained a royalty-free license to each of the patents ASMI asserted in the litigation, including both ALD patents as well as Patent '165. By specific agreement of the parties, these licenses are applicable to Genus' successors and affiliates. Genus has likewise obtained a covenant from ASMI that it will not sue Genus for patent infringement or antitrust violations for the next five years. In return, Genus has granted ASMI and its successors and affiliates a royalty-free license to the patent Genus asserted in the litigation, Patent '568, and has agreed to dismiss its antitrust claims against ASMI. Genus has also agreed not to sue ASMI for patent infringement or antitrust violations for the next five years. No payments have been made by either Genus or ASMI in exchange for these licenses and the covenant not to sue. However, under the terms of the Settlement, ASMI has the right to pursue an appeal of the District Court's judgments of non-infringement regarding the ALD patents. The agreement specifies that if the Federal Circuit vacates either of the existing judgments related to the ALD patents based on a change in the District Court's claim construction, Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents it has been granted under the agreement. We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES 31 We are highly dependent on key personnel to manage our business, and their knowledge of business, management skills and technical expertise would be difficult to replace. Our success depends upon the efforts and abilities of Dr. William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E. Seidel, our chief technology officer, and other key managerial and technical employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel or other key employees could limit or delay our ability to develop new products and adapt existing products to our customers' evolving requirements and would also result in lost sales and diversion of management resources. None of our executive officers are bound by a written employment agreement, and the relationships with our officers are at will. Because of competition for additional qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products. Our growth depends on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, technical, financial, sales and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. Competition for such personnel is intense, particularly in the San Francisco bay area where we are based. If we are unable to retain our existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to customers, or fail to meet delivery commitments or experience deterioration in service levels or decreased customer satisfaction. OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL LIABILITY TO US We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations. If we fail to comply with present or future regulations, we could be subject to substantial liability for clean up efforts, property damage, personal injury and fines or suspension or cessation of our operations. We use the following regulated gases at our manufacturing facility in Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen. We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The city of Sunnyvale, California, imposes high environmental standards to businesses operating within the city. Genus has received an operating license from Sunnyvale. Presently, our compliance record indicates that our methods and practices successfully meet standards. Moving forward, if we fail to continuously maintain high standards to prevent the leakage of any toxins from our facilities into the environment, restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses. WE DEPEND UPON FIVE INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US We currently sell and support our thin film products through direct sales and customer support organizations in the United States, Europe, South Korea and Japan and through five independent sales representatives and distributors in the United States, Europe, South Korea, Taiwan, Singapore and Malaysia. We do not have any long-term contracts with our sales representatives and distributors. Any disruption or termination of our existing distributor relationships could negatively impact sales and revenue. WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE In 2000, we invested significant resources in Japan by establishing a direct sales organization, Genus-Japan, Inc. To date, we have had limited success in penetrating in Japanese semiconductor industry. Although we continue 32 to invest significant resources in our Japan office, we may not be able to attract new customers in the Japanese semiconductor industry, and as a result, we may fail to yield a profit or return on our investment in our office in Japan. THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR TO SECURITIES LITIGATION Our common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in our, our competitors or our customers' actual or anticipated financial results, our competitors or our customers' announcements of technological innovations, revenue recognition policies, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which we do business, may adversely affect the market price of our common stock. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A disaster could severely damage our ability to deliver our products to our customers. Our products depend on our ability to maintain and protect our operating equipment and computer systems, which are primarily located in or near our principal headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake fault zone. Although our facilities are designed to be fault tolerant, the systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events. Although we maintain general business insurance against interruptions such as fires and floods, there can be no assurance that the amount of coverage will be adequate in any particular case. WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND WARRANTS AND SUCH ISSUANCE WILL DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS As of February 29, 2004, we had approximately of 3,949,000 shares of common stock underlying warrants and outstanding employee stock options. Of the stock options, 1,824,000 shares were exercisable as of February 29, 2004. All of the shares underlying the warrants are currently exercisable. Some warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that we issue new shares at a price lower than the exercise price of the warrants, where we make a distribution of common stock to our shareholders or effect a reclassification. If all of the shares underlying the exercisable options and warrants were exercised and sold in the public market, the value of your current holdings in Genus may decline because there may not be sufficient demand to purchase the increased number of shares that would be available for sale. WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR PERCENTAGE OWNERSHIP OF GENUS STOCK On September 7, 2000, the Company's Board of Directors declared a dividend pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar earlier plan that had expired on July 3, 2000. The intended purpose of the Rights Plan is to protect shareholders' rights and to maximize share value in the event of an unfriendly takeover attempt. As of the record date of October 13, 2000, each share of common stock of Genus, Inc. outstanding was granted one right under the new plan. Each right is exercisable only under certain circumstances and upon the occurrence of certain events and permits the holder to purchase from the Company one one-thousandth (0.001) of a share of Series C Participating Preferred Stock at an initial exercise price of forty dollars ($40.00) per one one-thousandth share. The 33 2,000 shares of Series C preferred stock authorized in connection with the Rights Plan will be used for the exercise of any preferred shares purchase rights in the event that any person or group (the Acquiring Person) acquires beneficial ownership of 15% or more of the outstanding common stock. In such event, the shareholders (other than the Acquiring Person) would receive common stock of the Company having a market value of twice the exercise price. Subject to certain restrictions, the Company may redeem the rights issued under the Rights Plan for $0.001 per right and may amend the Rights Plan without the consent of rights holders. The rights will expire on October 13, 2010, unless redeemed by the Company. In the event that circumstances trigger the transferability and exercisability of rights granted in our Rights Plan, your current holdings in Genus may decline as a result of dilution to your percentage ownership in Genus or as a result of a reduction in the per share value of our stock resulting from the increase in the number of outstanding shares available and your failure to exercise your rights under the Rights Plan. In the event of a change of control of the Company, the convertible note holders may elect to receive repayment of the notes at a premium of 10% over face value of the notes. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding, among other items, our business strategy, growth strategy and anticipated trends in our business. We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission or otherwise. When we use the words "believe," "expect," "anticipate," "project" and similar expressions, this should alert you that this is a forward-looking statement. We base these forward-looking statements on our expectations. They are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report on Form 10-K, and in documents incorporated therein, including those set forth above in "Risk Factors," describe factors, among others, that could contribute to or cause these differences. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Annual Report on Form 10-K will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------------------------------------------------------------------------- Approximately 83.8% of our revenues are U.S. dollar denominated sales. Consequently, fluctuations in our exchange rate could make our products relatively more expensive to our customers, which could lead to reduced demand for our products. Similarly, 16.2 % of our sales are denominated in non-U.S. based currencies. As exchange rates fluctuate, our revenues from sales of foreign currency denominated products will fluctuate which could have an adverse impact on our margins. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, reduce the demand for our products. Reduced demand for our products could materially adversely affect our business, results of operations and financial condition. We have both fixed rate and floating rate interest obligations. Fixed rate obligations may result in interest expenses in excess of market rates if interest rates fall, while floating rate obligations may result in additional 34 interest costs if interest rates rise. An increase of one percentage point in interest rates would not materially impact the results of our operations. At any time, fluctuations in interest rates could affect interest earnings on our cash, cash equivalents or increase any interest expense owed on the line of credit facility. We believe that the effect, if any, of reasonably possible near term changes in interest rates on our financial position, results of operations and cash flows would not be material. Currently, we do not hedge these interest rates exposures. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------------------------- The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP, independent auditors dated March 11, 2004, are included in a separate section of this Annual Report. SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA (UNAUDITED) The following table presents our unaudited consolidated statements of operations data for each of the eight quarters in the period ended December 31, 2003 In our opinion, this information has been presented on the same basis as the audited consolidated financial statements included in a separate section of this report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicated of results for any future period. We expect our quarterly operating results to fluctuate in future periods due to a variety of reasons, including those discussed in "Business Risks."
FIRST QTR SECOND QTR THIRD QTR FOURTH QTR ------------- ----------- ------------ ---------- (UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA) 2003 Revenues $ 17,695 $ 14,739 $ 9,107 $ 15,320 Gross profit 6,118 3,926 2,058 5,510 Net Income (loss) 408 (1,358) (2,837) 268 Basic net Income (loss) per share $ 0.01 $ (0.05) $ (0.09) $ 0.01 Diluted net Income (loss) per share $ 0.01 $ (0.05) $ (0.09) $ 0.01 2002 Revenues $ 9,591 $ 6,743 $ 12,153 $ 11,280 Gross profit 2,124 1,573 4,327 2,600 Net loss (3,752) (3,609) (1,575) (2,684) Basic net loss per share $ (0.15) $ (0.13) $ (0.06) $ (0.09) Diluted net loss per share $ (0.15) $ (0.13) $ (0.06) $ (0.09)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE - --------------------- None. 35 ITEM 9A. CONTROLS AND PROCEDURES - ------------------------------------ EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the fiscal 2002 financial reporting process, management, in consultation with the Company's independent auditors, identified deficiencies involving internal controls over inventories, warranties and the Company's Korean operations which constituted a "Reportable Condition" under standards established by the American Institute of Certified Public Accountants. Management believes that these matters have not had any material impact on our financial statements. Management established a project plan and implemented processes and controls to address these deficiencies in fiscal year 2003. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all potential frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Genus have been detected. 36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------------- Information about the Directors of the Company, including Company's audit committee financial expert is incorporated by reference from our proxy statement for the 2004 Annual Meeting of Shareholders filed with the SEC (the "Proxy Statement") under the heading "Election of Directors". Information about Section 16 reporting compliance is incorporated by reference to the Proxy Statement under the heading "Section 16 Beneficial Ownership Reporting Compliance." Information about our Code of Conduct is incorporated by reference to the Proxy Statement under the heading "Protocol." Information regarding our Executive Officers is set forth in Part I of this Form 10-K under the caption "Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION - ---------------------------------- The information required by this Item is incorporated by reference to "Board of Directors and Committees," "Summary Compensation Table," "Stock Options and Stock Appreciation Rights" and "Retirement Benefits" in the Company's Proxy Statement ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------------------------------------------------------------------------------- The information required by this Item is incorporated by reference to "Information Relating to Directors, Nominees and Executive Officers" in the Company's Proxy Statement ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------------- The information required by this Item is incorporated by reference to "Certain Transactions" in the Company's Proxy Statement ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - -------------------------------------------------------- The information required by this Item is incorporated by reference to "Principal Accountant Fees and Services" in the Company's definitive Proxy Statement. 37 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------------- (a) The following documents are filed as a part of this Report: 1. Consolidated Financial Statements. Report of Independent Auditors Consolidated Balance Sheets - December 31, 2003 and 2002 Consolidated Statements of Operations - Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Shareholders' Equity and Comprehensive Loss - Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002 and 2001 Notes to the Consolidated Financial Statements 2. Financial Statement Schedule. Schedule II "Valuation and Qualifying Accounts" 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. (b) Reports on Form 8-K The following reports on Form 8-K were filed or furnished during the quarter ended December 31, 2003: 1) A Report on Form 8-K was filed on November 10, 2003, reporting under Item 5 the announcement of the private placement transaction closed November 7, 2003. 2) A Report on Form 8-K was furnished on October 28, 2003 reporting under Item 7 and Item 12 financial results for the fiscal quarter ended September 30, 2003. (c) Financial Statement Schedule 11 - Valuation and Qualifying Accounts (See page 64) (d) Exhibits: For a list of exhibits filed with this Form 10-K, refer to the exhibit index beginning on page 65 38 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Genus, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a)(1) present fairly, in all material respects, the financial position of Genus, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------- PricewaterhouseCoopers LLP San Jose, California March 11, 2004 39
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, ---------------------- 2003 2002 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,608 $ 11,546 Accounts receivable (net of allowances for doubtful accounts of $0 in 2003 and $69 in 2002, respectively) . . . . . . . . . . . . . . . . . . . 9,606 7,505 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,783 11,405 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854 1,336 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,851 31,792 Equipment, furniture and fixtures, net . . . . . . . . . . . . . . . . . . . . . . . 8,748 8,661 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,169 1,057 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,768 $ 41,510 ========== ========== LIABILITIES Current Liabilities: Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,500 $ 7,813 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,956 6,498 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,130 3,064 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 2,713 Customer advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 1,809 Long term liabilities, current portion . . . . . . . . . . . . . . . . . . . . . . . 249 245 ---------- ---------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,538 22,142 Convertible notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,806 5,301 Long term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 270 ---------- ---------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,344 27,713 ---------- ---------- Commitments and contingencies (Note 7) SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized 2,000 shares; Issued and outstanding, none. . . . . . . . . . . . . . . . . - - Common stock, no par value: Authorized 100,000 shares on December 31, 2003 and 50,000 shares on December 31 2002; Issued and outstanding, 39,554 shares in 2003 and 28,621 shares in 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,061 123,890 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111,328) (107,809) Note receivable from shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . (187) (151) Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . (2,122) (2,133) ---------- ---------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,424 13,797 ---------- ---------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . $ 71,768 $ 41,510 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 40
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 -------- --------- -------- Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $56,861 $ 39,767 $48,739 Costs and expenses: Cost of goods sold. . . . . . . . . . . . . . . . . . . . 39,249 29,143 32,500 Research and development. . . . . . . . . . . . . . . . . 7,597 8,011 12,118 Selling, general and administrative . . . . . . . . . . . 11,741 12,621 10,381 -------- --------- -------- Loss from operations. . . . . . . . . . . . . . . . . . . . (1,726) (10,008) (6,260) Interest expense. . . . . . . . . . . . . . . . . . . . . . (1,723) (1,237) (496) Interest income . . . . . . . . . . . . . . . . . . . . . . 56 83 75 Other income, net . . . . . . . . . . . . . . . . . . . . . 102 80 85 -------- --------- -------- Loss before provision for income taxes. . . . . . . . . . . (3,291) (11,082) (6,596) Provision for income taxes. . . . . . . . . . . . . . . . . 228 538 70 -------- --------- -------- Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(3,519) $(11,620) $(6,666) ======== ========= ======== Per share data: Basic and diluted net loss per share. . . . . . . . . . . . $ (0.11) $ (0.43) $ (0.31) ======== ========= ======== Shares used to compute basic and diluted net loss per share 31,303 26,934 21,163 ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 41
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS (IN THOUSANDS) NOTES RETAINED OTHER TOTAL COMMON STOCK RECEIVABLE EARNINGS COMPRE- SHARE- ---------------- FROM (ACCUMULATED HENSIVE HOLDERS SHARES AMOUNT SHAREHOLDERS DEFICIT) LOSS EQUITY ------ -------- -------------- -------------- --------- --------- Balances, December 31, 2000. . . . . 19,319 $102,837 $ 0 $ (89,523) $ (2,022) $ 11,292 Issuance of shares of common stock and warrants to purchase common stock under private placement, net of issuance cost of $725. . . . . . . . . . . . . 2,542 6,900 0 0 0 6,900 Issuance of shares of common stock under stock option plan. . . . . 243 521 (151) 0 0 370 Issuance of shares of common stock under employee stock purchase plan . . . . . . . . . . . . . . 261 417 0 0 0 417 Stock-based compensation . . . . . 0 78 0 0 0 78 Net loss . . . . . . . . . . . . . 0 0 0 (6,666) 0 Translation adjustments. . . . . . 0 0 0 0 (263) Comprehensive loss . . . . . . . . . 0 0 0 0 0 (6,929) ------ -------- -------------- -------------- --------- --------- Balances, December 31, 2001. . . . . 22,365 110,753 (151) (96,189) (2,285) 12,128 Issuance of shares of common stock and warrants to purchase common stock under private placement, net of issuance costs of $447. . 3,871 7,750 0 0 0 7,750 Value of warrants related to the issuance of 7% convertible notes and warrants . . . . . . . . . . 0 1,312 0 0 0 1,312 Value of beneficial conversion feature related to the issuance of 7% convertible notes and warrants . . . . . . . . . . 0 928 0 0 0 928 Issuance of warrants . . . . . . . 0 54 0 0 0 54 Exercise of warrants . . . . . . . 1,536 1,764 0 0 0 1,764 Conversion of notes payable to shares of common stock . . . . . 490 675 0 0 0 675 Issuance of shares of common stock under stock option plan. . . . . 159 324 0 0 0 324 Issuance of shares of common stock under employee stock purchase plan . . . . . . . . . . . . . . 200 330 0 0 0 330 Net loss. . . . . . . . . . . . . 0 0 0 (11,620) 0 Translation adjustments. . . . . . 0 0 0 0 152 Comprehensive loss . . . . . . . . . 0 0 0 0 0 (11,468) ------ -------- -------------- -------------- --------- --------- Balances, December 31, 2002. . . . . 28,621 $123,890 ($151) ($107,809) ($2,133) $ 13,797 ====== ======== ============== ============== ========= =========
42
NOTES RETAINED OTHER TOTAL COMMON STOCK RECEIVABLE EARNINGS COMPRE- SHARE- ---------------- FROM (ACCUMULATED HENSIVE HOLDERS SHARES AMOUNT SHAREHOLDERS DEFICIT) LOSS EQUITY ------ -------- -------------- ----------- --------- -------- Balances, December 31, 2002 . . . . . . . 28,621 $123,890 $ (151) $ (107,809) $ (2,133) $13,797 Issuance of shares of common stock under private placement, net of issuance costs of $1.8 million 6,400 31,828 0 0 0 31,828 Exercise of warrants. . . . . . . . . . 3,094 4,946 0 0 0 4,946 Conversion of notes payable to shares of common stock. . . . . . . . 120 150 0 0 0 150 Interest from notes receivable. . . . . 0 0 (36) 0 0 (36) Issuance of shares of common stock under stock option plan . . . . . . . 1,143 1,887 0 0 0 1,887 Issuance of shares of common stock under employee stock purchase plan. . . . . . . . . . . . . . . . . 176 360 0 0 0 360 Net loss . . . . . . . . . . . . . . . 0 0 0 (3,519) 0 0 Translation adjustments . . . . . . . . 0 0 0 0 11 Comprehensive loss. . . . . . . . . . . 0 0 0 0 0 (3,508) ------ -------- -------------- ----------- --------- -------- Balances, December 31, 2003 . . . . . . . 39,554 $163,061 ($187) ($111,328) ($2,122) $49,424 ======== ======== ============== =========== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 43
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, ------------------------------- 2003 2002 2001 --------- --------- --------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,519) $(11,620) $ (6,666) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization. . . . . . . . . . . . . . . 3,287 3,748 3,034 Provision for excess and obsolete inventories and lower of cost or market. . . . . . . . . . . . . . . . . 466 2,190 317 Provision for doubtful accounts. . . . . . . . . . . . . . 40 5 0 Amortization of deferred finance costs . . . . . . . . . . 943 525 0 Write off of fixed assets. . . . . . . . . . . . . . . . . 140 72 0 Stock-based compensation . . . . . . . . . . . . . . . . . 0 0 78 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . . . (2,141) (3,248) 4,217 Inventories. . . . . . . . . . . . . . . . . . . . . . . 945 1,647 8,884 Other assets . . . . . . . . . . . . . . . . . . . . . . (409) 26 (512) Accounts payable . . . . . . . . . . . . . . . . . . . . (1,542) (1,854) (295) Accrued expenses . . . . . . . . . . . . . . . . . . . . 1,066 (489) 238 Deferred revenue . . . . . . . . . . . . . . . . . . . . (2,382) (4,675) (11,174) Customer advances. . . . . . . . . . . . . . . . . . . . (1,437) 1,809 0 --------- --------- --------- Net cash used in operating activities. . . . . . . . . . (4,543) (11,864) (1,879) --------- --------- --------- Cash flows from investing activities: Acquisition of equipment, furniture and fixtures . . . . . . (2,573) (502) (7,400) Acquisition of Intangible assets . . . . . . . . . . . . . . (275) (284) 0 --------- --------- --------- Net cash used in investing activities. . . . . . . . . . . . . (2,848) (786) (7,400) --------- --------- --------- Cash flows from financing activities: Issuance of convertible notes and warrants net of cash issuance costs of $814 . . . . . . . . . . . . . . . . . . 0 6,986 0 Net proceeds from issuance of common stock and warrants. . . 39,021 10,168 7,687 Proceeds from short-term bank borrowings . . . . . . . . . . 32,356 28,122 14,236 Payments of short-term bank borrowings . . . . . . . . . . . (33,669) (24,790) (12,474) Proceeds from debt . . . . . . . . . . . . . . . . . . . . . - 1,200 0 Payments for debt. . . . . . . . . . . . . . . . . . . . . . (266) (685) 0 --------- --------- --------- Net cash provided by financing activities. . . . . . . . 37,442 21,001 9,449 --------- --------- --------- Effect of exchange rate changes on cash. . . . . . . . . . . . 11 152 (263) --------- --------- --------- Net increase (decrease) in cash and cash equivalents . . . . . 30,062 8,503 (93) Cash and cash equivalents, beginning of year . . . . . . . . . 11,546 3,043 3,136 --------- --------- --------- Cash and cash equivalents, end of year . . . . . . . . . . . . $ 41,608 $ 11,546 $ 3,043 ========= ========= ========= Supplemental Cash Flow Information Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 778 $ 227 $ 470 Cash paid for income taxes . . . . . . . . . . . . . . . . . . 431 157 1 Non-cash investing and financing activities: Transfer of fixed assets to inventory. . . . . . . . . . . . 0 2,594 0 Transfer of inventory to fixed assets. . . . . . . . . . . . 143 0 0 Transfer of other assets to fixed assets . . . . . . . . . . 600 0 0 Conversion of notes payable to common stock. . . . . . . . . 150 675 0 Issuance of warrants in connection with convertible notes financing. . . . . . . . . . . . . . . . . . . . . . $ 0 $ 54 $ 0
The accompanying notes are an integral part of these consolidated financial statements. 44 GENUS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations. Genus, Inc. (the "Company") was incorporated in California in 1981. The Company designs, manufactures and markets capital equipment and deposition processes for advanced semiconductor manufacturing. The Company's products are marketed worldwide either directly to end-users or through sales representative arrangements. In January 1996, the Company opened a subsidiary in South Korea to provide sales and service support to Korean customers. The Company's customers include semiconductor manufacturers located throughout the United States, Europe and in the Pacific Rim including Japan, South Korea and Taiwan. The following is a summary of the Company's significant accounting policies. Basis of Presentation. The consolidated financial statements include the accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of significant intercompany accounts and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Liquidity. The Company has incurred losses of approximately $3.5 million, $11.6 million and $6.7 million for the years ended December 31, 2003, 2002 and 2001, respectively and had an accumulated deficit of $111.3 million at December 31, 2003. The Company raised $31.8 million, net of issuance costs, from a private placement in November of 2003. Management believes that existing cash and available financing will be sufficient to meet projected working capital, capital expenditure and other cash requirements for the next twelve months but cannot provide assurances that future cash flows from operations will be sufficient to meet operating requirements and allow the Company to service debt and repay any underlying indebtedness at maturity. The Company is actively marketing its existing and new products, which it believes will ultimately lead to profitable operations. However, if the Company does not achieve the anticipated cash flows, we may not be able to meet planned product release schedules and forecast sales objectives. In such event the Company will require additional financing to fund on-going and planned operations and may need to implement further expense reduction measures. In the event the Company needs additional financing, there is no assurance that funds would be available to the Company or, if available, under terms that would be acceptable to the Company. Risks and Uncertainties. The Company operates in the highly competitive and rapidly changing semiconductor and semiconductor manufacturing equipment industries and is dependant on limited financial resources, a small number of suppliers and customers with a concentration in Asian countries. The Company's future growth is dependant on acceptance of new products and market acceptance of systems relating to those products. Significant technological changes in the industry could affect operating results adversely. Cash and Cash Equivalents. The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of money market funds. Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, accounts receivable, short term bank borrowings and accounts payable approximate estimated fair value because of the short maturity of those financial instruments. The fair value of the convertible notes maturing August 15, 2005 with a carrying value of $5.8 million was approximately $30 million at December 31, 2003. Concentration of Credit Risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company places cash not required for current disbursement in money market funds in the United States. The Company does not require collateral from its customers and maintains an allowance for credit losses. 45 Three customers accounted for an aggregate of 91% of accounts receivable at December 31, 2003. Two customers accounted for an aggregate of 95% of accounts receivable at December 31, 2002. The Company has written off bad debts of $152,000, $5,000 and $294,000 in 2003, 2002, and 2001, respectively. The Company recovered $109,000 from previously written off bad debts during 2003. Inventories. Inventories are stated at the lower of cost or market, using standard costs that approximate actual costs under the first-in, first-out method. Long-Lived Assets. Equipment, furniture and fixtures are stated at cost and depreciated using the straight-line method over their estimated useful lives, ranging between three and five years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Equipment includes demonstration equipment, which is located in our Applications Laboratory and is used to demonstrate to our customers the capabilities of our equipment to process wafers and deposit films. The gross value of demonstration equipment is based on the cost of materials and actual factory labor and overhead expenses incurred in manufacturing the equipment. Costs related to refurbishing or maintaining existing demonstration equipment, which do not add to the capabilities or useful life of the equipment, are expensed as incurred. Demonstration equipment is stated at cost and depreciated over a period of three to five years. Revenue recognition. The Company derives revenue from the sale and installation of semiconductor manufacturing systems and from engineering services and the sale of spare parts to support such systems. Equipment selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. In the third quarter of 2002, the Company established verifiable objective evidence of fair value of installation services, one of the requirements for Genus to recognize revenue for multiple-element arrangements prior to completion of installation services. If a product delivered to a customer has met defined customer acceptance experience levels with both the customer and the specific type of equipment, then the Company recognizes equipment revenue upon shipment and transfer of title. A portion of revenue associated with undelivered elements such as installation and on-site support related tasks is recognized for installation when the installation is completed and the customer accepts the product and for on-site support as the support service is provided. For products that have not been demonstrated to meet product specifications for the customer prior to shipment or where objective and reliable evidence of the fair value of the undelivered elements, such as installation, is not available, revenue is recognized when installation is complete and the customer accepts the product. Revenues can fluctuate significantly as a result of the timing of customer acceptances. At December 31, 2003 and 2002, the Company had deferred revenue of $331,000 and $2.7 million, respectively. Revenues from sale of spare parts are recognized when title and risk of loss passes to the customer, generally upon shipment. Revenues from engineering services are recognized as the services are completed over the duration of the contract. Product Warranty. In general, the Company's warranty period terminates for material coverage in twelve to twenty-four months and for labor coverage in twelve months after the warranty period begins, but in any event no later then twenty seven months from the product shipment date for material coverage and fifteen months for labor coverage, unless otherwise stated in the quotation. The Company provides labor for all product repairs and replacement parts, excluding consumable items, free of charge during the warranty period. Warranty expenses are accrued upon revenue recognition. At present, based upon historical experience, the Company accrues material warranty equal to 2% and 5% of shipment value for its LYNX2(R) and LYNX3 products, respectively, and labor warranty equal to $20,000 per system for both its LYNX2(R) and LYNX3 products. At the end of every quarter, the Company reviews its actual spending on warranty and reassess if its accrual is adequate to cover warranty expenses on the systems in the field which are still under warranty. Differences between the required accrual and recorded accrual are charged or credited to warranty expenses for the period. 46 Income Taxes. The Company accounts for income taxes using a method that requires deferred tax assets to be computed annually on an asset and liability method and adjusted when new tax laws or rates are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Income tax expense (benefit) is the tax payable (refundable) for the period plus or minus the change in deferred tax assets and liabilities during the period. Foreign Currency. The Company has foreign sales and service operations. With respect to all foreign subsidiaries excluding South Korea and Japan, the functional currency is the U.S. dollar, and transaction and translation gains and losses are included in results of operations. The functional currency of the Company's South Korean subsidiary is the Won, and the functional currency of the Company's Japanese subsidiary is the yen. The translation from the applicable foreign currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate during the period. Adjustments resulting from such translation are reflected as cumulative translation adjustments. Net Loss Per Share. Basic net loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing loss available to common shareholders, adjusted for convertible preferred dividends and after-tax interest expense on convertible debt, if any, by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). Stock Compensation. The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting Standards Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation." Generally, the Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the date of the grant. Accordingly, no compensation cost has been recognized in the Company's statements of operations. Pro forma information regarding net loss and net loss per share as if the Company recorded compensation expense based on the fair value of stock-based awards have been presented in accordance with Statement of Financial Accounting Standards No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure" and is as follows for the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share data):
YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 -------- --------- -------- Net loss, as reported. . . . . . . . . . . . . . . $(3,519) $(11,620) $(6,666) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects . . . (2,049) (2,797) (3,240) -------- --------- -------- Pro forma net loss attributable to common shareholders . . . . . . . . . . . . . . . . . . $(5,568) $(14,417) $(9,906) ======== ========= ======== Earnings per share Basic and diluted - as reported. . . . . . . . . $ (0.11) $ (0.43) $ (0.31) Basic and diluted - pro forma . . . . . . . . . $ (0.18) $ (0.54) $ (0.47)
The above pro forma effects on net loss may not be representative of the effects on future results as options granted typically vest over several years and additional option grants are expected to be made in future years. The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2003, 2002 and 2001; 47 2003 2002 2001 Risk free interest rates . 2.50% 2.03% 4.19% Expected life. . . . . . . 3.73 yrs 3.0 yrs 3.0 yrs Expected volatility. . . . 103% 112% 112% Expected dividend yield. . 0% 0% 0% The weighted average fair value of options granted in 2003, 2002 and 2001 was $2.80, $1.42 and $1.93, respectively. The fair value of the employees' purchase rights under the 1989 Employee Stock Purchase Plan was estimated using the Black-Scholes option-pricing model with the following assumptions for those rights granted in 2003, 2002 and 2001. 2003 2002 2001 Risk free interest rates . 1.01% 1.21% 3.42% Expected life. . . . . . . 0.5 yrs 0.5 yrs 0.5 yrs Expected volatility. . . . 78% 123% 78% Expected dividend yield. . 0% 0% 0% The weighted average fair value of those purchase rights granted in 2003, 2002 and 2001 was $0.90, $1.06 and $1.30, respectively. Software development costs. Software development costs have been accrued for in accordance with SFAS No. 86 " Accounting for the Costs of Computer Software to be Sold, Leased or otherwise Marketed". Capitalization of software development costs begins upon establishment of technological feasibility, subject to net realizable considerations. During the years ended December 2003 and 2002, the Company capitalized $275,000 and $284,000, respectively. Capitalized costs are amortized over a three-year period on a straight-line basis. The Company recorded amortization expenses related to capitalized software of $130,000 during the year ended December 31, 2003. No amortization expenses of capitalized software was recorded in 2002 and 2001. Comprehensive loss. Comprehensive loss includes all changes in equity during a period from non-owner sources. The Company's comprehensive loss includes net loss and foreign currency translation adjustments and is displayed in the statement of shareholders' equity. RECLASSIFICATIONS. Certain reclassifications have been made to the prior year financial statements to conform to current year's presentation. Such reclassifications had no effect on the previously reported loss from operations or retained earnings. RECENT ACCOUNTING PRONOUNCEMENTS. In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21(EITF 00-21), Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The consensus mandates how to identify whether goods or services or both which are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are "separate units of accounting." The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or patterns of revenue recognition of individual items accounted for separately. The final consensus is applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. Additionally, companies are permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. The Company adopted EITF 00-21 during the third quarter of 2003 and the adoption did not result in any material impact on our financial position, cash flows or results of operations. 48 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting of derivative instruments and hedging activities under SFAS No. 133. The amendments pertain to decisions made: (i) as part of the Derivatives Implementation Group process that require amendment to SFAS 133, (ii) in connection with other FASB projects dealing with financial instruments, and (iii) in connection with the implementation issues raised related to the application of the definition of a derivative. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for designated hedging relationships after June 30, 2003. SFAS 149 will be applied prospectively. The Company adopted SFAS 149 during the third quarter of 2003 and the adoption did not result in any material impact on our financial position, cash flows or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and further requires that an issuer classify as a liability (or an asset in some circumstances) financial instruments that fall within its scope because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments as they relate to minority interest in consolidated finite-lived entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company adopted SFAS 150 during the third quarter of 2003 and the adoption did not result in any material impact on our financial position, cash flows or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities - an interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first reporting period beginning after June 15, 2004. The Company believes that the adoption of this standard will have no material effect on our consolidated financial statements. NOTE 2. INVENTORIES - --------------------- Inventories comprise the following (in thousands):
DECEMBER 31, --------------------- 2003 2002 --------- ---------- Raw materials and purchased parts. . . $ 4,602 $ 4,493 Work in process. . . . . . . . . . . 3,686 3,417 Finished goods. . . . . . . . . . . . 478 175 Inventory at customers' locations . . 1,017 3,320 --------- ---------- $ 9,783 $ 11,405 ========= ==========
49 Finished goods include customer evaluation units with a net book value of $478,000 and $175,000 at December 31, 2003 and 2002, respectively. Inventory at customers' locations represent the cost of systems shipped to customers for which the Company is awaiting customer acceptance. NOTE 3. EQUIPMENT, FURNITURE AND FIXTURES - ---------------------------------------------- Equipment, furniture and fixtures are stated at cost and comprise the following (in thousands):
DECEMBER 31, -------------------- 2003 2002 --------- --------- Equipment (useful life of 3 years). . . . . . . . . . . . . $ 10,005 $ 9,481 Demonstration equipment (useful life ranges from 3-5 years) 18,584 21,258 Furniture and fixtures (useful life of 3 years) . . . . . . 1,078 1,045 Leasehold improvements (useful life ranges from 4-10 years) 4,337 4,332 --------- --------- 34,004 36,116 Less accumulated depreciation . . . . . . . . . . . . . . . (25,929) (27,688) --------- --------- 8,075 8,428 Construction in progress. . . . . . . . . . . . . . . . . . 673 233 --------- --------- $ 8,748 $ 8,661 ========= =========
Depreciation expense was $3.2 million, $3.7 million and $3.0 million for 2003, 2002 and 2001, respectively. NOTE 4. ACCRUED EXPENSES - --------------------------- Accrued expenses are comprised of the following (in thousands):
DECEMBER 31, ---------------- 2002 2001 ------ -------- System warranty . . . . . . . . . . . . . $1,451 $ 970 Accrued compensation and related expenses 720 491 Federal, state and foreign income taxes . 511 751 Accrued rent. . . . . . . . . . . . . . . 362 162 Accrued professional fees . . . . . . . . 260 87 Accrued sales tax. . . . . . . . . . . . 270 19 Accrued interest. . . . . . . . . . . . . 184 202 Other . . . . . . . . . . . . . . . . . . 372 382 ------ -------- $4,130 $ 3,064 ====== ========
NOTE 5. WARRANTIES - -------------------- The Company warrants that each of the products we sell shall be free of defects in material and workmanship and meets performance specifications during our warranty period. The warranty period means the period commencing upon the earlier of successful completion of acceptance tests agreed in writing by the Company's customers; the customer's use of products for the customer's pre-production, production or product development activities; ninety days after the product shipment date. 50 In general, the Company's warranty period terminates for material coverage in twelve to twenty-four months and for labor coverage in twelve months after the warranty period begins, but in any event no later than twenty seven months from the product shipment date for material coverage and fifteen months for labor coverage, unless otherwise stated in the quotation. The Company provides labor for all product repairs and replacement parts, excluding consumable items, free of charge during the warranty period. Changes in our warranty liability, which is included as a component of "accrued expenses" on the Consolidated Balance Sheets, during the period follows:
Balance at January 1, 2002 $ 803 Accrual for warranty liability for revenues recognized in the period 576 Settlements made (409) -------- Balance at December 31, 2002 $ 970 Accrual for warranty liability for revenues recognized in the period 1,938 Settlements made (1,457) -------- Balance at December 31, 2003 $ 1,451 ========
NOTE 6. SHORT-TERM BANK BORROWING - ------------------------------------- On December 20, 2001 and as amended on March 27, 2002 and March 20, 2003, the Company maintained line of credit facilities from Silicon Valley bank for $15.0 million, borrowable amounts based on eligible receivables and inventory. The interest rate is prime plus 1.75% per annum (as at December 31, 2003) and the facility expires on June 29, 2004. The line of credit is collateralized by a first priority perfected security interest in the Company's assets and has a covenant requiring the Company to maintain a minimum tangible net worth (calculated as the excess of total assets over total liabilities adjusted to exclude intangible assets and balances receivable from officers or affiliates and to exclude debt subordinated to Silicon Valley Bank) of $15 million. As of December 31, 2003 and 2002, there was $6.5 million and $7.8 million outstanding respectively, under this credit facility. On January 4, 2002, the Company received gross proceeds of $1.2 million under a secured loan with CitiCapital, a division of Citigroup. The loan is payable over 36 months, accrues interest of 8.75% per annum and is secured by two systems in the Company's demonstration lab. The balance outstanding under this agreement was $249,000 and $515,000 at December 31, 2003 and 2002 respectively. NOTE 7. COMMITMENTS AND CONTINGENCIES - ----------------------------------------- We maintain our headquarters, manufacturing and research and development operations in Sunnyvale, California. Our lease for approximately 100,000 square feet for our Sunnyvale facility expires in October 2012. Commencing in 2003, our annual rental expense will be approximately $1.8 million. We also have leases for our sales and support offices in Seoul, South Korea and Tokyo, Japan. We believe that our existing facilities are adequate to meet our current requirements and that suitable additional or substitute space will be available as needed. 51 At December 31, 2003, minimum lease payments required under these operating leases are as follows (in thousands):
2004 . . . . . . . . . $ 1,700 2005 . . . . . . . . . 1,752 2006 . . . . . . . . . 1,773 2007 . . . . . . . . . 1,799 2008 . . . . . . . . . 1,930 Thereafter . . . . . . 7,820 --------- $ 16,774 =========
Rent expense was $1.9 million; $1.0 million and $682,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Sublease rental income was $5,000, $1,000 and $596,000 for the years ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003, the Company had approximately $5.5 million in open purchase order obligations. Legal Proceedings On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's Complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASMA claims to own or exclusively license. The Complaint seeks monetary and injunctive relief. Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are invalid, unenforceable, and not infringed by Genus; and (3) antitrust violations. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the Court issued an order granting ASMA leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASMA claims to own. The Court also severed and stayed discovery and trial of Genus' antitrust claims until after the trial of the patent claims. On February 4, 2002, Genus served its Amended Answer to ASMA's amended complaint and counterclaimed against ASMA for declaratory judgment that the '165 Patent is invalid, unenforceable, and not infringed by Genus. On August 15, 2002, the Court issued a claim construction order regarding the '590, '365, and 598' Patents. A claim construction hearing regarding the '165 Patent was held on September 26, 2002, and the Court issued a claim construction ruling regarding this patent on November 13, 2002. On September 23, 2002 Genus filed motions for summary judgment on noninfringement regarding the '590 and '365 Patents. On November 20, 2002, the Court granted the Genus motion for summary judgment of noninfringement of the '365 Patent. On January 10, 2003, the Court granted Genus' motion for summary judgment of non-infringement on the '590 Patent. On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement"). Under the terms of the Settlement, Genus gained a royalty-free license to each of the patents ASMI asserted in the litigation, including both ALD patents as well as Patent '165. By specific agreement of the parties, these licenses are applicable to Genus' successors and affiliates. Genus has likewise obtained a covenant from ASMI that it will not sue Genus for patent infringement or antitrust violations for the next five years. In return, Genus has granted ASMI and its successors and affiliates a royalty-free license to the patent Genus asserted in the litigation, Patent '568, and has agreed to dismiss its antitrust claims against ASMI. Genus has also agreed not to sue ASMI for patent infringement or antitrust violations for the next five years. No payments have been made by either Genus or ASMI in exchange for these licenses and the covenant not to sue. However, under the terms of the Settlement, ASMI has the right to pursue an appeal of the District Court's judgments of non-infringement regarding the ALD patents. The agreement specifies that if the Federal Circuit 52 vacates either of the existing judgments related to the ALD patents based on a change in the District Court's claim construction, Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents it has been granted under the agreement. We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. NOTE 8. CONVERTIBLE NOTES AND WARRANTS - ------------------------------------------- On August 15, 2002, the Company raised $7.0 million, net of issuance costs, by issuing $7.8 million unsecured 7% convertible notes and warrants to purchase 2,761,000 shares of common stock. - $7.5 million of the convertible notes were convertible into common stock at a price of $1.42 per share and a $300,000 convertible note was convertible into common stock at a price of $1.25 per share. During 2002, convertible notes with a face value of $525,000 were converted into common stock at a price of $1.42 and convertible notes with a face value of $150,000 were converted at a price of $1.25 per share. During 2003, convertible notes with a face value of $150,000 were converted at a price of $1.25 per share. The remaining convertible notes with a face value of $6,975,000 are redeemable three years after issuance or may be converted into 4,912,000 shares of common stock at a price of $1.42 per share prior to the redemption date at the election of the investors. All convertible notes accrue interest at 7% per annum, payable semi-annually each February 15 and August 15, in cash or, at the election of the Company, in registered stock. - Warrants exercisable for 2,641,000 shares of common stock had an exercise price of $1.42 per share and warrants exercisable for 120,000 shares of common stock had an exercise price of $1.25 per share. In 2002, warrants for 300,000 shares were exercised for cash proceeds of $400,000. The remaining warrants were exercised during 2003 for cash proceeds of $3.5 million. The net cash proceeds from the issuance of the convertible notes and warrants were recorded as follows (in thousands): Convertible note(face value $7.8 million) $5,560 Detachable warrants 1,312 Beneficial conversion feature 928 ------- Proceeds from convertible notes and warrants 7,800 Other asset, issuance costs (814) ------- Net cash proceeds $6,986 ======= 53 The Company classified the warrants as equity and allocated a portion of the proceeds from the convertible notes to the warrants, using the relative fair value method in accordance with APB No. 14. " Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The Company determined the fair value of the warrants, using the Black Scholes option pricing model with a risk free interest rate of 4.4 percent, volatility of 75%, a term of three years and no dividend yield. The allocation of proceeds to the warrants reduced the carrying value of the convertible notes. As a result, the fair value of the common stock issuable upon conversion of the notes exceeded the carrying value of the convertible notes, resulting in a beneficial conversion feature. The value of the beneficial conversion feature is accreted over the stated term of the convertible notes in accordance with EITF No. 98-5 " Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application Issue No. 98-5 to Certain Convertible Instruments". The $2.2 million difference between the $7.8 million face value of the notes and the $5.6 million original carrying value, representing the value of the warrants and the beneficial conversion feature, has been recorded as equity and is accreted as interest expense over the three year term of the convertible notes, using the effective interest rate method. The Company incurred issuance costs of approximately $868,000, representing cash obligations of $814,000 and warrants with a fair value of $54,000. The warrants to purchase 79,000 shares of common stock at $1.42 per share was subsequently net exercised for 38,631 shares of common stock. Issuance costs are included with other assets and are amortized as interest expense over the stated term of the convertible notes. In the event of a change of control of the Company, the note holders may elect to receive repayment of the notes at a premium of 10% over the face value of the notes. The carrying value of the convertible note and deferred issuance costs at December 31, 2003 is as follows (in thousands): Convertible Other Asset, Note Issuance Costs ------------- --------------- Balance at issuance, August 15, 2002 $ 5,560 ($868) Conversions (675) - Accretion and amortization 416 104 ------------- --------------- Balance at December 31, 2002 5,301 (764) Conversions (150) - Accretion and amortization 655 288 ------------- --------------- Balance at December 31, 2003 $ 5,806 ($476) ============= =============== The Company recorded interest costs related to the convertible notes and warrants of $1.4 million and $735,000 for the years ended December 31, 2003 and 2002, respectively. 54 NOTE 9. SHAREHOLDERS' EQUITY - ------------------------------- Sale of Common Stock On May 17, 2001, the Company sold 2,541,785 shares of our common stock and warrants to purchase up to 1,461,525 of additional shares of common stock for net proceeds of approximately $6.9 million. On January 25, 2002, the Company sold 3,871,330 shares of our common stock and warrants to purchase up to 580,696 additional shares of common stock for net proceeds of approximately $7.9 million. On November 7, 2003, the Company completed a private placement of approximately $33.6 million for 6.4 million shares of its common stock at a per share price of $5.25. The offering resulted in net proceeds to the company of approximately $31.8 million. The purchase price for the shares represented approximately a 5 percent discount to the average closing price for 10 days prior to the close on November 7, 2003. No warrants were issued in this transaction. Warrants Shares subject to warrants to purchase common stock (in thousands, except per share amounts):
NO OF SHARES OF COMMON NUMBER OF SHARES OF STOCK UNDERLYING COMMON STOCK EXERCISE WARRANTS UPON UNDERLYING WARRANTS ON DATE ISSUED PRICE DATE OF ISSUANCE REASON DECEMBER 31, 2003 - ------------- --------- ----------------------- --------------------------------- ---------------------- November 1999 $ 2.39 25(1) Credit facility costs - May 2001 $ 3.50 1,271(1) Warrants issued to investors - May 2001 $ 3.00 69 Placement agent (financing costs) 8 May 2001 $ 5.24 121 Placement agent (financing costs) 110 January 2002 $ 2.19 760(1) Warrants issued to investors - January 2002 $ 3.23 581 Warrants issued to investors 115 August 2002 $ 1.42 2,641(1) Warrants issued to notes holder - August 2002 $ 1.25 120 (1) Warrants issued to notes holder - August 2002 $ 1.42 79 (1) Placement agent (financing costs) - ----------------------- ---------------------- Totals 5,667 233 ======================= ====================== (1) Exercised in full prior to December 31, 2003.
In connection with the sale of common stock in May 2001, the Company issued warrants to purchase 1,461,525 shares of common stock with exercise prices ranging from $3.00 to $5.24. The warrants hade terms providing for an adjustment of the number of shares underlying the warrants in the event that the Company issued 55 new shares at a price lower than the exercise price of the warrants, where the Company makes distributions of common stock to its shareholders or effects a reclassification. In January 2002, warrants exercisable for 1,270,891 shares of common stock were adjusted and thereafter exercisable for an aggregate 760,203 additional shares of common stock. With the exception of certain warrants exercisable for 118,449 shares of common stock, the warrants issued in May 2001 have been exercised in full. In connection with the sale of common stock in January 2002, the Company issued warrants to purchase 580,696 shares of common stock at an exercise price of $3.23. The warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that the Company issues new shares at a price lower than the exercise price of the warrants, where the Company makes a distribution of common stock to its shareholders or effects a reclassification. In August 2002, the Company issued a convertible note with a face value of $7.8 million and warrants to purchase 2,760,669 shares of common stock with exercise prices ranging from $1.25 to $1.42 to the note holders. In connection with the issuance of convertible notes in August 2002, the Company adjusted the January 2002 warrant to be exercisable for an additional 86,979 shares of common stock. Additionally the exercise price of the January 2002 warrants was adjusted to $2.48. As of December 31, 2003, with the exception of certain warrants exercisable for 114,979 shares of common stock, the warrants issued in January 2002, as amended in August 2002, have been exercised in full. Shares reserved for future issuance A summary of shares reserved for future issuance by the Company as of December 31, 2003 is as follows:
Exercise of warrants 233,000 Conversion of convertible notes 4,912,000 Stock options outstanding 3,654,000 Employee Stock Purchase Plan 456,000 Stock options available for grants 215,000 --------- 9,470,000 =========
Net Loss Per Share A reconciliation of the numerator and denominator of basic and diluted loss per share is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ------------------------------- 2003 2002 2001 -------- --------- ---------- Loss attributable to common shareholders: Numerator-Basic and diluted: Net loss attributable to common shareholders. . . . . . . . . $(3,519) $(11,620) $ (6,666) ======== ========= ========== Denominator-Basic and diluted: Weighted average common stock outstanding . . . . . . . . . . 31,303 26,934 21,163 ======== ========= ========== Basic and diluted net loss per share. . . . . . . . . . . . . $ (0.11) $ (0.43) $ (0.31) ======== ========= ==========
56 Stock options to purchase 3,654,226 shares of common stock with a weighted average exercise price of $3.78 were outstanding on December 31, 2003, but were not included in the computation of diluted loss per share because the Company has a net loss for 2003. Warrants for the purchase of 233,428 shares of common stock with a weighted average exercise price of $3.80 were outstanding at December 31, 2003 but were not included in the computation of diluted loss per share because the Company has a net loss for 2003. Stock options to purchase 4,142,254 shares of common stock with a weighted average exercise price of $3.05 were outstanding on December 31, 2002, but were not included in the computation of diluted loss per share because the Company has a net loss for 2002. Warrants for the purchase of 3,336,224 shares of common stock with a weighted average exercise price of $1.89 were outstanding at December 31, 2002 but were not included in the computation of diluted loss per share because the Company has a net loss for 2002. Stock options to purchase 3,378,321 shares of common stock with a weighted average exercise price of $3.72 were outstanding on December 31, 2001, but were not included in the computation of diluted loss per share because the Company has a net loss for 2001. Warrants for the purchase of 1,486,525 shares of common stock with a weighted average exercise price of $3.60 were outstanding at December 31, 2001, but were not included in the computation of diluted loss per share because the Company has a net loss for 2001. Stock Option Plan In March of 2000, the Company adopted the 2000 Incentive Stock Option Plan to replace the 1991 Incentive Stock Option Plan. The 1991 Incentive Stock Option Plan was scheduled to expire ten years after its adoption in 1991. Under the 2000 Incentive Stock Option Plan, the Board of Directors can grant incentive and nonstatutory stock options. The Board of Directors has the authority to determine to whom options will be granted, the number of options, the term and exercise price. The options are exercisable at times and increments as specified by the Board of Directors, and generally vest over a three-year period and expire five years from the date of grant. In October 2003, the Board of Directors changed the vesting for future grants to vest over a four-year period and expire in ten years from the date of grant for all new grants. At December 31, 2003, the Company had registered 7,503,000 shares of common stock for issuance under the 2000 Incentive Stock Option Plan, which included 700,000 1,000,000 and 1,000,000 shares added to the plan in 2001, 2002 and 2003, respectively. At December 31, 2003, a total of 215,000 shares remained available for future grants. Activity under the 1991 and 2000 Incentive Stock Option Plans is set forth in the table below: (in thousands, except per share data):
WEIGHTED AVAILABLE OPTIONS OUTSTANDING AVERAGE FOR EXERCISE GRANT OPTIONS PRICE PER SHARE AMOUNT PRICE ---------- -------- ---------------------- -------- --------- Balance, January 31, 2001 418 2,972 0.88 to 15.75 12,733 4.28 Granted (1,005) 1,005 1.59 to 6.83 2,859 2.85 Exercised - (243) 2.02 to 7.32 (521) 2.15 Terminated 356 (356) 2.02 to 15.75 (2,489) 6.99 Authorized 700 - - - - - ---------- -------- ---------------------- -------- --------- Balance, December 31, 2001 469 3,378 0.88 to 15.75 12,582 3.72 Granted (1,629) 1,629 1.07 to 2.89 3,421 2.02 Exercised - (159) 0.88 to 3.03 (324) 2.05 57 Expired (336) - - - - - Terminated 706 (706) 0.88 to 4.00 (3,044) 1.57 Authorized 1,000 - - - - - ---------- -------- ---------------------- -------- --------- Balance, December 31, 2002 210 4,142 $ 0.88 to $15.75 $12,635 $ 2.11 Granted (1,146) 1,146 2.09 to 6.55 4,556 3.97 Exercised - (1,143) 0.88 to 5.34 (1,887) 1.65 Expired (340) - - - - - Terminated 491 (491) 1.29 to 15.75 (1,500) 3.06 Authorized 1,000 - - - - - ---------- -------- ---------------------- -------- --------- Balance, December 31, 2003 215 3,654 $ 1.07 to $15.75 $13,804 $ 3.78 ========== ======== ====================== ======== =========
Options outstanding and currently exercisable by exercise price under the option plan at December 31, 2003 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ---------------------------- WEIGHTED AVG. RANGE OF NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG. EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ---------------- ----------- ---------------- --------------- ----------- --------------- 1.07 - $ 1.07 3,000 3.79 $ 1.07 1,167 $ 1.07 1.29 - 1.29 517,200 3.82 1.29 183,837 1.29 1.59 - 2.44 495,396 2.67 2.28 301,784 2.24 2.47 - 2.56 472,675 3.42 2.56 209,647 2.56 2.57 - 3.09 460,622 2.69 2.80 327,123 2.86 3.13 - 3.88 42,333 3.11 3.59 35,306 3.60 4.08 - 4.08 978,000 9.81 4.08 - - 4.34 - 6.25 382,500 2.08 5.48 355,611 5.49 6.30 - 11.69 204,000 2.07 8.40 185,667 8.59 15.75- 15.75 98,500 1.19 15.75 98,500 15.75 - ---------------- ----------- ---------------- --------------- ----------- --------------- 1.07 - $15.75 3,654,226 4.72 $ 3.78 1,698,642 $ 4.48 ================ ----------- ---------------- =============== ----------- ===============
On January 24, 2001, the Company's Chief Executive Officer issued a full recourse promissory note for $151,000 in connection with the exercise of stock options. The note bears interest of 8% per annum and is repayable on January 24, 2004. As of December 31, 2003, the total amount outstanding related to the promissory note was $187,000, which included interest of $36,000. Employee Stock Purchase Plan The Company has reserved a total of 3,550,000 shares of common stock for issuance under a qualified stock purchase plan, which provides substantially all Company employees with the right to acquire shares of the Company's common stock through payroll deductions. This total includes 300,000 shares added to the plan in each of 2003 and 2002. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85% of fair market value at either the beginning of period or the end of each six-month purchase period. At December 31, 2003, 3,094,000 shares have been issued under the plan. The Company has issued 175,936, 200,247, and 261,177 shares in 2003, 2002 and 2001, respectively. At December 31, 2003, 456,000 shares were available for purchase under this plan. Share Purchase Rights Plan 58 On September 7, 2000, the Company's Board of Directors declared a dividend pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar earlier plan that had expired on July 3, 2000. The intended purpose of the Rights Plan is to protect shareholders' rights and to maximize share value in the event of an unfriendly takeover attempt. As of the record date of October 13, 2000, each share of common stock of Genus, Inc. outstanding was granted one right under the new plan. Each right is exercisable only under certain circumstances and upon the occurrence of certain events and permits the holder to purchase from the Company one one-thousandth (0.001) of a share of Series C Participating Preferred Stock at an initial exercise price of forty dollars ($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred stock authorized in connection with the Rights Plan will be used for the exercise of any preferred share purchase rights in the event that any person or group (the Acquiring Person) acquires beneficial ownership of 15% or more of the outstanding common stock. In such event, the shareholders (other than the Acquiring Person) would receive common stock of the Company having a market value of twice the exercise price. Subject to certain restrictions, the Company may redeem the rights issued under the Rights Plan for $0.001 per right and may amend the Rights Plan without the consent of rights holders. The rights will expire on October 13, 2010, unless redeemed by the Company. Stock Compensation The Company recorded $28,000 of stock compensation in 2001 resulting from a shortfall in shares approved for the ESPP. The calculation and recording of expense was made in accordance with EITF 97-12, "Accounting for Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25." In accordance with this consensus, a compensation charge is calculated for the amount by which the quoted stock price on the date of shareholder approval, less a 15% discount, exceeds the price at which options were granted under the ESPP. The compensation charge so determined is amortized over the term of the options issued under the ESPP that remains after shareholder approval of additional shares. The Company did not record any stock compensation charge during 2002 and 2003 related to the ESPP plan since the plan had adequate shares reserved for issuance under the ESPP plan in both these years. During 2001, the Company recorded $34,000 of stock compensation in connection with the accelerated vesting of options granted to a terminated employee. There was no acceleration of vesting of options during 2002 and 2003. NOTE 10. EMPLOYEE BENEFIT PLAN - ---------------------------------- During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit Plan") to provide retirement and incidental benefits for eligible employees. The Benefit Plan provides for Company contributions as determined by the Board of Directors that may not exceed 6% of the annual aggregate salaries of those employees eligible for participation. In 2003, 2002 and 2001, the Company contributed $174,000, $170,000, and $101,000, respectively, to the Benefit Plan. NOTE 11. OTHER INCOME (EXPENSE), NET - ----------------------------------------- Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 ---------- --------- --------- Foreign exchange, net. 111 98 (27) Other, net . . . . . (9) (18) 112 ---------- --------- --------- $ 102 $ 80 $ 85 ========== ========= =========
59 NOTE 12. INCOME TAXES - ------------------------ The provision for income tax expense for the years ended December 31, 2003, 2002 and 2001 was $228,000, $538,000, and $70,000, respectively. The components of income (loss) before income taxes were as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 ---------- ---------- --------- Domestic loss before taxes. . . . . . . . . . . . . $ (2,823) $ (11,407) $ (6,905) Foreign income (loss) before taxes. . . . . . . . . (468) 325 309 ---------- ---------- --------- Loss before taxes . . . . . . . . . . . . . . . . $ (3,291) $ (11,082) $ (6,596) ========== ========== =========
The income tax expense for 2003, 2002 and 2001, respectively, was due to current foreign taxes. The Company's effective tax rate for the years ended December 31, 2003, 2002 and 2001 differs from the U.S. federal statutory income tax rate as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 ---------- ---------- --------- Federal income tax at statutory rate. . . . . . . (35.0%) (35.0%) (35.0%) Foreign income taxes . . . . . . . . . . . . . . . 6.9 4.9 1.1 Net operating loss not benefited . . . . . . . . . 35.0 35.0 35.0 ---------- ---------- --------- 6.9% 4.9% 1.1% ========== ========== =========
Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31, ---------------------- 2003 2002 ----------- --------- Deferred tax assets Depreciation and amortization . . . . . . . . . . $ 3,069 $ 2,511 Inventory, accounts receivable and other related allowances. . . . . . . . . . . . . . . . . . . 2,293 2,092 Tax credits . . . . . . . . . . . . . . . . . . . 2,322 2,267 Net operating loss. . . . . . . . . . . . . . . . 36,051 34,554 Deferred revenue. . . . . . . . . . . . . . . . . 1,087 1,563 Non-Deductible accruals . . . . . . . . . . . . . 601 1,236 ----------- --------- 45,423 44,223 Deferred tax asset valuation allowance. . . . . . . ( 45,423) (44,223) ----------- --------- Net deferred tax assets . . . . . . . . . . . . . . $ - $ - =========== =========
The deferred tax assets valuation allowance at December 31, 2003 and 2002 is attributable to federal and state deferred tax assets. Management believes that sufficient uncertainty exists with regard to the realizability of these tax 60 assets such that a full valuation allowance is necessary. These factors include the lack of a significant history of consistent profits and lack of carry-back capacity to realize these assets. Based on these factors, management is unable to assert that it is more likely than not that the Company will generate sufficient taxable income to realize the Company's net deferred tax assets. As of December 31, 2003, the Company has a net operating loss carryforward of approximately $100 million for federal purposes and $10 million for state tax purposes. If not utilized, these carryforwards will begin to expire beginning in 2015 for federal purposes and 2005 for state purposes. The Company has research credit carryforwards of approximately $1.1 million and $1.7 million for federal and state income tax purposes, respectively. If not utilized, the federal carryforward will expire in various amounts beginning in 2013. The California credit can be carried forward indefinitely. Utilization of the net operating losses and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitations may result in the expiration of net operating loss carry-forwards and credits before utilization. NOTE 13. SEGMENT INFORMATION - ------------------------------- Currently, the Company operates in one industry segment. The Company is engaged in the design, manufacture, marketing and servicing of advanced thin film deposition systems used in the semiconductor manufacturing industry. Export Revenues For reporting purposes, export revenues are determined by the location of the parent company of the Company's customer, regardless of where the delivery was made by the Company. Revenues by geographical region for the years ended December 31, 2003, 2002, and 2001 were as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- --------- --------- United States . . . $ 12,833 $ 11,199 $ 3,200 South Korea . . . . 38,502 22,430 35,767 Japan . . . . . . . 1,887 2,758 3,089 Europe. . . . . . . 3,112 3,295 2,706 Taiwan. . . . . . . 0 85 2,300 Rest of world . . . 527 0 1,677 -------- --------- --------- $ 56,861 $ 39,767 $ 48,739 ======== ========= =========
The Company did not hold any material long-lived assets in countries other than the United States at December 31, 2003 and December 31, 2002. 61 Major Customers In 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies, Inc., HGST (formerly IBM), and Western Digital (formerly Read-Rite Corporation) accounted for 69%, 8%, 7%, 7%, and 4% of revenues, respectively. In 2002, Samsung Electronics Company, Ltd, Seagate Technologies, Inc., IBM, and Asuka Project accounted for 58%, 24%, 7%, and 6% of revenues, respectively. In 2001, Samsung Electronics Company, Ltd, Read-Rite Corporation, NEC, Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. NOTE 14. RELATED PARTY TRANSACTIONS - --------------------------------------- Mario Rosati, a director of the Company, is also a partner of Wilson Sonsini Goodrich & Rosati, the general counsel of the Company. In 2003, 2002 and 2001, the Company incurred $259,000, $630,000 and $781,000 in legal costs, respectively, and paid approximately $490,000, $1.1 million and $57,000, respectively, to Wilson Sonsini Goodrich & Rosati. At December 31, 2003, the Company owed approximately $67,000 to Wilson Sonsini Goodrich & Rosati. 62 ITEM 15 (A) 2. FINANCIAL STATEMENT SCHEDULE - ------------------------------------------------- REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Genus, Inc.: Our audits of the consolidated financial statements referred to in our report dated March 11, 2004 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------- PricewaterhouseCoopers LLP San Jose, California March 11, 2004 63 Schedule II "Valuation and Qualifying Accounts"
- -------------------------------------------------------------------------------------- Description Balance at Additions Deductions Balance at Beginning of Charged to Charged to end Period costs/exp Other of period - -------------------------------------------------------------------------------------- 2003 Allowance for doubtful accounts. $ 69 $ 83 $ 152 $ 0 Allowance for excess and obsolete inventory . . . . . . . 4,305 629 163 4,771 Deferred tax valuation allowance 44,223 1,200 0 45,423 2002 Allowance for doubtful accounts. $ 69 $ 5 $ 5 $ 69 Allowance for excess and obsolete inventory . . . . . . . 2,115 2,190 0 4,305 Deferred tax valuation allowance 38,049 6,174 0 44,223 2001 Allowance for doubtful accounts. $ 363 $ 0 $ 294 $ 69 Allowance for excess and obsolete inventory . . . . . . . 2,830 317 1,032 2,115 Deferred tax valuation allowance 30,826 7,223 0 38,049 - --------------------------------------------------------------------------------------
64 GENUS, INC. ANNUAL REPORT ON FORM 10-K Year ended December 31, 2003 INDEX TO EXHIBITS No. Description - --- ----------- 2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian Associates, Inc. and Registrant and exhibits thereto (15) 3.1 Amended and Restated Articles of Incorporation of Registrant as filed September 6, 1997 (11) 3.2 By-laws of Registrant, as amended (13) 4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between Registrant and Bank of America, N.T. and S.A., as Rights Agent (4) 4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.3 Registration Rights Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.4 Certificate of Determination of Rights, Preferences and Privileges of Series A Convertible Preferred Stock (14) 4.5 Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Preferred Stock (17) 4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the Registrant and the Investors (17) 4.7 Registration Rights Agreement, dated January 17, 2002, as amended, amongst the Registrant and the Investors (20) 4.8 Securities Purchase Agreement dated July 31, 2002 among the Company and the Purchasers signatory thereto. (21) 4.9 Resale Registration Rights Agreement dated August 14, 2002 among the Company and the Purchasers signatory thereto. (21) 4.10 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (21) 4.11 Stock Purchase and Registration Agreement dated November 7, 2003 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 Registrant's 2000 Stock Plan (19) 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) 65 10.13 License and Distribution Agreement, dated September 8, 1992, between the Registrant and Sumitomo Mutual Industries Ltd. (8) 10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9) 10.15 International Distributor Agreement, dated July 18, 1997, between Registrant and Macrotron Systems GmbH (12) 10.16 Credit Agreement, dated August 18, 1997, between Registrant and Sumitomo Bank of California (12) 10.18 Settlement Agreement and Mutual Release, dated April 20, 1998, between Registrant and James T. Healy (16) 10.19 Form of Change of Control Severance Agreement (16) 10.20 Settlement Agreement and Mutual Release, dated January 1998, between the Registrant and John Aldeborgh (18) 10.21 Settlement Agreement and Mutual Release, dated May 1998, between the Registrant and Mary Bobel (18) 14.1 Genus Code of Conduct 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Accountants 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - --------------------------- (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 September 30, 1992. (7) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K dated September 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 September 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. 66 (13) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (14) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated February 12, 1998. (15) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated April 15, 1998. (16) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1997. (17) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated July 29, 1998. (18) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10 Q/A for the quarter ended September 30, 1998. (19) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. (20) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated January 25, 2002. (21) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated August 20, 2002. 67 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 12th day of March 2004 GENUS, INC. By: /s/ Shum Mukherjee ------------------- Shum Mukherjee Executive Vice President, Finance Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shum Mukherjee and William W R Elder, jointly and severally, his attorneys-in-fact each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual 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 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, President March 12, 2004 - ----------------------- and Chief Executive Officer William W.R. Elder (principal executive officer) /s/ SHUM MUKHERJEE Executive Vice President, Finance March 12, 2004 - ------------------------ Chief Financial Officer Shum Mukherjee (principal financial officer and principal accounting officer) /s/ G. Frederick Forsyth Director March 12, 2004 - ------------------------ G. Frederick Forsyth /s/ Todd S. Myhre Director March 12, 2004 - ------------------------ Todd S. Myhre /s/ Mario M. Rosati Director March 12, 2004 - ------------------------ Mario M. Rosati /s/ Robert J. Richardson Director March 12, 2004 - ------------------------ Robert J. Richardson
68 EX-4.11 3 doc2.txt EXHIBIT 4.11 STOCK PURCHASE AND REGISTRATION AGREEMENT ----------------------------------------- This STOCK PURCHASE AND REGISTRATION AGREEMENT (this "AGREEMENT"), dated as of November 7, 2003, by and among GENUS, INC., a corporation organized under the laws of the State of California (the "COMPANY"), and the purchasers (the "PURCHASERS") set forth on the execution pages hereof (the "EXECUTION PAGES"). WHEREAS: A. The Company and each Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D ("REGULATION D"), as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"). B. Each Purchaser desires to purchase, severally and not jointly, subject to the terms and conditions stated in this Agreement, shares of the Company's common stock, no par value (the "COMMON STOCK"). C. The Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW, THEREFORE, the Company and the Purchasers hereby agree as follows: 1. CERTAIN DEFINITIONS. -------------------- For purposes of this Agreement, the following terms shall have the meanings ascribed to them as provided below: "BUSINESS DAY" shall be each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which the banking institutions in the State of California are authorized or obligated by law or executive order to close or be closed. "CLOSING PRICE" shall be $5.25. "INVESTMENT AMOUNT" shall mean the dollar amount to be invested in the Company at the Closing pursuant to this Agreement by a Purchaser, as set forth on the Execution Page hereto executed by such Purchaser. "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on (i) the Shares, (ii) the ability of the Company to perform its obligations hereunder (including the issuance of the Shares) or (iii) the business, operations, properties or financial condition of the Company and its subsidiaries, taken as a whole. "PLACEMENT AGENT" shall mean Halpern Capital, Inc. "PROSPECTUS" shall mean the prospectus included in a Resale Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such prospectus. "REGISTRABLE SHARES" or "SHARES" shall mean each of the shares of Common Stock issued or issuable pursuant to this Agreement or as a result of any stock split, stock dividend, recapitalization exchange or similar event without regard to any limitations on conversions or exercises, until the earlier of: (i) the date on which such share has been effectively registered under the Securities Act and disposed of in accordance with the Resale Registration Statement; (ii) the date on which such share is transferred in compliance with Rule 144 under the Securities Act or may be sold or transferred by a person who is not an affiliate of the Company pursuant to Rule 144(k) under the Securities Act (or any other similar provision then in force); or (iii) the date on which such share ceases to be outstanding (whether as a result of redemption, repurchase and cancellation or otherwise). "TRADING DAY" shall mean a day during which trading in securities generally occurs on the Nasdaq National Market or, if the Common Stock is not quoted on the Nasdaq National Market, on the principal other national or regional securities exchange on which the Common Stock then is listed or, if the Common Stock is not listed on a national or regional securities exchange, on the National Association of Securities Dealers Automated Quotation System, on the principal other market on which the Common Stock is then traded; provided, however, that "Trading Day" shall not include any day (an "excluded day") during which trading in the Common Stock is suspended for more than three hours between 9:30 a.m. (New York time) and 4:00 p.m. (New York time). 2. PURCHASE AND SALE OF SHARES. ------------------------------- a. Generally. Except as otherwise provided in this Section 2 and --------- subject to the satisfaction (or waiver) of the conditions set forth in Section 7 and Section 8 below, each Purchaser shall purchase the number of Shares determined as provided in this Section 2, and the Company shall issue and sell such number of Shares to each Purchaser for such Purchaser's Investment Amount as provided below. The Company's agreement with each of the Purchasers is a separate agreement, and the sale of the Securities to each of the Purchasers is a separate sale. b. Number of Closing Shares; Form of Payment; Closing Date. --------------------------------------------------------------- (i) On the Closing Date (as defined below), the Company shall sell and each Purchaser shall buy the number of Shares as is equal to the quotient of (A) such Purchaser's 2 Investment Amount divided by (B) the Closing Price. On the Closing Date, each Purchaser shall pay the Company an amount equal to such Purchaser's Investment Amount. (ii) On the Closing Date, each Purchaser shall pay its Investment Amount by wire transfer to the Company, in accordance with the Company's written wiring instructions against delivery of certificates representing the Shares being purchased by such Purchaser, and the Company shall deliver such Shares against delivery of such Purchaser's Investment Amount. (iii) Subject to the satisfaction (or waiver) of the conditions thereto set forth in Section 7 and Section 8 below, the date and time of the sale of the Shares pursuant to this Agreement (the "CLOSING") shall be 10:00 a.m. California time on November 7, 2003 or such other date or time as the Placement Agent and the Company may mutually agree ("CLOSING DATE"). The Closing shall occur at the Palo Alto offices of Wilson Sonsini Goodrich & Rosati ("WSGR"), or at such other place as the Placement Agent and the Company may otherwise mutually agree. 3. THE PURCHASER'S REPRESENTATIONS AND WARRANTIES. -------------------------------------------------- Each Purchaser severally and not jointly represents and warrants to the Company as follows: a. Purchase for Own Account. The Purchaser is purchasing the Shares --------------------------- for the Purchaser's own account and not with a present view towards the distribution thereof. The Purchaser understands that the Purchaser must bear the economic risk of this investment indefinitely, unless the Shares are registered pursuant to the Securities Act and any applicable state securities or blue sky laws or an exemption from such registration is available, and that the Company has no present intention of registering any such Shares other than as contemplated by this Agreement. Notwithstanding anything in this Section 3(a) to the contrary, by making the foregoing representation, the Purchaser does not agree to hold the Shares for any minimum or other specific term and reserves the right to dispose of the Shares at any time in accordance with or pursuant to a registration statement or an exemption from registration under the Securities Act and any applicable state securities laws. b. Information. The Purchaser has been furnished all materials ----------- (excluding any material nonpublic information) relating to the business, finances and operations of the Company and its subsidiaries and materials relating to the offer and sale of the Shares that have been requested by the Purchaser. The Purchaser has been afforded the opportunity to ask questions of the Company and has received what the Purchaser believes to be satisfactory answers to any inquiries. The Purchaser understands that its investment in the Shares involves a high degree of risk. Neither such inquiries nor any other due diligence investigation conducted by the Purchaser or its counsel or any of its representatives shall modify, amend or affect the Purchaser's right to rely on the Company's representations and warranties contained in Section 4 below. c. Governmental Review. The Purchaser understands that no United -------------------- States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Shares. 3 d. Authorization; Enforcement. The Purchaser has the requisite power --------------------------- and authority to enter into and perform its obligations under this Agreement and to purchase the Shares in accordance with the terms hereof. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). e. Transfer or Resale. The Purchaser understands that (i) except as -------------------- provided in Section 5 of this Agreement, the Shares have not been and are not being registered under the Securities Act or any state securities laws, and may not be transferred unless (a) subsequently registered thereunder, or (b) the Purchaser shall have delivered to the Company an opinion of counsel reasonably acceptable to the Company (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Shares to be sold or transferred may be sold or transferred under an exemption from such registration, and (ii) neither the Company nor any other person is under any obligation to register such Shares under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder, in each case, other than pursuant to this Agreement. f. Legends. The Purchaser understands that, until the end of the ------- holding period under Rule 144(k) of the Securities Act (or any successor provision) with respect to the Shares, any stock certificate representing the Shares shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. The legend set forth above shall be removed and the Company shall within three (3) Trading Days issue the Shares without such legend to the holder of the Shares upon which it is stamped, (i) if such Shares have been resold or transferred pursuant to the registration statement contemplated by Section 5 of this Agreement and the registration statement was effective at the time of such transfer, (ii) if, in connection with a sale transaction, such holder provides the Company with an opinion of counsel reasonably acceptable to the Company to the effect that a public sale, assignment, pledge or transfer of the Shares may be made without registration under the Securities Act, or (iii) upon expiration of the two-year period under Rule 144(k) of the Securities Act (or any successor rule). The Company shall not require such opinion of counsel for the sale of Shares in accordance with Rule 144 of the Securities Act, provided that the seller provides such representations that the Company shall reasonably request confirming compliance 4 with the requirements of Rule 144. Such Purchaser understands that, in the event Rule 144(k) as promulgated under the Securities Act (or any successor rule) is amended to change the two-year period under Rule 144(k) (or the corresponding period under any successor rule), (i) each reference in Section 3(f) of this Agreement to "two (2) years" or the "two-year period" shall be deemed for all purposes of this Agreement to be references to such changed period, and (ii) all corresponding references in the Shares shall be deemed for all purposes to be references to the changed period, provided that such changes shall not become effective if they are otherwise prohibited by, or would otherwise cause a violation of, the then-applicable federal securities laws. g. Investor Status. The Purchaser is an "accredited investor" within ---------------- the meaning of Rule 501 Regulation D under the Securities Act. In the normal course of its business, it invests in or purchases securities similar to the Shares and it has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of purchasing the Shares. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. -------------------------------------------------- The Company represents and warrants to each Purchaser as follows: a. Organization and Qualification. Each of the Company and its -------------------------------- subsidiaries is a corporation duly organized and existing under the laws of the jurisdiction in which it is incorporated, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. b. Authorization; Enforcement. (i) The Company has the requisite --------------------------- corporate power and authority to enter into and perform its obligations under this Agreement, to issue and sell the Shares in accordance with the terms hereof; (ii) the execution, delivery and performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby (including, without limitation, the reservation for issuance and issuance of the Shares) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors or its shareholders is required; (iii) this Agreement has been duly executed and delivered by the Company; and (iv) this Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). c. Capitalization. The capitalization of the Company and each of its -------------- subsidiaries as of the date hereof is set forth on Schedule 4(c), including the ------------- authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to the Company's stock option plans, the number of shares issuable and reserved for issuance pursuant to securities exercisable for, or convertible into or exchangeable for any shares of capital stock. All 5 of such outstanding shares of the Company's capital stock have been, or upon issuance will be, validly issued, fully paid and nonassessable. Except as set forth on Schedule 4(c), no shares of capital stock of the Company (including the ------------- Shares) or any of the subsidiaries are subject to preemptive rights or any other similar rights of the shareholders of the Company or any liens or encumbrances. Except for the Shares and as disclosed in Schedule 4(c), as of the date of this ------------- Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever to which the Company or any of the subsidiaries is a party relating to the issuance by the Company or any of its subsidiaries of securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or such subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except as contemplated by this Agreement). Except as set forth on Schedule -------- 4(c), there are no securities or instruments containing antidilution or similar - ---- provisions that may be triggered by the issuance of the Shares in accordance with the terms of this Agreement and the holders of the securities and instruments listed on such Schedule 4(c) have waived any rights they may have ------------- under such antidilution or similar provisions in connection with the issuance of the Shares in accordance with the terms of this Agreement. The Company has made available to each Purchaser true and correct copies of the Company's Articles of Incorporation as in effect on the date hereof ("ARTICLES OF INCORPORATION"), the Company's By-laws as in effect on the date hereof (the "BY-LAWS") and all other instruments and agreements governing securities convertible into or exercisable or exchangeable for capital stock of the Company, except for stock options granted under any benefit plan of the Company. d. Issuance of Shares. The Shares are duly authorized and when issued ------------------- and paid for in accordance with the terms hereof, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances (other than those imposed through acts or omissions of the Purchaser thereof), and will not be subject to preemptive rights or other similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof. e. No Conflicts. The execution, delivery and performance of this ------------- Agreement by the Company, and the consummation by the Company of the transactions contemplated hereby (including, without limitation, the reservation for issuance and issuance of the Shares) will not (i) conflict with or result in a violation of the Articles of Incorporation or By-laws or (ii) conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (assuming the accuracy of the representations and warranties of the Purchasers) of the United States federal and state securities laws and regulations applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except, with respect to clause (ii), for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of 6 its subsidiaries is in violation of its Articles of Incorporation, By-laws and other organizational documents and neither the Company nor any of its subsidiaries is in default (and no event has occurred which, with notice or lapse of time or both, would put the Company or any of its subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, except for actual or possible violations, defaults or rights as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for actual or possible violations, if any, the sanctions for which either singly or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, approval, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement in accordance with the terms hereof. The Company is not in violation of the listing requirements of The Nasdaq Stock Market and does not reasonably anticipate that the Common Stock will be delisted by The Nasdaq Stock Market in the foreseeable future based on its rules as currently in effect. f. SEC Documents; Financial Statements. Since January 1, 2002, the -------------------------------------- Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and has filed all registration statements and other documents required to be filed by it with the SEC pursuant to the Securities Act (all of the foregoing filed prior to the date hereof, and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the "SEC DOCUMENTS"). The Company has made available to each Purchaser true and complete copies of the SEC Documents, except for the exhibits and schedules thereto and the documents incorporated therein. As of their respective dates, the SEC Documents complied as to form with the requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Any statements made in any such SEC Documents that are or were required to be updated or amended under applicable law have been so updated or amended. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form with applicable accounting requirements and the published rules and regulations of the SEC applicable with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present the consolidated financial position of the Company and its subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments). Except as set forth in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of such SEC Documents and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such SEC Documents, which liabilities 7 and obligations referred to in clauses (i) and (ii), individually or in the aggregate, would not have a Material Adverse Effect. g. Absence of Certain Changes. Except as disclosed in the SEC ----------------------------- Documents, since January 1, 2003, there has been no change or development which individually or in the aggregate has had or could have a Material Adverse Effect. h. Absence of Litigation. Except as disclosed in Schedule 4(h) or the ---------------------- ------------- SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company, or any of its subsidiaries, or any of their directors or officers in their capacities as such which would have a Material Adverse Effect. i. Intellectual Property. The Company and each of its subsidiaries ---------------------- owns or is licensed to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, permits, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "INTANGIBLES") necessary for the conduct of its business as now being conducted and as proposed to be conducted. Other than as disclosed in the Company's SEC Documents, neither the Company nor any of its subsidiaries has received written notice that it is infringing upon or in conflict with any third party Intangibles. Other than as disclosed in the Company's SEC Documents, neither the Company nor any of its subsidiaries has entered into any consent, indemnification, forbearance to sue or settlement agreements with respect to the validity of the Company's or such subsidiary's ownership or right to use its Intangibles. The Intangibles are valid and enforceable, and no registration relating thereto has lapsed, expired or been abandoned or canceled or is the subject of cancellation or other adversarial proceedings, and all applications therefor are pending and in good standing. The Company has complied with its contractual obligations relating to the protection of the Intangibles used pursuant to licenses. To the Company's knowledge, no person is infringing on or violating the Intangibles owned or used by the Company. j. Acknowledgment Regarding the Purchasers' Purchase of the Shares. ------------------------------------------------------------------- The Company acknowledges and agrees that no Purchaser is acting as a financial advisor or is acting as a fiduciary of the Company (or in any similar capacity) with respect to this Agreement or the transactions contemplated hereby, and the relationship between the Company and the Purchasers is "arms length" and that any statement made by any Purchaser or any of its representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to such Purchaser's purchase of Shares and has not been relied upon by the Company, its officers or directors in any way. The Company further represents to the Purchaser that the Company's decision to enter into this Agreement has been based solely on an independent evaluation by the Company and its representatives. k. No Brokers. Except for the Placement Agent, the Company has not ----------- engaged any person to which or to whom brokerage commissions, finder's fees, financial advisory fees or similar payments are or will become due in connection with this Agreement or the transactions contemplated hereby. 8 l. Tax Status. The Company and each of its subsidiaries has made or ----------- filed all material federal, state and local income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company or the applicable subsidiary has set aside on its books provisions adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no material unpaid taxes claimed to be due by the taxing authority of any jurisdiction. The Company has not executed a waiver with respect to any statute of limitations relating to the assessment or collection of any federal, state or local tax. None of the Company's tax returns have been or is being audited by any taxing authority. m. No General Solicitation. Neither the Company nor any person ------------------------- participating on the Company's behalf in the transactions contemplated hereby has conducted any "general solicitation" or "general advertising" as such terms are used in Regulation D, with respect to any of the Shares being offered hereby. n. Securities Laws. Neither the Company, nor any of its affiliates, ---------------- nor any person acting on its or their behalf, has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security under circumstances that would require registration of the Shares being offered hereby under the Securities Act or cause this offering of Shares to be integrated with any prior offering of securities of the Company for purposes of the Securities Act. Assuming the truth and accuracy of the representations and warranties of the Purchasers set forth in Section 3 of this Agreement, the Purchasers will not be statutory underwriters within the meaning of Section 2(a)(11) of the Securities Act. o. Form S-3 Eligibility. The Company is currently eligible to register -------------------- the resale of its Common Stock on a registration statement on Form S-3 under the Securities Act. There exist no facts or circumstances (including without limitation any required approvals or waivers of any circumstances that may delay or prevent the obtaining of accountant's consents) that would prohibit or delay the preparation and filing of a registration statement on Form S-3 with respect to the Registrable Shares. p. Disclosure. The Company confirms that neither it nor any other ---------- person acting on its behalf has provided any of the Purchasers or its agents or counsel with any information that constitutes or might constitute material non-public information (other than information necessary to consummate the transaction contemplated by this Agreement). The Company understands and confirms that the Purchasers shall be relying on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 9 q. Internal Accounting Controls. The Company maintains a system of ---------------------------- internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. r. Insurance. The Company will continue to be insured by insurers of --------- recognized financial responsibility against such losses and risks and in such amounts as are commensurate with similarly situated companies engaged in businesses similar to those of the Company. s. Regulatory Permits. The Company possess all material certificates, ------------------ authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as currently conducted (the "Permits"), and the Company has not received any written notice of proceedings relating to the revocation or modification of any such Permit. 5. REGISTRATION OF SHARES. ------------------------ a. The Company shall: (i) as promptly as practicable, but not later than 30 days after the earliest date of original issuance of any of the Shares (the " Filing Deadline"), cause to be filed with the SEC a registration statement on Form S-3 pursuant to Rule 415 under the Securities Act (the "Resale Registration Statement"), which Resale Registration Statement shall provide for the offer and sale of all Registrable Shares held by Purchasers that have provided the information required pursuant to the terms of Section 5(b) hereof; (ii) use its reasonable best efforts to cause the Resale Registration Statement to be declared effective by the SEC as promptly as practicable, but not later than 60 days after the filing of the Resale Registration Statement with the SEC or, in the event of a review by the SEC, 120 days; and (iii) use its reasonable best efforts to keep the Resale Registration Statement continuously effective, supplemented and amended subject to the provisions of Section 5(d) hereof (subject to the right of the Company to suspend the use of the Resale Registration Statement by delivery of a Suspension Notice in accordance with Section 5(d) hereof) to the extent necessary to ensure that it (A) is available for resales of Registrable Shares by the Purchasers to the benefit of this Agreement and (B) conforms with the requirements of this Agreement and the Securities Act and the rules 10 and regulations of the SEC promulgated thereunder as announced from time to time, for a period (the "Effectiveness Period") ending two (2) years from the date the Resale Registration Statement is declared effective by the SEC. b. The Company hereby agrees to pay damages to each Purchaser in an amount equal to 1.0% of such Purchaser's Investment Amount for each consecutive thirty (30) day period following (i) the Filing Deadline (in the event the Company fails to file the Resale Registration Statement on or before that date) and (ii) the date upon which the Company receives comments from the SEC relating to the Resale Registration Statement (in the event the Company fails to respond to any such SEC comments within thirty (30) days of its receipt of such comments); provided, however, that no damages shall be payable pursuant to this -------- ------- Section 5(b) after such date that the Resale Registration Statement is filed with the SEC or such date that the Company responds to any SEC comments to the Resale Registration Statement. c. No Purchaser may include any of its Registrable Shares in the Resale Registration Statement pursuant to this Agreement unless such Purchaser furnishes to the Company in writing, prior to or on the 10th Business Day after such Purchaser's receipt from the Company of the Purchaser Questionnaire (such applicable deadline, the "Questionnaire Deadline"), such information regarding the Purchaser and the distribution of Registrable Shares as the Company may reasonably request for use in connection with the Resale Registration Statement or Prospectus or preliminary Prospectus included therein and in any application to be filed with or under state securities laws (the form of which request is attached as Appendix A hereto regarding the sale of the Shares to the Purchasers ---------- and is referred to herein as the "Purchaser Questionnaire"). In connection with all requests for information from the Purchasers with respect to inclusion of Registrable Shares in the Resale Registration Statement, the Company shall notify such Purchasers of the requirements set forth in the preceding sentence. The Company agrees and undertakes that (i) it shall distribute a Purchaser Questionnaire no later than 10 Business Days prior to the initial effectiveness of the Resale Registration Statement to each Purchaser and (ii) upon the request of any Purchaser made prior to 9:00 a.m., California time, on the second Business Day before the initial effectiveness of the Resale Registration Statement, the Company shall also distribute a Purchaser Questionnaire to such Purchaser at the address set forth in any request by such Purchaser. Purchasers that do not complete the Purchaser Questionnaire and timely deliver it to the Company shall not be named as selling security holders in the Prospectus or preliminary Prospectus included in the Resale Registration Statement and therefore shall not be permitted to sell any Registrable Shares pursuant to the Resale Registration Statement. Notwithstanding the foregoing, upon request from a Purchaser that did not return a Purchaser Questionnaire on a timely basis because it was a subsequent transferee of Registrable Shares after the Company distributed the Purchaser Questionnaire, (i) the Company shall distribute a Purchaser Questionnaire to such Purchaser at the address set forth in the request and (ii) upon receipt of a properly completed Purchaser Questionnaire from such Purchaser, the Company shall use its reasonable efforts to name such Purchaser as a selling security holder by means of an amendment or, if permitted by the SEC, by means of a Prospectus supplement to the Resale Registration Statement. Each Purchaser as to which the Resale Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make information previously furnished to the Company by such Purchaser 11 not materially misleading. d. In connection with the Resale Registration Statement, the Company shall use its reasonable best efforts to effect such registration to permit the sale of the Registrable Shares, and pursuant thereto, shall prepare and file with the SEC a Resale Registration Statement relating to the registration of the Registrable Shares on Form S-3. The Company represents and warrants that it currently meets the requirements for use of Form S-3 for registration of the resale of the Registrable Shares, and has no actual knowledge of any facts which would reasonably cause the Company to fail to meet such requirements. In connection with the Resale Registration Statement and any Prospectus required by this Agreement to permit the sale or resale of Registrable Shares, the Company shall: (i) Subject to any notice by the Company of the existence of any fact or event of the kind described in Section 5(e) and the Company's right to invoke a Suspension Period in the manner described in this Section 5(d)(i), use commercially reasonable efforts to keep the Resale Registration Statement continuously effective during the Effectiveness Period; upon the occurrence of any event that would cause the Resale Registration Statement or the Prospectus contained therein to (A) contain a material misstatement or omission or (B) not be effective and usable for resale of Registrable Shares during the Effectiveness Period, unless a Suspension Period is then in effect, the Company shall file promptly an appropriate amendment to the Resale Registration Statement, a supplement to the Prospectus or a report filed with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the case of clause (A), correcting any such misstatement or omission, and, in the case of either clause (A) or (B), use commercially reasonable efforts to cause such amendment to be declared effective and the Resale Registration Statement and the related Prospectus to become usable for their intended purposes as soon as practicable thereafter. Notwithstanding the foregoing, the Company may suspend the effectiveness of the Resale Registration Statement by written notice to the Purchasers for a period not to exceed an aggregate of 60 days in any 360-day period (each such period, a "Suspension Period"); provided that the Company shall promptly notify each Purchaser in writing of the date on which the Suspension Period will begin and the date on which the Suspension Period ends and no single Suspension Period shall exceed 30 days. (ii) Prepare and file with the SEC such amendments and post-effective amendments to the Resale Registration Statement as may be necessary to keep the Resale Registration Statement effective during the Effectiveness Period; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (it being understood that the Company shall not be required to file a Prospectus supplement pursuant to Rule 424(b) with respect to any Purchaser that failed to submit their Purchaser Questionnaire by the Questionnaire Deadline) under the 12 Securities Act, and to comply fully with the applicable provisions of Rules 424 and 430A under the Securities Act in a timely manner; and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Shares covered by the Resale Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in the Resale Registration Statement or a supplement to the Prospectus. e. Each Purchaser agrees that, upon receipt of any notice (a "Suspension Notice") from the Company of the existence of any fact or the happening of any event, during the Effectiveness Period, that makes any statement of a material fact made in the Resale Registration Statement, the Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Resale Registration Statement or the Prospectus in order to make the statements therein not misleading, such Purchaser shall discontinue disposition of Registrable Shares pursuant to the Resale Registration Statement and any use of the associated Prospectus until: (i) such Purchaser has received copies of the supplemented or amended Prospectus contemplated by Section 5(d) hereof; or (ii) such Purchaser is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are part of or incorporated by reference in the Prospectus. Each Purchaser agrees to keep the receipt of a Suspension Notice and its contents confidential. If so directed by the Company, each Purchaser will deliver to the Company all copies, other than permanent file copies then in such Purchaser's possession, of the Prospectus covering such Registrable Shares that was current at the time of receipt of such Suspension Notice. The Company agrees that the Suspension Notice shall not include any material non-public information other than such information necessary to inform the Purchasers that a Suspension Period has been implemented. f. All expenses incident to the Company's performance of or compliance with Section 5 of this Agreement shall be borne by the Company regardless of whether a Resale Registration Statement becomes effective, including, without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal and state securities laws; (iii) all expenses of printing (including printing of Prospectuses and certificates for the Common Stock) and the Company's expenses for messenger and delivery services and telephone; (iv) all fees and disbursements of counsel to the Company and all Transfer 13 agent fees; (v) all application and filing fees in connection with listing (or authorizing for quotation) the Common Stock on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company. Each Purchaser shall bear all costs associated with selling commissions, discounts and expenses of any financial or legal advisors engaged to review the Resale Registration Statement. The Company shall permit the Purchasers and their legal counsel to review and comment upon the Resale Registration Statement at least two Business Days prior to their filing with the SEC, and not file any document in a form to which Purchasers reasonably object in a timely manner. 6. COVENANTS. --------- a. Satisfaction of Conditions. The parties shall use their best ---------------------------- efforts to satisfy in a timely manner each of the conditions set forth in Section 7 and Section 8 of this Agreement. b. Form D; Blue Sky Laws. The Company agrees to file a Form D with ------------------------- respect to the Shares as required under Regulation D and to provide a copy thereof to each Purchaser promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Shares for sale to the Purchasers pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States or obtain exemption therefrom, and shall provide evidence of any such action so taken to each Purchaser on or prior to the Closing Date. c. Reporting Status. So long as a Purchaser beneficially owns any ----------------- Shares or has the right to acquire any Shares pursuant to this Agreement, the Company shall timely file all reports required to be filed with the SEC pursuant to the Exchange Act, and shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. d. Use of Proceeds. The Company shall use the net proceeds from the ----------------- sale of the Shares for general business purposes, but in no event shall the Company use such net proceeds to repurchase any outstanding securities of the Company. e. Listing. On the Closing Date, the Company shall have applied for ------- the listing of the Shares, in each case, upon each national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed or quoted and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Shares from time to time issuable hereunder. The Company shall use its reasonable best efforts to include its shares of Common Stock in The Nasdaq Stock Market at the earliest practical date and, in any event, by the date the first 14 registration statement covering the resale of the Shares is declared effective by the SEC and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of The Nasdaq Stock Market. f. No Integrated Offerings. The Company shall not make any offers or -------------------------- sales of any security (other than the Shares) under circumstances that would require registration of the Shares being offered or sold hereunder under the Securities Act or cause this offering of Shares to be integrated with any other offering of securities by the Company for any purposes, including for purposes of any shareholder approval provision applicable to the Company or its securities. g. Securities Laws Disclosure; Publicity. The Company shall issue a ------------------------------------- press release reasonably acceptable to the Purchasers disclosing the transactions contemplated hereby and file a Current Report on Form 8-K disclosing the material terms of the transactions contemplated hereby. In addition, the Company will make such other filings and notices in the manner and time required by the SEC and the trading market on which the Shares are listed. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the SEC (other than the Resale Registration Statement and any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the Exchange Act) or any regulatory agency or trading market, without the prior written consent of such Purchaser, except to the extent such disclosure is required by law or trading market regulations, in which case the Company shall provide the Purchaser with prior notice of such disclosure. 7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. ---------------------------------------------------- The obligation of the Company hereunder to issue and sell Shares to a Purchaser at the Closing hereunder is subject to the satisfaction, at or before the Closing Date, of each of the following conditions thereto; provided, -------- however, that these conditions are for the Company's sole benefit and may be - ------- waived by the Company at any time in its sole discretion. a. The applicable Purchaser shall have executed the signature page to this Agreement and delivered the same to the Company. b. The applicable Purchaser shall have delivered such Purchaser's Investment Amount in accordance with Section 2(b) above. c. The representations and warranties of the applicable Purchaser shall be true and correct as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the applicable Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Purchaser at or prior to the Closing Date. d. No statute, rule, regulation, executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been enacted, entered, promulgated, endorsed or adopted by 15 any court or governmental authority of competent jurisdiction or any self-regulatory organization, or the staff of any thereof, having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of, any of the transactions contemplated by this Agreement. 8. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE. ----------------------------------------------------------- The obligation of each Purchaser hereunder to purchase Shares to be purchased by it hereunder is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these -------- conditions are for such Purchaser's sole benefit and may be waived by such Purchaser at any time in such Purchaser's sole discretion: a. The Company shall have executed the signature pages to this Agreement and delivered the same to the Purchaser. b. The trading in the Company's Common Stock shall not have been suspended or be under threat of suspension by the SEC or any governing body of The Nasdaq Stock Market. c. The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Purchaser shall have received a certificate, executed on behalf of the Company by its Chief Financial Officer, dated as of the Closing Date, to the foregoing effect and attaching true and correct copies of the resolutions adopted by the Company's Board of Directors authorizing the execution, delivery and performance by the Company of its obligations under this Agreement. d. No statute, rule, regulation, executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been enacted, entered, promulgated, endorsed or adopted by any court or governmental authority of competent jurisdiction or any self-regulatory organization, or the staff of any thereof, having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of, any of the transactions contemplated by this Agreement. e. As of the Closing Date, there shall not have occurred any Material Adverse Effect. f. The Company shall have provided advance notice to The Nasdaq Stock Market of the issuance of the Shares if so required by the rules applicable thereto. g. The Purchaser shall have received an opinion of the Company's counsel, dated as of the Closing Date. 9. GOVERNING LAW MISCELLANEOUS. ----------------------------- 16 a. Governing Law; Jurisdiction. This Agreement shall be governed by ----------------------------- and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State of New York. Each of the parties irrevocably consents to the nonexclusive jurisdiction of the United States federal courts and the state courts located in the State of New York in any suit or proceeding based on or arising under this Agreement and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in such courts. Each of the parties, irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Each of the parties further agrees that service of process upon such party mailed by first class mail to the address set forth in Section 9(f) shall be deemed in every respect effective service of process upon such party in any such suit or proceeding. Nothing herein shall affect the right of any Purchaser to serve process in any other manner permitted by law. Each of the parties, agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. b. Counterparts. This Agreement may be executed in two or more ------------ counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. In the event any signature is delivered by facsimile transmission, the party using such means of delivery shall cause the manually executed Execution Page(s) hereof to be physically delivered to the other party within five (5) days of the execution hereof. c. Headings. The headings of this Agreement are for convenience of -------- reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement shall be invalid ------------ or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments; Waiver. This Agreement and the --------------------------------------- instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchasers make any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the Company and, by the Purchasers as provided in Section 9(l) hereof. Any waiver by the Purchasers, on the one hand, or the Company, on the other hand, of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision of or any breach of any other provision of this Agreement. The failure of the Purchasers, on the one hand, or the Company, on the other hand to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. f. Notices. Any notices required or permitted to be given under the ------- terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered 17 personally or by courier or by confirmed telecopy, and shall be effective five days after being placed in the mail, if mailed, or upon receipt or refusal of receipt, if delivered personally or by courier or confirmed telecopy, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Genus, Inc. 1139 Karlstad Drive Sunnyvale, CA 94089 Telephone No.: (408) 747-7120 Facsimile No.: (408) 747-7198 Attention: Mr. Shum Mukherjee With a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 Telephone No.: (650) 493-9300 Facsimile No.: (650) 493-6811 Attention: Mark Reinstra, Esq. If to the Purchaser, to the address set forth under the Purchaser's name on the Execution Page hereto executed by such Purchaser, with a copy to: Halpern Capital, Inc. 1111 Kane Concourse, Suite 401 Bay Harbor Island, FL 33154 Facsimile No.: (413) 521-8020 Attention: Baruch Halpern Each party hereto may from time to time change its address or facsimile number for notices under this Section 9 by giving at least ten (10) days' prior written notice of such changed address or facsimile number, in the case of the Purchasers to the Company, and in the case of the Company to all of the Purchasers. g. Successors and Assigns. This Agreement shall be binding upon and ------------------------ inure to the benefit of the parties and their successors and assigns. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. h. Third Party Beneficiaries. This Agreement is intended for the --------------------------- benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by any other person. i. Survival. The representations and warranties of the Company and the -------- Agreements 18 and covenants of the Company shall survive the Closing notwithstanding any due diligence investigation conducted by or on behalf of the Purchasers. Moreover, none of the representations and warranties made by the Company herein shall act as a waiver of any rights or remedies a Purchaser may have under applicable federal or state securities laws. The Company agrees to indemnify and hold harmless each Purchaser and each of such Purchaser's officers, directors, employees, partners, members, agents and affiliates for loss or damage relating to the Shares purchased hereunder arising as a result of or related to any breach by the Company of any of its representations or covenants set forth herein. j. Further Assurances. Each party shall do and perform, or cause to be ------------------ done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. k. Equitable Relief. Each party acknowledges that a breach by it of ----------------- its obligations hereunder will cause irreparable harm to the other parties by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, each party acknowledges that the remedy at law for a breach of its obligations hereunder will be inadequate and agrees, in the event of a breach or threatened breach by such party of the provisions of this Agreement, that the other parties shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. 19 l. Determinations. Except as otherwise expressly provided herein, all -------------- consents, approvals and other determinations to be made by the Purchasers pursuant to this Agreement and all waivers and amendments to or of any provisions in this Agreement prior to the Closing Date to be binding upon a Purchaser shall be made by such Purchaser and except as otherwise expressly provided herein, all consents, approvals and other determinations (other than amendments to the terms and provisions of this Agreement) to be made by the Purchasers pursuant to this Agreement and all waivers and amendments to or of any provisions in this Agreement after the Closing Date shall be made by Purchasers (excluding Purchasers who are affiliates of the Company) that have invested more than fifty percent (50%) of the aggregate Investment Amounts invested by all Purchasers (excluding Purchasers who are affiliates of the Company). m. Independent Nature of Investors' Obligations and Rights. The ------------------------------------------------------------- obligations of each Purchaser are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible for the performance of obligations of any other Purchaser under this Agreement. Nothing contained herein, and no action taken by any Purchaser hereunder shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 20 IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this Agreement to be duly executed as of the date first above written. COMPANY: GENUS, INC. By: ------------------------ Shum Mukherjee Chief Financial Officer 21 THE PURCHASER: [____________________________] By:________________________________ Name:______________________________ Title:_____________________________ Investment Amount: $_____________ Residence: ________________________ ___________________________________ ___________________________________ Address:___________________________ ___________________________________ ___________________________________ Telephone No.: ( )_____________ Telecopy No.: ( )_____________ Attention:_________________________ with copies of all notices to: ___________________________________ ___________________________________ ___________________________________ ___________________________________ Telephone No.: ( )______________ Telecopy No.: ( )______________ Attention:_________________________ 22 APPENDIX A __________, 2003 GENUS, INC. FORM OF SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE The undersigned beneficial Purchaser of shares of common stock, no par value per share (the "Shares" or "Registrable Shares"), of Genus, Inc. ("Genus" or "Registrant"), issued or issuable pursuant to that certain Stock Purchase and Registration Agreement dated November 7, 2003 (the "Purchase Agreement") understands that the Registrant has filed or intends to file with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (the "Resale Registration Statement") for the registration and resale under Rule 415 of the Securities Act of 1933, as amended (the "Securities Act" ), of the Shares, in accordance with the terms of the Purchase Agreement. Each capitalized term not otherwise defined herein shall have the meaning ascribed thereto in the Purchase Agreement. Each beneficial owner of Registrable Shares is entitled to the benefits of the Purchase Agreement. In order to sell or otherwise dispose of any Registrable Shares pursuant to the Resale Registration Statement, a beneficial owner of Registrable Shares generally will be required to be named as a selling securityholder in the related prospectus, deliver a prospectus to purchasers of Registrable Shares and be bound by those provisions of the Purchase Agreement applicable to such beneficial owner. Beneficial owners that do not complete this Notice and Questionnaire and deliver it to Genus within 10 Business Days of the date of this Notice and Questionnaire as provided below will not be named as selling securityholders in the prospectus and therefore will not be permitted to sell any Registrable Shares pursuant to the Resale Registration Statement. Beneficial owners are encouraged to complete and deliver this Notice and Questionnaire prior to the effectiveness of the Resale Registration Statement so that such beneficial owners may be named as selling securityholders in the related prospectus at the time of effectiveness. BENEFICIAL OWNERS THAT DO NOT COMPLETE THIS NOTICE AND QUESTIONNAIRE AND TIMELY DELIVER IT TO GENUS SHALL NOT BE NAMED AS SELLING SECURITYHOLDERS IN THE PROSPECTUS INCLUDED IN THE RESALE REGISTRATION STATEMENT AND THEREFORE SHALL NOT BE PERMITTED TO SELL ANY REGISTRABLE SHARES PURSUANT TO THE RESALE REGISTRATION STATEMENT. Certain legal consequences arise from being named as a selling securityholder in the Resale Registration Statement and the related prospectus. Accordingly, Purchasers and beneficial owners of Registrable Shares are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling securityholder in the Resale Registration Statement and the related prospectus. 23 NOTICE The undersigned beneficial owner (the "Selling Securityholder") of Registrable Shares hereby gives notice to Genus of its intention to sell or otherwise dispose of Registrable Shares beneficially owned by it and listed below in Item 3 (unless otherwise specified under Item 3) pursuant to the Resale Registration Statement. The undersigned, by signing and returning this Notice and Questionnaire, understands that it will be bound by the terms and conditions of this Notice and Questionnaire and the Purchase Agreement. Upon any sale of Registrable Shares pursuant to the Resale Registration Statement, the undersigned will be required to deliver to Genus the Notice of Transfer (completed and signed) set forth in Exhibit 1 attached hereto and --------- hereby undertakes to do so. The undersigned hereby provides the following information to Genus and represents and warrants that such information is accurate and complete: QUESTIONNAIRE 1. (a)Full Legal Name of Selling Securityholder: ___________________________________________________________________________ (b) Full Legal Name of Registered Purchaser (if not the same as (a) above) through which Registrable Shares listed in Item 3 below are held: ___________________________________________________________________________ (c) Full Legal Name of DTC Participant (if applicable and if not the same as (b) above) through which Registrable Shares listed in Item 3 below are held: ___________________________________________________________________________ 2. Address for Notices to Selling Securityholder: ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Telephone:_________________________________________________________________ Fax:_______________________________________________________________________ Contact Person:____________________________________________________________ 3. Beneficial Ownership of Registrable Shares: (a)Type and Principal Amount of Registrable Shares beneficially owned: ___________________________________________________________________________ 24 (b)CUSIP No(s). of such Registrable Shares beneficially owned: ___________________________________________________________________________ 4. Beneficial Ownership of other securities of Genus owned by Selling Securityholder: Except as set forth below in this Item 4, the undersigned is not the beneficial or registered owner of any securities of Genus other than the Registrable Shares listed above in Item 3. (a)Type and Amount of other securities beneficially owned by the Selling Securityholder: ________________________________________________________________________ ________________________________________________________________________ (b)CUSIP No(s). of such other securities beneficially owned: ________________________________________________________________________ ________________________________________________________________________ 5. Relationships with Genus: Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (5% or more) has held any position or office or has had any other material relationship with Genus (or its predecessors or affiliates) during the past three years. State any exceptions here:_________________________________________________ ________________________________________________________________________________ 6. Plan of Distribution: Except as set forth below, the undersigned (including its donees or pledgees) intends to distribute the Registrable Shares listed above in Item 3 pursuant to the Resale Registration Statement only as follows (if at all): Such Registrable Shares may be sold from time to time directly by the undersigned or, alternatively, through underwriters, broker-dealers or agents. If the Registrable Shares are sold through underwriters or broker-dealers, the Selling Securityholder will be responsible for underwriting discounts or commissions or agent's commissions. Such Registrable Shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale, or at negotiated prices. Such sales may be effected in transactions (which may involve block transactions) (i) on any national securities exchange or quotation service on which the Registrable Shares may be listed or quoted at the time of sale, (ii) in the over-the-counter market, (iii) in transactions otherwise than on such exchanges or services or in the over-the-counter market, (iv) in ordinary brokers' transactions, (v) in purchasers by brokers, dealers or underwriters as 25 principal and resale by the Selling Securityholders for their own accounts pursuant to this prospectus, (vi) "at the risk of the market," to or through market makers, or into an existing market the Registrable Shares, (vii) in other ways not involving market makers or established trading markets, including direct sales to purchasers or sales effected through agents, (viii) through transactions in swaps or other derivatives (whether exchange-listed or otherwise), (ix) to cover short sales or (x) through the writing of options. In connection with sales of the Registrable Shares or otherwise, the undersigned may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Registrable Shares in the course of hedging positions they assume. The undersigned may also sell Registrable Shares short and deliver Registrable Shares to close out short positions, or loan or pledge Registrable Shares to broker-dealers that in turn may sell such securities. State any exceptions here:_________________________________________________ ________________________________________________________________________________ Note: In no event will such method(s) of distribution take the form of an underwritten offering of the Registrable Shares without the prior written agreement of Genus. The undersigned acknowledges that it understands its obligation to comply with the provisions of the Exchange Act and the rules thereunder relating to stock manipulation, particularly Regulation M thereunder (or any successor rules or regulations), in connection with any offering of Registrable Shares pursuant to the Purchase Agreement. The undersigned agrees that neither it nor any person acting on its behalf will engage in any transaction in violation of such provisions. In accordance with the undersigned's obligation under the Purchase Agreement, the undersigned agrees to promptly notify Genus of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the Resale Registration Statement remains effective. All notices hereunder and pursuant to the Purchase Agreement shall be made in writing at the address set forth below. In the event that the undersigned transfers all or any portion of the Registrable Shares listed in Item 3 above after the date on which such information is provided to Genus, the undersigned agrees to notify the transferee(s) at the time of transfer of its rights and obligations under this Notice and Questionnaire and the Purchase Agreement. By signing below, the undersigned consents to the disclosure of the information contained herein in, its answers to Items 1 through 6 above and the inclusion of such information in the Resale Registration Statement and the related prospectus. The undersigned understands that such information will be relied upon by Genus in connection with the preparation or amendment of the Resale Registration Statement and the related prospectus. Once this Notice and Questionnaire is executed by the undersigned and received by Genus, the terms of this Notice and Questionnaire, and the representations and warranties contained herein, shall be binding on, shall inure to the benefit of and shall be enforceable by the 26 respective successors, heirs, personal representatives, and assigns of Genus and the undersigned with respect to the Registrable Shares beneficially owned by the undersigned and listed in Item 3 above. This Agreement shall be governed in all respects by the laws of the State of New York. IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent. Date:________________________________ _________________________________________ Beneficial Owner By:______________________________________ Name:____________________________________ Title:___________________________________ PLEASE RETURN THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE TO GENUS, INC. AT: Genus, Inc. 1139 Karlstad Drive Sunnyvale, CA 94089 Attention: Shum Mukherjee, CFO ___________________ 27 EXHIBIT 1 NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 Attention: Mark Reinstra Phone:(650) 493-9300 Fax: (650) 493-6811 RE: GENUS, INC. (THE "COMPANY") COMMON STOCK TRANSFER Dear Sirs: Please be advised that __________ has transferred ___________ shares of the Company's Common Stock pursuant to the Registration Statement on Form S-3 (File No.___-______) filed by the Company. We hereby certify that the prospectus delivery requirements, if any, of the Securities Act of 1933, as amended, have been satisfied with respect to the transfer described above and that the above-named beneficial owner of the Notes or Common Stock is named as a selling securityholder in the Prospectus dated __________, 2003 or in amendments or supplements thereto, and that the number of shares of Common Stock transferred are all/a portion (please circle as appropriate) of the Common Stock listed for resale in such Prospectus as amended or supplemented opposite such owner's name. Very truly yours, ________________________________________ (Name) By: ____________________________________ (Authorized Signature) 28 EX-14.1 4 doc3.txt EXHIBIT 14.1 GENUS, INC. CODE OF BUSINESS CONDUCT AND ETHICS I. INTRODUCTION This Code of Business Conduct and Ethics helps ensure compliance with legal requirements and our standards of business conduct. All Company employees are expected to read and understand this Code of Business Conduct and Ethics, uphold these standards in day-to-day activities, comply with all applicable policies and procedures, and ensure that all agents and contractors are aware of, understand and adhere to these standards. Because the principles described in this Code of Business Conduct and Ethics are general in nature, you should also review all applicable Company policies and procedures for more specific instruction, and contact the Human Resources Department if you have any questions. Nothing in this Code of Business Conduct and Ethics, in any company policies and procedures, or in other related communications (verbal or written) creates or implies an employment contract or term of employment. We are committed to continuously reviewing and updating our policies and procedures. Therefore, this Code of Business Conduct and Ethics is subject to modification. This Code of Business Conduct and Ethics supersedes all other such codes, policies, procedures, instructions, practices, rules or written or verbal representations to the extent they are inconsistent. Please sign the acknowledgment form at the end of this Code of Business Conduct and Ethics and return the form to the Human Resources Department indicating that you have received, read, understand and agree to comply with the Code of Business Conduct and Ethics. The signed acknowledgment form will be located in your personnel file. COMPLIANCE IS EVERYONE'S BUSINESS Ethical business conduct is critical to our business. As an employee, your responsibility is to respect and adhere to these practices. Many of these practices reflect legal or regulatory requirements. Violations of these laws and regulations can create significant liability for you, the Company, its directors, officers, and other employees. Part of your job and ethical responsibility is to help enforce this Code of Business Conduct and Ethics. You should be alert to possible violations and report possible violations to the Human Resources Department or the Legal Department. If you believe that, based on the nature of the suspected improprieties and the persons you believe to be involved, reporting violations to the Human Resources Department or the Legal Department would be ineffective, you may report such violations to the any member of the Audit Committee of the Board of Directors. You must cooperate in any internal or external investigations of possible violations. You should know that reprisal, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of law, this Code of Business Conduct or other Company policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited. Violations of law, this Code of Business Conduct and Ethics or other Company policies or procedures by Company employees can lead to disciplinary action up to and including termination. In trying to determine whether any given action is appropriate, use the following test. Imagine that the words you are using or the action you are taking is going to be fully disclosed in the media with all the details, including your photo. If you are uncomfortable with the idea of this information being made public, perhaps you should think again about your words or your course of action. In all cases, if you are unsure about the appropriateness of an event or action, please seek assistance in interpreting the requirements of these practices by contacting the Human Resources Department. II. YOUR RESPONSIBILITIES TO THE COMPANY AND ITS STOCKHOLDERS A. General Standards of Conduct The Company expects all employees, agents and contractors to exercise good judgment to ensure the safety and welfare of employees, agents and contractors and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. These standards apply while working on our premises, at offsite locations where our business is being conducted, at Company-sponsored business and social events, or at any other place where you are a representative of the Company. Employees, agents or contractors who engage in misconduct or whose performance is unsatisfactory may be subject to corrective action, up to and including termination. You should review our employment handbook for more detailed information. B. Applicable Laws All Company employees, agents and contractors must comply with all applicable laws, regulations, rules and regulatory orders. Company employees located outside of the United States must comply with laws, regulations, rules and regulatory orders of the United States, including the Foreign Corrupt Practices Act and the U.S. Export Control Act, in addition to applicable local laws. Each employee, agent and contractor must acquire appropriate knowledge of the requirements relating to his or her duties sufficient to enable him or her to recognize potential dangers and to know when to seek advice from the Human Resources Department on specific Company policies - -2- and procedures. Violations of laws, regulations, rules and orders may subject the employee, agent or contractor to individual criminal or civil liability, as well as to discipline by the Company. Such individual violations may also subject the Company to civil or criminal liability or the loss of business. C. Conflicts of Interest Each of us has a responsibility to the Company, our stockholders and each other. Although this duty does not prevent us from engaging in personal transactions and investments, it does demand that we avoid situations where a conflict of interest might occur or appear to occur. The Company is subject to scrutiny from many different individuals and organizations. We should always strive to avoid even the appearance of impropriety. What constitutes conflict of interest? A conflict of interest exists where the interests or benefits of one person or entity conflict with the interests or benefits of the Company. Examples include: (i) Employment/Outside Employment. In consideration of your employment with the Company, you are expected to devote your full attention to the business interests of the Company. You are prohibited from engaging in any activity that interferes with your performance or responsibilities to the Company or is otherwise in conflict with or prejudicial to the Company. Our policies prohibit any employee from accepting simultaneous employment with a Company supplier, customer, developer or competitor, or from taking part in any activity that enhances or supports a competitor's position. Additionally, you must disclose to the Company any interest that you have that may conflict with the business of the Company. If you have any questions on this requirement, you should contact your supervisor or the Human Resources Department. (ii) Outside Directorships. It is a conflict of interest to serve as a director of any company that competes with the Company. Although you may serve as a director of a Company supplier, customer, developer, or other business partner, our policy requires that you first obtain approval from the Company's Chief Executive Officer before accepting a directorship. Any compensation you receive should be commensurate to your responsibilities. Such approval may be conditioned upon the completion of specified actions. (iii) Business Interests. If you are considering investing in a Company customer, supplier, developer or competitor, you must first take great care to ensure that these investments do not compromise your responsibilities to the Company. Many factors should be considered in determining whether a conflict exists, including the size and nature of the investment; your ability to influence the Company's decisions; your access to confidential information of the Company or of the other company; and the nature of the relationship between the Company and the other company. - -3- (iv) Related Parties. As a general rule, you should avoid conducting Company business with a relative or significant other, or with a business in which a relative or significant other is associated in any significant role. Relatives include spouse, sister, brother, daughter, son, mother, father, grandparents, aunts, uncles, nieces, nephews, cousins, step relationships, and in-laws. Significant others include persons living in a spousal (including same sex) or familial fashion with an employee. If such a related party transaction is unavoidable, you must fully disclose the nature of the related party transaction to the Company's Chief Financial Officer. If determined to be material to the Company by the Chief Financial Officer, the Company's Audit Committee must review and approve in writing in advance these related party transactions. The most significant related party transactions, particularly those involving the Company's directors or executive officers, must be reviewed and approved in writing in advance by the Company's Board of Directors. The Company must report all material related party transactions under applicable accounting rules, Federal securities laws, SEC rules and regulations, and securities market rules. Any dealings with a related party must be conducted in such a way that no preferential treatment is given to this business. The Company discourages the employment of relatives and significant others in positions or assignments within the same department and prohibits the employment of these individuals in positions that have a financial dependence or influence (e.g., an auditing or control relationship, or a supervisor/subordinate relationship). The purpose of this policy is to prevent the organizational impairment and conflicts that are a likely outcome of the employment of relatives or significant others, especially in a supervisor/subordinate relationship. (v) Other Situations. Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations. If a proposed transaction or situation raises any questions or doubts in your mind you should consult the Legal Department. D. Corporate Opportunities Employees, officers and directors may not exploit for their own personal gain opportunities that are discovered through the use of corporate property, information or position unless the opportunity is disclosed fully in writing to the Company's Board of Directors and the Board of Directors declines to pursue such opportunity. E. Protecting the Company's Confidential Information The Company's confidential information is a valuable asset. The Company's confidential information includes product architectures; source codes; product plans and road maps; names and lists of customers, dealers, and employees; and financial information. This information is the property of the Company and may be protected by patent, trademark, copyright and trade secret laws. All confidential information must be used for Company business purposes only. Every employee, agent and contractor must safeguard it. THIS RESPONSIBILITY INCLUDES NOT - -4- DISCLOSING THE COMPANY CONFIDENTIAL INFORMATION SUCH AS INFORMATION REGARDING THE COMPANY'S PRODUCTS OR BUSINESS OVER THE INTERNET. You are also responsible for properly labeling any and all documentation shared with or correspondence sent to the Company's outside counsel as "Attorney-Client Privileged". This responsibility includes the safeguarding, securing and proper disposal of confidential information in accordance with the Company's policy on Maintaining and Managing Records set forth in Section III.I of this Code of Business Conduct and Ethics. This obligation extends to confidential information of third parties, which the Company has rightfully received under Non-Disclosure Agreements. See the Company's policy dealing with Handling Confidential Information of Others set forth in Section IV.D of this Code of Business Conduct and Ethics. (i) Proprietary Information and Invention Agreement. When you joined the Company, you signed an agreement to protect and hold confidential the Company's proprietary information. This agreement remains in effect for as long as you work for the Company and after you leave the Company. Under this agreement, you may not disclose the Company's confidential information to anyone or use it to benefit anyone other than the Company without the prior written consent of an authorized Company officer. (ii) Disclosure of Company Confidential Information. To further the Company's business, from time to time our confidential information may be disclosed to potential business partners. However, such disclosure should never be done without carefully considering its potential benefits and risks. If you determine in consultation with your manager and other appropriate Company management that disclosure of confidential information is necessary, you must then contact the Company's outside counsel to ensure that an appropriate written nondisclosure agreement is signed prior to the disclosure. The Company has standard nondisclosure agreements suitable for most disclosures. You must not sign a third party's nondisclosure agreement or accept changes to the Company's standard nondisclosure agreements without review and approval by the Company's outside counsel. In addition, all Company materials that contain Company confidential information, including presentations, must be reviewed and approved by the Company's outside counsel prior to publication or use. Furthermore, any employee publication or publicly made statement that might be perceived or construed as attributable to the Company, made outside the scope of his or her employment with the Company, must be reviewed and approved in writing in advance by the Company's outside counsel and must include the Company's standard disclaimer that the publication or statement represents the views of the specific author and not of the Company. (iii) Requests by Regulatory Authorities. The Company and its employees, agents and contractors must cooperate with appropriate government inquiries and investigations. In this context, however, it is important to protect the legal rights of the Company with respect to its confidential information. All government requests for information, documents or investigative interviews must be referred to the Company's outside counsel. No financial information may be disclosed without the prior approval of the Chief Financial Officer. - -5- (iv) Company Spokespeople. Specific policies have been established regarding who may communicate information to the press and the financial analyst community. All inquiries or calls from the press and financial analysts should be referred to the Chief Financial Officer. The Company has designated its CEO and CFO as official Company spokespeople for financial, marketing, technical and other such matters. These designees are the only people who may communicate with the press on behalf of the Company. F. Obligations Under Securities Laws-"Insider" Trading Obligations under the U.S. securities laws apply to everyone. In the normal course of business, officers, directors, employees, agents, contractors and consultants of the Company may come into possession of significant, sensitive information. This information is the property of the Company -- you have been entrusted with it. You may not profit from it by buying or selling securities yourself, or passing on the information to others to enable them to profit or for them to profit on your behalf. The purpose of this policy is both to inform you of your legal responsibilities and to make clear to you that the misuse of sensitive information is contrary to Company policy and U.S. securities laws. Insider trading is a crime, penalized by fines of up to $5,000,000 and 20 years in jail for individuals. In addition, the SEC may seek the imposition of a civil penalty of up to three times the profits made or losses avoided from the trading. Insider traders must also disgorge any profits made, and are often subjected to an injunction against future violations. Finally, insider traders may be subjected to civil liability in private lawsuits. Employers and other controlling persons (including supervisory personnel) are also at risk under U.S. securities laws. Controlling persons may, among other things, face penalties of the greater of $5,000,000 or three times the profits made or losses avoided by the trader if they recklessly fail to take preventive steps to control insider trading. Thus, it is important both to you and the Company that insider-trading violations not occur. You should be aware that stock market surveillance techniques are becoming increasingly sophisticated, and the chance that U.S. federal or other regulatory authorities will detect and prosecute even small-level trading is significant. Insider trading rules are strictly enforced, even in instances when the financial transactions seem small. You should contact the Chief Financial Officer or outside counsel if you are unsure as to whether or not you are free to trade. The Company has imposed a trading blackout period on members of the Board of Directors, executive officers and certain designated employees who, as a consequence of their position with the Company, are more likely to be exposed to material nonpublic information about the Company. These directors, executive officers and employees generally may not trade in Company securities during the blackout period. - -6- For more details, and to determine if you are restricted from trading during trading blackout periods, you should contact the Company's SEC Compliance Officer. You should take a few minutes to read the Company's [Insider Trading Compliance Program] carefully, paying particular attention to the specific policies and the potential criminal and civil liability and/or disciplinary action for insider trading violations. Employees, agents and contractors of the Company who violate this Policy are also be subject to disciplinary action by the Company, which may include termination of employment or of business relationship. All questions regarding the Company's Insider Trading Compliance Program should be directed to the Company's Chief Financial Officer. G. Prohibition Against Short Selling of Company Stock No Company director, officer or other employee, agent or contractor may, directly or indirectly, sell any equity security, including derivatives, of the Company if he or she (1) does not own the security sold, or (2) if he or she owns the security, does not deliver it against such sale (a "short sale against the box") within twenty days thereafter, or does not within five days after such sale deposit it in the mails or other usual channels of transportation. No Company director, officer or other employee, agent or contractor may engage in short sales. A short sale, as defined in this policy, means any transaction whereby one may benefit from a decline in the Company's stock price. While employees who are not executive officers or directors are not prohibited by law from engaging in short sales of the Company's securities, the Company has adopted as policy that employees may not do so. H. Use of Company's Assets (i) General. Protecting the Company's assets is a key fiduciary responsibility of every employee, agent and contractor. Care should be taken to ensure that assets are not misappropriated, loaned to others, or sold or donated, without appropriate authorization. All Company employees, agents and contractors are responsible for the proper use of Company assets, and must safeguard such assets against loss, damage, misuse or theft. Employees, agents or contractors who violate any aspect of this policy or who demonstrate poor judgment in the manner in which they use any Company asset may be subject to disciplinary action, up to and including termination of employment or business relationship at the Company's sole discretion. Company equipment and assets are to be used for Company business purposes only. Employees, agents and contractors may not use Company assets for personal use, nor may they allow any other person to use Company assets. Employees who have any questions regarding this policy should bring them to the attention of the Company's Human Resources Department. (ii) Physical Access Control. The Company has and will continue to develop procedures covering physical access control to ensure privacy of communications, maintenance of the security of the Company communication equipment, and safeguard Company assets from theft, misuse and destruction. You are personally responsible for complying with the level of access control that has been implemented in the facility where you work on a permanent or - -7- temporary basis. You must not defeat or cause to be defeated the purpose for which the access control was implemented. (iii) Company Funds. Every Company employee is personally responsible for all Company funds over which he or she exercises control. Company agents and contractors should not be allowed to exercise control over Company funds. Company funds must be used only for Company business purposes. Every Company employee, agent and contractor must take reasonable steps to ensure that the Company receives good value for Company funds spent, and must maintain accurate and timely records of every expenditure. Expense reports must be accurate and submitted in a timely manner. Company employees, agents and contractors must not use Company funds for any personal purpose. (iv) Computers and Other Equipment. The Company strives to furnish employees with the equipment necessary to efficiently and effectively do their jobs. You must care for that equipment and to use it responsibly only for Company business purposes. If you use Company equipment at your home or off site, take precautions to protect it from theft or damage, just as if it were your own. If the Company no longer employs you, you must immediately return all Company equipment. While computers and other electronic devices are made accessible to employees to assist them to perform their jobs and to promote Company's interests, all such computers and electronic devices, whether used entirely or partially on the Company's premises or with the aid of the Company's equipment or resources, must remain fully accessible to the Company and, to the maximum extent permitted by law, will remain the sole and exclusive property of the Company. Employees, agents and contractors should not maintain any expectation of privacy with respect to information transmitted over, received by, or stored in any electronic communications device owned, leased, or operated in whole or in part by or on behalf of the Company. To the extent permitted by applicable law, the Company retains the right to gain access to any information received by, transmitted by, or stored in any such electronic communications device, by and through its employees, agents, contractors, or representatives, at any time, either with or without an employee's or third party's knowledge, consent or approval. (v) Software. All software used by employees to conduct Company business must be appropriately licensed. Never make or use illegal or unauthorized copies of any software, whether in the office, at home, or on the road, since doing so may constitute copyright infringement and may expose you and the Company to potential civil and criminal liability. In addition, use of illegal or unauthorized copies of software may subject the employee to disciplinary action, up to and including termination. The Company's IT Department will inspect Company computers periodically to verify that only approved and licensed software has been installed. Any non-licensed/supported software will be removed. (vi) Electronic Usage. The purpose of this policy is to make certain that employees utilize electronic communication devices in a legal, ethical, and appropriate manner. - -8- This policy addresses the Company's responsibilities and concerns regarding the fair and proper use of all electronic communications devices within the organization, including computers, e-mail, connections to the Internet, intranet and extranet and any other public or private networks, voice mail, video conferencing, facsimiles, and telephones. Posting or discussing information concerning the Company's products or business on the Internet without the prior written consent of the Company's CFO is prohibited. Any other form of electronic communication used by employees currently or in the future is also intended to be encompassed under this policy. It is not possible to identify every standard and rule applicable to the use of electronic communications devices. Employees are therefore encouraged to use sound judgment whenever using any feature of our communications systems. I. Maintaining and Managing Records The purpose of this policy is to set forth and convey the Company's business and legal requirements in managing records, including all recorded information regardless of medium or characteristics. Records include paper documents, CDs, computer hard disks, email, floppy disks, microfiche, microfilm or all other media. The Company is required by local, state, federal, foreign and other applicable laws, rules and regulations to retain certain records and to follow specific guidelines in managing these records. Civil and criminal penalties for failure to comply with such guidelines can be severe for employees, agents, contractors and the Company, and failure to comply with such guidelines may subject the employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at the Company's sole discretion. J. Records on Legal Hold A legal hold suspends all document destruction procedures in order to preserve appropriate records under special circumstances, such as litigation or government investigations. The Company's Chief Executive Officer and Chief Financial Officer determine and identify what types of Company records or documents are required to be placed under a legal hold. Every Company employee, agent and contractor must comply with this policy. Failure to comply with this policy may subject the employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at the Company's sole discretion. The Company's management will notify you if a legal hold is placed on records for which you are responsible. You then must preserve and protect the necessary records in accordance with instructions from the Company's management. RECORDS OR SUPPORTING DOCUMENTS THAT HAVE BEEN PLACED UNDER A LEGAL HOLD MUST NOT BE DESTROYED, ALTERED OR MODIFIED UNDER ANY CIRCUMSTANCES. A legal hold remains effective until it is officially released in writing by the Company's management. If you are unsure whether a document has been placed under a legal hold, you should preserve and protect that document while you check with your supervisor. - -9- K. Payment Practices (i) Accounting Practices. The Company's responsibilities to its shareholders and the investing public require that all transactions be fully and accurately recorded in the Company's books and records in compliance with all applicable laws. False or misleading entries, unrecorded funds or assets, or payments without appropriate supporting documentation and approval are strictly prohibited and violate Company policy and the law. Additionally, all documentation supporting a transaction should fully and accurately describe the nature of the transaction and be processed in a timely fashion. Finally, no "side letters" or other understandings, oral or written, that deviate from express contractual terms or the Company's approved practices, policies and procedures may be entered into unless the terms of such letters or understandings are approved by the Chief Financial Officer. (ii) Political Contributions. The Company reserves the right to communicate its position on important issues to elected representatives and other government officials. It is the Company's policy to comply fully with all local, state, federal, foreign and other applicable laws, rules and regulations regarding political contributions. The Company's funds or assets must not be used for, or be contributed to, political campaigns or political practices under any circumstances without the prior written approval of the Board of Directors. (iii) Prohibition of Inducements. Under no circumstances may employees, agents or contractors offer to pay, make payment, promise to pay, or issue authorization to pay any money, gift, or anything of value to customers, vendors, consultants, etc. that is perceived as intended, directly or indirectly, to improperly influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events and entertainment, provided that they are not excessive or create an appearance of impropriety, do not violate this policy. Questions regarding whether a particular payment or gift violates this policy should be directed to Human Resources. L. Foreign Corrupt Practices Act The Company requires full compliance with the Foreign Corrupt Practices Act (FCPA) by all of its employees, agents, and contractors. The anti-bribery and corrupt payment provisions of the FCPA make illegal any corrupt offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value to any foreign official, or any foreign political party, candidate or official, for the purpose of: influencing any act or failure to act, in the official capacity of that foreign official or party; or inducing the foreign official or party to use influence to affect a decision of a foreign government or agency, in order to obtain or retain business for anyone, or direct business to anyone. All Company employees, agents and contractors whether located in the United States or abroad, are responsible for FCPA compliance and the procedures to ensure FCPA compliance. All - -10- managers and supervisory personnel are expected to monitor continued compliance with the FCPA to ensure compliance with the highest moral, ethical and professional standards of the Company. FCPA compliance includes the Company's policy on Maintaining and Managing Records in Section III.I of this Code of Business Conduct and Ethics. Laws in most countries outside of the United States also prohibit or restrict government officials or employees of government agencies from receiving payments, entertainment, or gifts for the purpose of winning or keeping business. No contract or agreement may be made with any business in which a government official or employee holds a significant interest, without the prior approval of the Company's management. M. Export Controls A number of countries maintain controls on the destinations to which products or software may be exported. Some of the strictest export controls are maintained by the United States against countries that the U.S. government considers unfriendly or as supporting international terrorism. The U.S. regulations are complex and apply both to exports from the United States and to exports of products from other countries, when those products contain U.S.-origin components or technology. Software created in the United States is subject to these regulations even if duplicated and packaged abroad. In some circumstances, an oral presentation containing technical data made to foreign nationals in the United States may constitute a controlled export. The Company's outside counsel can provide you with guidance on which countries are prohibited destinations for Company products or whether a proposed technical presentation to foreign nationals may require a U.S. Government license. III. RESPONSIBILITIES TO OUR CUSTOMERS AND OUR SUPPLIERS A. Customer Relationships If your job puts you in contact with any Company customers or potential customers, it is critical for you to remember that you represent the Company to the people with whom you are dealing. Act in a manner that creates value for our customers and helps to build a relationship based upon trust. The Company and its employees have provided products and services for many years and have built up significant goodwill over that time. This goodwill is one of our most important assets, and the Company employees, agents and contractors must act to preserve and enhance our reputation. B. Payments or Gifts from Others Under no circumstances may employees, agents or contractors accept any offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value from customers, vendors, consultants, etc. that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the - -11- commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events and entertainment, provided that they are not excessive or create an appearance of impropriety, do not violate this policy. Questions regarding whether a particular payment or gift violates this policy are to be directed to Human Resources. Gifts given by the Company to suppliers or customers or received from suppliers or customers should always be appropriate to the circumstances and should never be of a kind that could create an appearance of impropriety. The nature and cost must always be accurately recorded in the Company's books and records. C. Publications of Others The Company subscribes to many publications that help employees do their jobs better. These include newsletters, reference works, online reference services, magazines, books, and other digital and printed works. Copyright law generally protects these works, and their unauthorized copying and distribution constitute copyright infringement. You must first obtain the consent of the publisher of a publication before copying publications or significant parts of them. When in doubt about whether you may copy a publication, consult the Company's outside counsel. D. Handling the Confidential Information of Others The Company has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the Company to enter into a business relationship. At other times, we may request that a third party provide confidential information to permit the Company to evaluate a potential business relationship with that party. Whatever the situation, we must take special care to handle the confidential information of others responsibly. We handle such confidential information in accordance with our agreements with such third parties. See also the Company's policy on Maintaining and Managing Records in Section III.I of this Code of Business Conduct and Ethics. (i) Appropriate Nondisclosure Agreements. Confidential information may take many forms. An oral presentation about a company's product development plans may contain protected trade secrets. A customer list or employee list may be a protected trade secret. A demo of an alpha version of a company's new software may contain information protected by trade secret and copyright laws. You should never accept information offered by a third party that is represented as confidential, or which appears from the context or circumstances to be confidential, unless an appropriate nondisclosure agreement has been signed with the party offering the information. THE COMPANY'S OUTSIDE COUNSEL CAN PROVIDE NONDISCLOSURE AGREEMENTS TO FIT ANY PARTICULAR SITUATION, AND WILL COORDINATE APPROPRIATE EXECUTION OF SUCH AGREEMENTS ON BEHALF OF THE COMPANY. Even after a nondisclosure agreement is in place, you should accept only the information necessary to accomplish - -12- the purpose of receiving it, such as a decision on whether to proceed to negotiate a deal. If more detailed or extensive confidential information is offered and it is not necessary, for your immediate purposes, it should be refused. (ii) Need-to-Know. Once a third party's confidential information has been disclosed to the Company, we have an obligation to abide by the terms of the relevant nondisclosure agreement and limit its use to the specific purpose for which it was disclosed and to disseminate it only to other Company employees with a need to know the information. Every employee, agent and contractor involved in a potential business relationship with a third party must understand and strictly observe the restrictions on the use and handling of confidential information. When in doubt, consult the Legal Department. (iii) Notes and Reports. When reviewing the confidential information of a third party under a nondisclosure agreement, it is natural to take notes or prepare reports summarizing the results of the review and, based partly on those notes or reports, to draw conclusions about the suitability of a business relationship. Notes or reports, however, can include confidential information disclosed by the other party and so should be retained only long enough to complete the evaluation of the potential business relationship. Subsequently, they should be either destroyed or turned over to management for safekeeping or destruction. They should be treated just as any other disclosure of confidential information is treated: marked as confidential and distributed only to those the Company employees with a need to know. (iv) Competitive Information. You should never attempt to obtain a competitor's confidential information by improper means, and you should especially never contact a competitor regarding their confidential information. While the Company may, and does, employ former employees of competitors, we recognize and respect the obligations of those employees not to use or disclose the confidential information of their former employers. E. Selecting Suppliers The Company's suppliers make significant contributions to our success. To create an environment where our suppliers have an incentive to work with the Company, they must be confident that they will be treated lawfully and in an ethical manner. The Company's policy is to purchase supplies based on need, quality, service, price and terms and conditions. The Company's policy is to select significant suppliers or enter into significant supplier agreements though a competitive bid process where possible. Under no circumstances should any Company employee, agent or contractor attempt to coerce suppliers in any way. The confidential information of a supplier is entitled to the same protection as that of any other third party and must not be received before an appropriate nondisclosure agreement has been signed. A supplier's performance should never be discussed with anyone outside the Company. A supplier to the Company is generally free to sell its products or services to any other party, including competitors of the Company. In some cases where the products or services have been designed, fabricated, or developed to our specifications the agreement between the parties may contain restrictions on sales. - -13- F. Government Relations It is the Company's policy to comply fully with all applicable laws and regulations governing contact and dealings with government employees and public officials, and to adhere to high ethical, moral and legal standards of business conduct. This policy includes strict compliance with all local, state, federal, foreign and other applicable laws, rules and regulations. If you have any questions concerning government relations you should contact the Company's outside counsel. G. Lobbying Employees, agents or contractors whose work requires lobbying communication with any member or employee of a legislative body or with any government official or employee in the formulation of legislation must have prior written approval of such activity from the Company's Board of Directors. Activity covered by this policy includes meetings with legislators or members of their staffs or with senior executive branch officials. Preparation, research, and other background activities that are done in support of lobbying communication are also covered by this policy even if the communication ultimately is not made. H. Government Contracts It is the Company's policy to comply fully with all applicable laws and regulations that apply to government contracting. It is also necessary to strictly adhere to all terms and conditions of any contract with local, state, federal, foreign or other applicable governments. The Company's management must review and approve all contracts with any government entity. I. Free and Fair Competition Most countries have well-developed bodies of law designed to encourage and protect free and fair competition. The Company is committed to obeying both the letter and spirit of these laws. The consequences of not doing so can be severe for all of us. These laws often regulate the Company's relationships with its distributors, resellers, dealers, and customers. Competition laws generally address the following areas: pricing practices (including price discrimination), discounting, terms of sale, credit terms, promotional allowances, secret rebates, exclusive dealerships or distributorships, product bundling, restrictions on carrying competing products, termination, and many other practices. Competition laws also govern, usually quite strictly, relationships between the Company and its competitors. As a general rule, contacts with competitors should be limited and should always avoid subjects such as prices or other terms and conditions of sale, customers, and suppliers. Employees, agents or contractors of the Company may not knowingly make false or misleading statements regarding its competitors or the products of its competitors, customers or suppliers. Participating with competitors in a trade association or in a standards creation body is acceptable - -14- when the association has been properly established, has a legitimate purpose, and has limited its activities to that purpose. No employee, agent or contractor shall at any time or under any circumstances enter into an agreement or understanding, written or oral, express or implied, with any competitor concerning prices, discounts, other terms or conditions of sale, profits or profit margins, costs, allocation of product or geographic markets, allocation of customers, limitations on production, boycotts of customers or suppliers, or bids or the intent to bid or even discuss or exchange information on these subjects. In some cases, legitimate joint ventures with competitors may permit exceptions to these rules as may bona fide purchases from or sales to competitors on non-competitive products, but the Company's management must review all such proposed ventures in advance. These prohibitions are absolute and strict observance is required. Collusion among competitors is illegal, and the consequences of a violation are severe. Although the spirit of these laws, known as "antitrust," "competition," or "consumer protection" or unfair competition laws, is straightforward, their application to particular situations can be quite complex. To ensure that the Company complies fully with these laws, each of us should have a basic knowledge of them and should involve our outside counsel early on when questionable situations arise. J. Industrial Espionage It is the Company's policy to lawfully compete in the marketplace. This commitment to fairness includes respecting the rights of our competitors and abiding by all applicable laws in the course of competing. The purpose of this policy is to maintain the Company's reputation as a lawful competitor and to help ensure the integrity of the competitive marketplace. The Company expects its competitors to respect our rights to compete lawfully in the marketplace, and we must respect their rights equally. Company employees, agents and contractors may not steal or unlawfully use the information, material, products, intellectual property, or proprietary or confidential information of anyone including suppliers, customers, business partners or competitors. IV. WAIVERS Any waiver of any provision of this Code of Business Conduct and Ethics for a member of the Company's Board of Directors or an executive officer must be approved in writing by the Company's Board of Directors and promptly disclosed. Any waiver of any provision of this Code of Business Conduct and Ethics with respect any other employee, agent or contractor must be approved in writing by the Company's Chief Executive Officer. V. DISCIPLINARY ACTIONS The matters covered in this Code of Business Conduct and Ethics are of the utmost importance to the Company, its stockholders and its business partners, and are essential to the - -15- Company's ability to conduct its business in accordance with its stated values. We expect all of our employees, agents, contractors and consultants to adhere to these rules in carrying out their duties for the Company. The Company will take appropriate action against any employee, agent, contractor or consultant whose actions are found to violate these policies or any other policies of the Company. Disciplinary actions may include immediate termination of employment or business relationship at the Company's sole discretion. Where the Company has suffered a loss, it may pursue its remedies against the individuals or entities responsible. Where laws have been violated, the Company will cooperate fully with the appropriate authorities. You should review the Company's policies and procedures for more detailed information. - -16- VI. ACKNOWLEDGMENT OF RECEIPT OF CODE OF BUSINESS CONDUCT AND ETHICS I have received and read the Company's Code of Business Conduct and Ethics. I understand the standards and policies contained in the Company Code of Business Conduct and Ethics and understand that there may be additional policies or laws specific to my job. I further agree to comply with the Company Code of Business Conduct and Ethics. If I have questions concerning the meaning or application of the Company Code of Business Conduct and Ethics, any Company policies, or the legal and regulatory requirements applicable to my job, I know I can consult my manager or the Human Resources Department, knowing that my questions or reports to these sources will be maintained in confidence. - ------------------------------- Employee Name - ------------------------------- Signature - ------------------------------- Date Please sign and return this form to the Human Resources Department. - -17- EX-21.1 5 doc4.txt EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT 1. Genus Korea Co., Ltd. (a Korean entity) 2. Genus-Japan, Inc. (a Japanese entity) 3. Genus GMBH (a German entity) 4. Genus Europa (a United Kingdom entity) 5. Genus SARL (an Italian entity) EX-23.1 6 doc5.txt EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-64072, 333-29999, 333-70815, 333-84837, 333-40332 and 333-99447) and on Forms S-3 (No 333-99413, 333-86834 and 333-82354) of Genus, Inc. of our report dated March 11, 2004, relating to financial statements, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated March 11, 2004 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP San Jose, California March 12, 2004 EX-31.1 7 doc6.txt EXHIBIT 31.1 ------------ EXCHANGE ACT RULE 13a-14(a) CERTIFICATION I, William W.R. Elder, certify that: 1. I have reviewed this annual report on Form 10K of Genus Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2003 /s/ William W. R. Elder William W.R. Elder Chief Executive Officer EX-31.2 8 doc7.txt EXHIBIT 31.2 ------------ EXCHANGE ACT RULE 13a-14(a) CERTIFICATION I, Shum Mukherjee, certify that: 1. I have reviewed this annual report on Form 10K of Genus Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2003 /s/ Shum Mukherjee Shum Mukherjee Chief Financial Officer EX-32.1 9 doc8.txt EXHIBIT 32.1 ------------ CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, William W.R. Elder, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Genus, Inc. on Form 10-K for the fiscal year ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Genus, Inc. By: /s/ William W.R. Elder ------------------------- Name: William W.R. Elder Title: Chief Executive Officer EX-32.2 10 doc9.txt EXHIBIT 32.2 ------------ CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Shum Mukherjee, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Genus, Inc. on Form 10-K for the fiscal year ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Genus, Inc. By: /s/ Shum Mukherjee -------------------- Name: Shum Mukherjee Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----