-----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, LOtATnP6ul7eXVxXV/Raks1KoJqXcqoFX0ZvXmvbQgRb/mNUVSC8kZXmQ+gQY4Xc CGduSdyDoNX+0ywO0fLUwA== 0001015402-99-000321.txt : 19990412 0001015402-99-000321.hdr.sgml : 19990412 ACCESSION NUMBER: 0001015402-99-000321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENUS INC CENTRAL INDEX KEY: 0000837913 STANDARD INDUSTRIAL CLASSIFICATION: 3559 IRS NUMBER: 942790804 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17139 FILM NUMBER: 99585784 BUSINESS ADDRESS: STREET 1: 1139 KARLSTAD DR CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 BUSINESS PHONE: 4087477120 MAIL ADDRESS: STREET 2: 1139 KARLSTAD DR CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 10-K 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 ------------------- OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-17139 ------- GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2790804 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1139 Karlstad Drive, Sunnyvale, CA 94089 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 747-7120 --------------- Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 22, 1998 in the over-the-counter market as reported by the NASDAQ National Market, was approximately $32,499,410. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 22, 1999, Registrant had 18,113,791 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Part III of this Form 10-K Report: Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders-Items 10, 11, 12 and 13. PART I ITEM 1. BUSINESS Genus, Inc. ("Genus" or "the Company") was formed in 1982 and designs, manufactures and markets capital equipment and processes for advanced semiconductor manufacturing. The Company's thin film deposition products are used worldwide to produce integrated circuits ("ICs") for the data processing, communications, medical, military, transportation and consumer electronics industries. Genus pioneered the technical development of chemical vapor deposition ("CVD") tungsten silicide ("WSiX"), which perform two critical steps in the manufacture of semiconductors. These technologies enable chip manufacturers to simplify their IC production process and lower their cost-of-ownership. The Company's global customer base consists of semiconductor manufacturers in the United States, Europe and Asia/Pacific including Japan, South Korea and Taiwan. CURRENT MARKET AND PRODUCTS Thin Film (CVD) Market The manufacture of ICs includes the formation of isolation, transistor and interconnect capabilities. Genus' CVD equipment provides thin films for the gate electrode of the transistor and for barrier metal to clad the interconnect and contact elements. WSiX is used as a gate electrode and also improves the conductivity of local interconnects, producing faster Dynamic Random Access Memory ("DRAM"), Static Random Access Memory ("SRAM") and flash memory devices. Tungsten nitride ("WN") is emerging as a barrier-of-choice for advanced gate formation, memory cell electrodes and metal interconnect and contact applications in logic. CVD sales accounted for 35%, 32% and 38% of total revenues for 1998, 1997 and 1996, respectively. The current products manufactured by Genus include three CVD systems. These products are available with a variety of options and/or upgrades. Thin Film Products Genus' CVD systems are designed for the deposition of WSiX and WN on the gate electrode and interconnect. The Company offers the Lynx2(TM) (formerly called the 7000 Series), a single wafer, thin film cluster tool. Genus' two other hardware architectures, the 8700 Series and the 6000 Series, deposit WSiX using batch processes. Genus Lynx2 System. Introduced in December 1994, the Genus 7000 Series was renamed the Lynx2 in July 1997 in conjunction with the introduction of two new films. The Lynx2 system was designed to meet the advanced technology requirements of the 16Mbit DRAM generation and beyond. This single wafer, open architecture cluster tool supports silane ("SiH4") and dichlorosilane ("DCS") process chemistries. Semiconductor manufacturers benefit by the high throughput offered by the Lynx2, which results in higher productivity and lower cost-of-ownership. By offering the lowest fluorine content, manufacturers using DCS also gain more reliable gate oxides with the Genus Lynx2. In addition, its low deposited stress provides higher process yields with improved step coverage. This system is currently used in production by manufacturers of advanced DRAM and flash memory devices to 0.18-micron. The Lynx2 features a Modular Equipment Standards Committee ("MESC") compatible wafer handling platform from Brooks Automation with a centrally located, dual end effector robot for high throughput operation with up to four process modules. The cluster tool is controlled by an easy-to-use Windows(TM)-based graphic user interface. The modular design of the Lynx2 enables the addition of other process modules to the cluster tool. Other manufacturing advantages offered by the Lynx2 include a multi-zone resistive heater for more uniform wafer heating, two-zone showerheads for improved film composition uniformity and a state-of-the-art gas delivery system that minimizes chamber-to-chamber variance. LRS Silicide. LRS silicide, a Low-Resistivity, low-Stress ("LRS") CVD WSiX, was introduced by Genus in December 1996. LRS silicide offers a 20% reduction in resistivity and extremely as-deposited low stress, while retaining the advantages of conventional DCS chemistry. Memory device manufacturers using the production-proven DCS and tungsten hexafluoride chemistries can easily insert LRS silicide into existing process flows, providing increased yields and faster devices. PECVD Tungsten Nitride. In July 1997, Genus announced the industry's first plasma-enhanced CVD ("PECVD") WN barrier film. This film, compatible with the Lynx2 product platform, has the potential for broadening Genus' thin film customer base by bringing the Company's CVD products into the logic market. WN enables gigabit-scale DRAM device production by serving as the top barrier electrode for tantalum oxide ("Ta2O5") capacitors. WN is amorphous as deposited (to 500 degrees centigrade), and acts as a superior barrier even when deposited to a thickness of 100 angstroms. It has also been proven to be a superior barrier for copper diffusion relative to titanium nitride ("TiN"), and can be used as an adhesion layer for blanket tungsten. CVD Tungsten Nitride. In November 1998, Genus introduced the availability of a new CVD WN film. This film, compatible with the Lynx2 product platform, may offer significant advantages in the production of next generation DRAM devices. WN, when used as an electrode material, results in 10 times lower leakage for Ta2O5 capacitors compared to other electrode materials, such as TiN. Genus' CVD technique to deposit WN uniformly coats the intricate structures that are present in modern DRAM capacitors. This development gives the advantage of controlling particles and repeatability to levels consistent with today's production requirements. Lynx2 CBS. In November 1998, Genus introduced the first all CVD-based integrated approach for copper barrier seed ("CBS") for advanced metallization. The Lynx2 CBS enables efficient scaling of copper metallization to the 0.18-0.15-micron generation and beyond, and is based on a well-established low temperature, highly conformal PECVD WN barrier film. This integrated product is available on the Lynx2. Lynx3(TM). In January 1999, Genus introduced its first 300 mm low pressure chemical vapor deposition ("LPCVD") cluster tool. The Lynx3 is based on a newly developed and Genus-patented process chamber concept that results in exceptional uniformity. Genus 8700 Series and 6000 Series. The 8700 Series and 6000 Series are Genus' previous generation thin film products. While Genus no longer actively sells these products, it does continue to sell spare parts and provide service for these products pursuant to spare parts purchase and service agreements. Genus' thin films manufacturing facility maintains and operates a Class-1 cleanroom to demonstrate integrated applications with its customers. The Genus technical staff includes an experienced consulting resource for successful process integration of its products and processes. Samsung Electronics Company, Ltd. is the primary customer for the current generation thin film product. A representative list of Genus' CVD customers for spare parts and service revenue are Advanced Micro Devices, Fujitsu, Hitachi, IBM, Integrated Device Technology, Intel, M/A Com, Sanyo, and SGS-Thomson. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors-Reliance on a Small Number of Customers and Concentration of Credit Risk." MARKETING, SALES AND SERVICE Genus sells and supports its CVD products through direct sales and customer support organizations in the U.S. and South Korea and through seven exclusive, independent sales representatives and distributors in the U.S., Europe, Japan, South Korea, China and Southeast Asia. Yarbrough Southwest provides sales distribution in the southwestern region of the U.S. and SemiTorr provides sales distribution in the Northwest. Tony Fletcher & Assoc. supports and sells Genus' equipment in Europe, and AVBA, Ltd. represents Genus in Israel. In August 1998, the exclusive sales and service agreement with Innotech Corp. was terminated, and Innotech is now under contract as a non-exclusive service organization, with primary responsibility for the systems that were sold under their sales tenure. Pacific International has been contracted as the new sales representative for Japan. United Vision International (UVI) has been contracted as an exclusive sales and service representative for China and Malaysia. Genus Korea, Ltd., provides in-country field service and support, and in late 1997, assumed all responsibilities for system sales in South Korea. Sales in the Singapore and Taiwan market segments were served by the representative organizations of Spirox Singapore, Pte. Ltd. and Spirox Taiwan, respectively. As of January 1, 1999, sales and service responsibility for this region transferred to IdealTech. Genus distributes spare parts from several worldwide depots including Sunnyvale, California and Seoul, Korea. To facilitate its marketing efforts, the Company has cleanroom applications laboratories in Sunnyvale, California. Genus' products are sold primarily to domestic and foreign device manufacturers, including both foundries (companies producing semiconductors principally for other semiconductor manufacturers) and companies producing semiconductors mainly for outside sales. The Company maintains sales, technical support and service personnel at its principal executive offices located in Sunnyvale, California. Genus has also established a subsidiary, Genus Korea, Ltd., to facilitate its sales and service activities in Seoul, Korea. This subsidiary provides installation, field service and maintenance, as well as additional technical support to assist Genus' customers in effectively utilizing the Company's products. Other foreign subsidiaries include Genus KK in Tokyo, Japan, Genus Europa Ltd., France, Genus Europa GmbH in Stuttgart, Germany and Genus Europa Srl. in Milan, Italy. The Company warrants its products against defects in material and workmanship for 12 months. While the Company has experienced no difficulty to date in complying with U.S. export controls, these rules could change in the future and make it more difficult or impossible for the Company to export its products to various countries and could have a material adverse effect on the Company's business, financial condition and results of operations. Historically, the Company has relied on a limited number of customers for a substantial portion of its net sales. In 1998, three customers, Samsung Electronics Company, Ltd., Advanced Micro Devices and Micron Technology, Inc. accounted for 28%, 15% and 12%, respectively, of the Company's net sales. In 1998, three customers, Samsung Electronics Company, Ltd., M/A Com and SGS Thomson accounted for 68%, 8% and 5%, respectively of the Company's CVD net sales and three customers, Advanced Micro Devices, Micron Technology, Inc. and Atmel accounted for 21%, 18% and 14%, respectively, of the Company's ion implantation net sales. In 1997, Samsung Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%, respectively, of the Company's net sales. Additionally, three customers, Samsung Electronics Company, Ltd., Philips Semiconductor and Atmel, accounted for an aggregate of 78% of accounts receivable at December 31, 1998; and three customers, Samsung Electronics Company, Ltd., Micron Technology, Inc. and Innotech Corporation, accounted for an aggregate of 75% of accounts receivable at December 31, 1997. Because the semiconductor manufacturing industry is concentrated in a limited number of generally larger companies, the Company expects that a significant portion of its future product sales will be concentrated within a limited number of customers. None of these customers has entered into a long-term agreement requiring it to purchase the Company's products. Furthermore, sales to certain of these customers may decrease in the future when those customers complete their current semiconductor equipment purchasing requirements for new or expanded fabrication facilities. The loss of a significant customer or any reduction in orders from a significant customer, including reductions due to customer departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing ICs, could have a material adverse effect on the Company's business, financial condition and results of operations. Backlog. The Company's backlog at December 31, 1998 was approximately $293,679 compared with approximately $25.6 million at December 31, 1997. A multiple system purchase order from a major DRAM manufacturer was received in February 1999, and not included in the 1998 backlog. Backlog in 1997 also included the ion implant product line, which was sold to Varian. Genus includes in its backlog only those orders for which a customer purchase order has been received and a delivery date within 12 months has been specified. Because of the possibility of customer changes in delivery schedules or cancellations of orders, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. RESEARCH AND DEVELOPMENT Constant technological change, fierce competition and a high rate of technical obsolescence are key characteristics of the semiconductor equipment industry. Genus' future prospects depend in part on the Company's ability to broaden its market acceptance by differentiating its products on the basis of production-worthiness, technical capability, productivity, particle control and customer support. For thin film, the Company's research and development has focused on tungsten nitride film, a general-purpose process module and advanced ultra thin film CVD technologies. For ion implant, the Company's research and development focused on a multipurpose implanter. The Company has a Class 1 applications laboratory and a separate thin films development area in California. The Company spent $8.9 million, $12.3 million and $14.6 million on R&D during 1998, 1997 and 1996, respectively. R&D decreased in 1998 primarily due to the Asset Sale. To maintain close relationships with its customers and remain responsive to their requirements, continued investment is needed for thin film R&D. COMPETITION The Company believes that the principal competitive factors in the semiconductor equipment market are product performance, quality and reliability, wafer throughput, customer support, equipment automation, price and relationships. Genus competes with a number of companies that historically have had wider name recognition, broader product acceptance within the industry and substantially greater resources. In addition, the rapid rate of technological change in the industry creates opportunities for firms to enter this market and apply new technologies to meet its needs. Accordingly, the Company anticipates that it will continue to face competition in the domestic as well as foreign market from both well-established and new competitors. There can be no assurance that the Company can successfully compete with such companies. Genus competes with other producers of CVD systems, as well as alternative methods of deposition, such as sputtering and thin films other than WSiX, WN and DCS. The Company has an installed base of over 400 tools worldwide. The Company estimates that its market share for the stand-alone WSiX was 32% for 1998. The Company faces direct competition in all three films from Applied Materials, Inc. and Tokyo Electron, Ltd. The impact of their presence in these niche markets continued to increase during 1998. There can be no assurance that levels of competition in the Company's particular CVD product market will not intensify or that Genus' technical advantages may not be reduced or lost as a result of technical advances made by competitors or changes in semiconductor processing technology. MANUFACTURING AND SUPPLIERS Most of the components for the Company's CVD systems are produced in subassemblies by independent domestic suppliers according to the Company's design and procurement specifications. The Company anticipates that the use of such subassemblies will continue to increase in order to achieve additional manufacturing efficiencies. The Company has alternate sources of supply for the components and parts purchased from outside suppliers, except for certain components used in its CVD tungsten products that are presently available only from a single source. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from existing sources. The inability to develop alternate sources or to obtain sufficient source components as required in the future, however, could result in delays of product shipments that would have a material adverse effect on the Company's operating results. The Company's thin film CVD operation is located in Sunnyvale, California. INTELLECTUAL PROPERTY The Company believes that because of the rapid technological change in the industry, its future prospects will depend primarily upon the expertise and creative skills of its personnel in process technology, new product development, marketing, application engineering and product engineering, rather than on patent protection. Nevertheless, the Company has a policy to actively pursue domestic and foreign patent protection to cover technology developed by the Company. The Company currently holds 17 United States patents relating to thin film. All of the patents have at least five years remaining on their term. EMPLOYEES As of December 31, 1998, the Company employed 83 people on a full-time basis. Genus reduced its workforce by 25% in the April 1998 reorganization, and transferred 145 ion implant employees to Varian in July 1998, as part of the Asset Sale. The Company believes that its relations with its employees are satisfactory. None of the employees are covered by a collective bargaining agreement. ENVIRONMENTAL REGULATION Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases used in the manufacturing process. The Company believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of semiconductor operations. While the Company has not experienced any materially adverse effects on its operations from governmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements. Any failure by the Company to adequately restrict the discharge of hazardous substances could subject it to future liabilities or could cause its manufacturing operations to be suspended. SALE OF ASSETS In July 1998, the Company sold selected assets and transferred selected liabilities related to the Millions of Electron Volts ("MeV") ion implantation equipment product line to Varian Associates, Inc. MeV Ion Implantation Market Ion implantation is the process by which a beam of electrically charged dopant atoms (ions) are accelerated and driven into the surface of a silicon wafer. This process alters the electrical characteristics of the silicon by making it more or less conductive. The market for ion implanters consisted of three primary segments: high current, medium current and high energy. High and medium current ion implanters made up approximately 67% of the total ion implantation market. Ion implantation sales accounted for 65%, 68% and 62% of total revenues for 1998, 1997 and 1996, respectively. Information regarding the Company's foreign and domestic operations and export sales is included in Note 14 of Notes to Consolidated Financial Statements. MeV Ion Implant Products The Kestrel(TM) Family of Ion Implanters. Introduced in July 1997, Genus' fourth-generation of implanters, the Kestrel Family, offered high productivity manufacturing, low cost-of-ownership and flexibility for MeV, medium current backup, chained implants, mainstream retrograde well and advanced well applications. Kestrel 650 and 750. The Kestrel 650 had been optimized to meet the requirements of established retrograde well applications that require a lower price/performance point. The accelerator design was the same as that of the Tandetron(TM) 1520 that was used worldwide for retrograde well, R&D, as well as production applications. The Kestrel 750, the most recent addition to the Kestrel family, was best used for advanced well applications such as triple wells and Genus developed and patented Buried Implanted Layer for Lateral Isolation ("BILLI"). Tandetron 1520 and Genus 1510. Introduced in 1995 and 1992, respectively, the Tandetron 1520 and Genus 1510 were Genus' previous generation MeV ion implant products. While the Company no longer actively sold these products, the Company did continue to provide service and sell spare parts for these products pursuant to service and spare parts purchase agreements. A representative list of Genus' ion implant customers included: Advanced Micro Devices, Atmel, Fujitsu, Macrotron, Micron Technology, Inc., Newport Wafer-Fab Ltd., Philips Semiconductor, Samsung, SGS-Thomson, and Symbios Logic. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors-Reliance on a Small Number of Customers and Concentration of Credit Risk." ITEM 2. PROPERTIES The Company's executive offices, thin film manufacturing and R&D operations are presently located in one building in Sunnyvale, California, totaling approximately 100,500 square feet, of which the Company has subleased approximately 40,000 square feet to third parties. The California facilities are occupied under a lease expiring in October 2002, with a current annual rental expense of approximately $713,580. The Company also leases sales and support offices in Seoul, Korea. The Company owns substantially all of the machinery and equipment used in its facilities. See Notes 3 and 8 of Notes to Consolidated Financial Statements. The Company believes that its existing facilities and capital equipment are adequate to meet its current requirements and that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS The Company and Varian Associates, Inc. ("Varian") are in the process of resolving a dispute through arbitration. This dispute is in regard to whether Genus or Varian has rights to one ion implant sale and related inventory. In accordance with generally accepted accounting principles, if the Company prevails in the arbitration, any adjustments to the Company's financial statements as a result of this gain contingency will be made in the quarter in which the decision is rendered and the collection of the amount in question is probable. The Company is not conceding any rights to the disputed sales and believes that it will prevail in the arbitration. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Information The common stock of Genus, Inc. is traded in the over-the-counter market under the NASDAQ symbol GGNS. The high and low last sales prices for 1998 and 1997 set forth below are as reported by the NASDAQ National Market System. At March 22, 1999, the Company has 439 registered shareholders as reported by ChaseMellon Shareholder Services.
1998 1997 ---------------- ------------------ HIGH LOW HIGH LOW ------- ------ -------- ------- First Quarter $ 4 $ 2 $ 6-7/8 $ 3-5/8 Second Quarter 2-3/4 31/32 6-7/16 3-1/8 Third Quarter 1-9/16 7/16 7-7/8 4-1/2 Fourth Quarter 1-3/4 5/8 6-15/16 3-1/8
The Company has not paid cash dividends on its common stock since inception, and its Board of Directors presently intends to reinvest the Company's earnings, if any, in its business. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future. In February 1998, the Company issued equity securities to accredited investors through a private placement of 100,000 shares of Series A Convertible Preferred Stock ("Series A Stock") and warrants to purchase an aggregate of 400,000 shares of common stock ("Warrants") for net proceeds of $4.8 million. In August 1998, the Company redeemed 70,000 shares of the outstanding Series A Stock for cash and exchanged the outstanding 28,000 shares of Series A Stock for Series B Convertible Preferred Stock ("Series B Stock"). The Series B Stock was convertible into shares of the Company's common stock at the option of the holder at a conversion price of $1.25. As of March 1, 1999, no remaining Series B Stock were outstanding as all have been redeemed or converted to common stock. The issuances of the above securities were deemed to be exempt from registration under the Securities Act of 1993 in reliance on Section 4(2) of such Securities Act as transactions by an issuer not involving any public offering. The recipients of the securities represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and Warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. The resale of the common stock issued upon conversion of the Series B Stock and exercise of the Warrants has been registered pursuant to the Registration Statement on Form S-3 dated August 5, 1998, and all amendments and supplements thereto. ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA) 1998 1997 1996 1995 1994 --------- --------- --------- --------- -------- Net sales $ 32,431 $ 84,286 $ 82,509 $100,350 $63,616 Gross profit 8,230 29,524 26,972 39,239 24,967 Gross profit as a percentage of sales 25% 35% 33% 39% 39% Income (loss) from operations (27,513) (3,129) (11,458) 7,976 3,729 Net income (loss) available to common shareholders (29,503) (19,336) (9,205) 19,282 4,177 Net income (loss) per share-basic (1.71) (1.15) (0.56) 1.26 0.33 Net income (loss) per share-diluted (1.71) (1.15) (0.56) 1.20 0.32 Cash and cash equivalents 8,125 8,700 11,827 12,630 10,188 Total assets 31,827 76,738 89,132 95,247 54,997 Long-term obligations, less current portion 50 971 1,260 1,034 523 Working capital 15,799 30,774 39,290 50,061 23,201 Shareholders' equity 19,953 48,357 68,251 75,361 36,986 Backlog 294 25,554 19,846 44,996 44,011 Number of employees 83 301 325 319 264
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this report which express "belief", "anticipation" or "expectation" as well as other statements which are not historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under "Risk Factors" in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in or incorporated by reference into this report. The following discussion should be read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere in this report. 1998 Compared to 1997 In July 1998, the Company sold selected assets and transferred selected liabilities related to the Millions of Electron Volts ("MeV") ion implantation equipment product line to Varian Associates, Inc. ("Varian") for approximately $24.2 million ("Asset Sale"). As a result of the Asset Sale, the Company no longer engages in the ion implant business and has refocused its efforts on thin film deposition. The Company used the net proceeds of the Asset Sale for repayment of certain outstanding indebtedness as well as for working capital and general corporate purposes, including investment in Research & Development ("R&D") of thin film products. In connection with the Asset Sale and the refocusing of the Company's business on thin film products, the Company significantly reduced the workforce at its Sunnyvale, California location. In addition, James Healy resigned as President and Chief Executive Officer of the Company and William W.R. Elder, the Company's Chairman, returned to a full-time role as Chairman, President and Chief Executive Officer. The components of the Company's statements of operations, expressed as percentage of net sales, are as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 -------- ------- ------- Net sales 100.0% 100.0% 100.0% Costs and expenses: Cost of goods sold 74.6 65.0 67.3 Research and development 27.5 14.6 17.7 Selling, general and administrative 43.5 24.1 21.7 Special charge 39.2 0 7.2 -------- ------- ------- Income (loss) from operations (84.8) (3.7) (13.9) Other income (expense), net (0.3) (1.6) 0.1 -------- ------- ------- Income (loss) before provision for income taxes (85.1) (5.3) (13.8) Provision for (benefit from) income taxes 0 17.6 (2.7) -------- ------- ------- Net income (loss) (85.1)% (22.9)% (11.1)% ======== ======= =======
Net sales for the year ended December 31, 1998 were $32.4 million, compared to net sales of $84.3 million in 1997. The primary reason for the decline in sales volume was the divestiture of the ion implant product line, which contributed $23.8 million of revenue in 1998 compared to $57.1 million in 1997. Also, the semiconductor equipment industry continued in one of its worst recessions in 1998, and the Company's sales volumes were adversely affected by the lack of capital investment by semiconductor manufacturers due to DRAM overcapacity. To strengthen the Company's financial position, Genus made the decision during the second quarter to sell the MeV ion implant products to Varian Associates, Inc. and focus the Company's resources on the thin film product line. Export sales accounted for 56% of the Company's net sales in 1998, compared to 74% in 1997. Non-system sales were 32% of total revenue, compared to 20% in 1997. This was attributed to significantly fewer system unit shipments in 1998 compared to 1997, while non-system revenues decreased at a slower pace. In 1998, the Company recorded a special charge of approximately $12.7 million (Note 15). Included in this special charge are personnel charges of $1.7 million associated with the Company's reduction in workforce as well as $5.4 million in inventory write-downs, and $1.1 million in leasehold improvement write-offs. In addition, this charge included $1.4 million for expenses associated with the closing of several sales offices and transaction losses as a result of the sale of the ion implant products to Varian and $1.0 million for legal, accounting, and banking fees associated with the Varian transaction. Finally, the special charge included a $2.0 million write-off of ion implant inventory that is currently a matter of dispute with Varian in connection with the Asset Sale. The Company and Varian are in the process of resolving the dispute through arbitration to determine whether the Company or Varian has rights to the one ion implant sale and related inventory. If and when the Company prevails in the arbitration, any adjustments to the Company's financial statements as a result of this gain contingency will be made in the quarter in which the decision is rendered and the collection from the end customer of the amount in question is probable. The Company is not conceding any rights to the disputed sale. At December 31, 1998, the following cash components of the special charge remain unpaid: $300,000 in payroll costs associated with the reduction in force, $220,000 in foreign subsidiary closing costs, and $720,000 in transaction costs. The Company expects these amounts to be paid by the end of the second quarter of 1999. Gross margin for the year ended December 31, 1998 was 25.4%, a 10.6 percentage point decline compared to 35% in 1997. Inventory and warranty reserve reversals of $1.6 million during 1998 increased the gross margin percentage by 5%. The decrease in gross margin is primarily attributed to underabsorbed fixed operations and service costs due to depressed sales volumes during the first half of 1998. During that time, Genus operated as a two-product line company, with separate manufacturing facilities for each product line. During the second half of 1998, when the Company was a focused thin film equipment provider, the gross margins from operations (exclusive of the $1.6 million in inventory and warranty reserve reversals taken in the fourth quarter) were 38.6% (see Note 15 in Notes to Consolidated Financial Statements). The Company's gross margins have historically been affected by variations in average selling prices, changes in the mix of product sales, unit shipment levels, the level of foreign sales and competitive pricing pressures. The Company anticipates that these conditions may continue for the foreseeable future in light of current market conditions. As a percentage of net sales, R&D expenses for the year ended December 31, 1998 were 28%, compared to 15% for the year ended December 31, 1997. On a dollar basis, R&D expenses of $8.9 million for 1998 were $3.4 million lower than 1997, due to decreased expenditures associated with the MeV ion implant product line which was sold in July, 1998. Thin film R&D spending of $5.4 million in 1998 was relatively flat compared to 1997. The Company serves markets that are highly competitive and rapidly changing, and the Company believes that it must continue to maintain its investment in R&D to develop competitive products. Accordingly, the Company anticipates that R&D expenses will increase in the future, as we continue to invest in programs critical to our future success. Selling, General and Administrative ("SG&A") expenses were 44% of net sales for the year ended December 31, 1998, compared to 24% of net sales for the year ended December 31, 1997. While the Company took significant actions to reduce SG&A expenses in 1998, the decreased sales volumes adversely affected the percentage. Actual SG&A expenses were $14.1 million in 1998, a $6.2 million decrease over 1997. Included in SG&A for 1998 was a $1.4 million net charge for the write-off of an outstanding receivable from Innotech Corporation, formerly the Company's Japanese distributor. In 1998, the Company had $86,000 in other expense, compared to $1.4 million for the comparable period in 1997. Due to the strengthening of the Korean won and the Japanese yen, the Company recorded a foreign exchange gain of $318,000 during the fourth quarter of 1998. In the fourth quarter of 1997, the Company incurred foreign exchange losses of $1.1 million due to the weakening of these two currencies. Net interest expense for the year was $109,000, compared to $289,000 for 1997. Due to current market conditions, the fluctuation in the Company's order rates in the last 12 months, the Company's continued reliance on one customer for a significant portion of its orders, the slowdown in the Korean semiconductor market, the continued competitive market environment for the Company's products, and the historically cyclical nature of the semiconductor equipment market, the Company remains cautious about the prospects for its business over the next twelve months. The Company continues to make strategic investments in new product development and manufacturing improvements with a view of augmenting future performance by enhancing product offerings; however, such investments may adversely effect short-term operating performance. The Company is also continuing its efforts to implement productivity improvements for future operating performance. There can be no assurance that the Company's strategic efforts will be successful. 1997 Compared to 1996 Net sales for the year ended December 31, 1997 were $84.3 million, compared to net sales of $82.5 million for the year ended December 31, 1996. While 1997 sales were essentially flat on a year-to-year basis, the Company experienced volatility on a quarterly basis during both years. Sales for the nine month period ended September 30, 1997 increased over the same period for 1996 as the industry and the Company recovered from the slowdown in the DRAM market experienced during the latter half of 1996. However, in the fourth quarter of 1997, the Company's sales fell from the prior quarter due partially to the financial crisis in Asia that caused some customers to push out their required delivery dates. Export sales accounted for 74% of the Company's net sales in 1997, compared to 84% in 1996. Non-system sales remained relatively flat year-to-year, accounting for 20% of revenue in 1997, compared to 23% in 1996. During 1996, in response to the industry slowdown, the Company incurred $5.9 million in special charges during the third and fourth quarters as it restructured its operations to attain profitability at a decreased sales level. These charges reflected capacity cost reductions, including reductions in headcount, write-off of some manufacturing equipment and increased inventory reserves. During 1997, these measures resulted in lower expenses in cost of goods sold and R&D. Gross margin for the year ended December 31, 1997 was 35%, a two percentage point improvement compared to 33% for the year ended December 31, 1996. Improvements in operating efficiencies as a result of the restructuring were mitigated by pricing pressures, especially from Asian customers. The Company's gross margins have historically been affected by variations in average selling prices, changes in the mix of product sales, unit shipment levels, the level of foreign sales and competitive pricing pressures. As a percentage of net sales, R&D expenses for the year ended December 31, 1997 were 15%, compared to 18% for the year ended December 31, 1996. On a dollar basis, R&D expenses during 1997 decreased $2.3 million when compared to the same period in 1996, primarily due to the restructuring. The Company serves markets that are highly competitive and rapidly changing, and the Company believes that it must continue to maintain its investment in R&D to develop competitive products. SG&A expenses were 24% of net sales for the year ended December 31, 1997, compared to 22% of net sales for the year ended December 31, 1996. Included in SG&A for 1997 was a write-off of an outstanding receivable from a Malaysian customer. Absent this bad debt expense, SG&A expense would have increased only approximately $300,000 or 2% from 1996. In 1997, the Company had $1.4 million in other expense, compared to $53,000 in other income for the comparable period in 1996. As a result of the Asian financial crisis and the devaluation of the Korean won, the Company incurred a foreign exchange transaction loss of $1.1 million during the fourth quarter of 1997. Net interest expense for the year was $289,000 as compared to net interest income of $124,000 for 1996 as a result of higher outstanding short-term borrowings and lower levels of invested cash and cash equivalents during 1997. During the fourth quarter of 1997, management determined that, based upon the weight of available evidence as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), it is more likely than not that the net deferred tax asset at December 31, 1997 will not be realized and, therefore, provided a full valuation allowance against the net deferred tax asset resulting in a tax provision of $14.8 million for the year. Accordingly, the effective tax rate for the year ended December 31, 1997 was 330% compared to an effective tax rate of (19)% in 1996. Liquidity and Capital Resources At December 31, 1998, the Company's cash and cash equivalents were $8.1 million, a decrease of $575,000 from the prior year. Operating activities in 1998 used cash of $18.9 million, primarily due to a $27.6 million net loss, a $2.5 million increase in inventories, and a $11.7 decrease in accounts payable and accrued expenses, partially offset by a $4.8 million decrease in accounts receivable and non-cash charges for restructuring activities and depreciation and amortization of $15.2 million. Operating activities in 1997 used cash of $3.7 million, primarily due to a $19.3 million net loss, offset partially by non-cash charges for deferred taxes of $14.8 million; and operating activities in 1996 provided cash of $2.4 million, primarily due to decreases in accounts receivable of $11.2 million, partially offset by a $9.2 million net loss and a $4.5 million increase in inventories. The Company received $23.2 million from the sale of its MeV ion implant product line to Varian, and used these funds to pay certain existing obligations, including $16 million of accounts payable and $2.8 million for the outstanding bank line of credit. Additionally, the Company redeemed 70,000 shares of its Series A Convertible Preferred Stock and 12,000 shares of its Redeemable Series B Convertible Preferred Stock for approximately $5.3 million. Financing activities in 1998 used cash of $4.3 million, primarily due to the net repayments of short-term bank borrowings and the net redemptions of preferred stock. Financing activities in 1997 and 1996 provided cash of $5.0 million and $3.7 million, primarily due to net short-term bank borrowings and proceeds from issuance of common stock. Capital expenditures during 1998 were $919,000, related primarily to acquisition of machinery and equipment for the Company's R&D and applications laboratories. These expenditures were financed by the Company's working capital. The Company anticipates that any additional capital expenditures in 1999 will be funded through existing working capital or lease financing. The Company's primary source of funds at December 31, 1998 consisted of $8.1 million in cash and cash equivalents, and $13.0 million of accounts receivable, most of which are expected to be collected during the first half of 1999. Included in the cash balance was $4.0 million in short-term borrowings, utilizing the Company's accounts receivable purchase agreement. This borrowing represents the maximum amount available under that credit facility, and the $4.0 million balance was repaid in January 1999. The Company believes that its existing working capital and cash generated from operations, if any, will be sufficient to satisfy its cash needs through the end of fiscal 1999. There can be no assurance that any required additional funding, if needed, will be available on terms attractive to the Company, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Recent Account Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for accounting for derivatives and hedging activities as is effective for the Company's fiscal year 1999. The impact of the implementation of SFAS 133 on the consolidated financial statements of the Company has not yet been determined. In March 1998, the Accounting Standards Executive Committee ("AcSEC"), released Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires certain costs of computer software developed or obtained for internal use to be capitalized, provided that those costs are not research and development. SOP 98-1 is effective for the Company's fiscal year 1999, and the impact of the adoption of SOP 98-1 on the Company's consolidated financial statements has not yet been determined. In April 1998, AcSEC released Statement of Position 98-5, "Accounting for Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the costs of start-up activities to be expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, initiating a new process in an existing facility, or commencing some new operation. SOP 98-5 is effective for the Company's fiscal year 1999, and the impact of the adoption of SOP 98-5 on the Company's consolidated financial statements has not yet been determined. Financial Risk Management The Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could seriously harm the Company's financial results. All of the Company's international sales, except spare parts and service sales made by the Company's subsidiary in South Korea, are currently denominated in U.S. dollars. All spare parts and service sales made by the South Korean subsidiary are won denominated. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, reduce the demand for the Company's products. Reduced demand for the Company's products could seriously harm the Company's financial results. Currently, the Company does not hedge against any foreign currencies. Risk Factors Certain sections of Management's Discussion and Analysis contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth above in Management's Discussion and Analysis and this Risk Factors section. The discussion of these factors is incorporated by this reference as if said discussion was fully set forth in Management's Discussion and Analysis. Historical Performance. The Company has experienced losses of $29.5 million, $19.3 million, and $9.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. As a result of the Company's inconsistent sales and operating results in recent years, there can be no assurance that the Company will be able to attain or sustain consistent future revenue growth on a quarterly or annual basis, or that the Company will be able to attain or maintain consistent profitability on a quarterly or annual basis. Reliance on International Sales. Export sales accounted for approximately 56%, 74% and 84% of total net sales in the years ended 1998, 1997 and 1996, respectively. In addition, net sales to South Korean customers accounted for approximately 34%, 50% and 59%, respectively, of total net sales during the same periods. The Company anticipates that international sales, including sales to South Korea, will continue to account for a significant portion of net sales. As a result, a significant portion of the Company's sales will be subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Although the Company's foreign system sales are primarily denominated in U.S. dollars and the Company does not engage in hedging transactions, the Company's foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could have the effect of making the Company's products more or less expensive. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company has a wholly owned South Korean subsidiary providing service and support to the installed base of customers and whose functional currency is the won. There can be no assurance that the Company will not incur currency losses or gains in future quarters as the currency fluctuates. A substantial portion of the Company's sales are in Asia. Recent turmoil in the Asian financial markets has resulted in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM prices have fallen dramatically and may continue to do so as some Asian IC manufacturers may be selling DRAMs at less than cost in order to raise cash. These developments may affect the Company in several ways. Currency devaluation may make dollar-denominated goods, such as the Company's, more expensive for Asian clients. Asian manufacturers may limit capital spending. Furthermore, the uncertainty of the DRAM market may cause manufacturers everywhere to delay capital spending plans. These circumstances may also affect the ability of Company customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. Reliance on a Small Number of Customers and Concentration of Credit Risk. Historically, the Company has relied on a limited number of customers for a substantial portion of its net sales. In 1998, three customers, Samsung Electronics Company, Ltd., Advanced Micro Devices and Micron Technology, Inc. accounted for 28%, 15% and 12%, respectively, of the Company's net sales. In 1998, three customers, Samsung Electronics Company, Ltd., M/A Com and SGS Thomson accounted for 68%, 8% and 5%, respectively of the Company's CVD net sales and three customers, Advanced Micro Devices, Micron Technology, Inc. and Atmel accounted for 21%, 18% and 14%, respectively, of the Company's ion implantation net sales. In 1997, Samsung Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%, respectively, of the Company's net sales. Additionally, three customers, Samsung Electronics Company, Ltd., Philips Semiconductor and Atmel accounted for an aggregate of 78% of accounts receivable at December 31, 1998; and three customers, Samsung Electronics Company, Ltd., Micron Technology, Inc. and Innotech Corporation, accounted for an aggregate of 75% of accounts receivable at December 31, 1997. Because the semiconductor manufacturing industry is concentrated in a limited number of generally larger companies, the Company expects that a significant portion of its future product sales will be concentrated within a limited number of customers. None of these customers has entered into a long-term agreement requiring it to purchase the Company's products. Furthermore, sales to certain of these customers may decrease in the future when those customers complete their current semiconductor equipment purchasing requirements for new or expanded fabrication facilities. The loss of a significant customer or any reduction in orders from a significant customer, including reductions due to customer departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing ICs, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is dependent on a small number of customers. Accordingly, the Company is subject to concentration of credit risk. If a major customer were to encounter financial difficulties and become unable to meet its obligations, the Company would be adversely impacted. Cyclical Nature of the Semiconductor Industry. The Company's business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for ICs and products utilizing ICs. The semiconductor industry is cyclical and experiences periodic downturns, which have an adverse effect on the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have adversely affected the Company's revenues, operating margins and results of operations. There can be no assurance that the Company's revenues and operating results will not continue to be materially and adversely affected by future downturns in the semiconductor industry. In addition, the need for continued investment in R&D, substantial capital equipment requirements and extensive ongoing worldwide customer service and support capability limits the Company's ability to reduce expenses. Accordingly, there is no assurance that the Company will be able to attain profitability in the future. Fluctuations in Quarterly Operating Results. The Company's revenue and operating results may fluctuate significantly from quarter to quarter. The Company derives its revenue primarily from the sale of a relatively small number of high-priced systems, many of which may be ordered and shipped during the same quarter. The Company's results of operations for a particular quarter could be adversely affected if anticipated orders, for even a small number of systems, were not received in time to enable shipment during the quarter, anticipated shipments were delayed or canceled by one or more customers or shipments were delayed due to manufacturing difficulties. The Company's revenue and operating results may also fluctuate due to the mix of products sold and the channel of distribution. Competition. The semiconductor manufacturing capital equipment industry is highly competitive. Genus faces substantial competition throughout the world. The Company believes that to remain competitive, it will require significant financial resources in order to offer a broader range of products, to maintain customer service and support centers worldwide and invest in product and process R&D. Many of the Company's existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing and customer service and support capabilities, as well as greater name recognition than the Company. The Company expects its competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. If the Company's competitors enter into strategic relationships with leading semiconductor manufacturers covering CVD products similar to those sold by the Company, it would materially adversely effect the Company's ability to sell its products to these manufacturers. There can be no assurance that the Company will continue to compete successfully in the United States or worldwide. The Company faces direct competition in CVD WSiX from Applied Materials, Inc. and Tokyo Electron, Ltd. There can be no assurance that these or other competitors will not succeed in developing new technologies, offering products at lower prices than those of the Company or obtaining market acceptance for products more rapidly than the Company. Dependence on New Products and Processes. The Company believes that its future performance will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to invest in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely effect sales of existing products. There can be no assurance that the market will accept the Company's new products or that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it has formed strategic alliances, its ability to sell its products to those manufacturers would be adversely affected. Product Concentration; Rapid Technological Change. Semiconductor manufacturing equipment and processes are subject to rapid technological change. The Company derives its revenue primarily from the sale of its WSiX CVD systems. The Company estimates that the life cycle for these systems is generally three-to-five years. The Company believes that its future prospects will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to make significant investments in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely effect sales of existing products. There can be no assurance that future technologies, processes or product developments will not render the Company's product offerings obsolete or that the Company will be able to develop and introduce new products or enhancements to its existing and future processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could adversely effect the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it currently does business, its ability to sell its products to those manufacturers would be adversely affected. Dependence on Patents and Proprietary Rights. The Company's success depends in part on its proprietary technology. While the Company attempts to protect its proprietary technology through patents, copyrights and trade secret protection, it believes that the success of the Company will depend on more technological expertise, continuing the development of new systems, market penetration and growth of its installed base and the ability to provide comprehensive support and service to customers. There can be no assurance that the Company will be able to protect its technology or that competitors will not be able to develop similar technology independently. The Company currently has a number of United States and foreign patents and patent applications. There can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. From time-to-time, the Company has received notices from third parties alleging infringement of such parties' patent rights by the Company's products. In such cases, it is the policy of the Company to defend against the claims or negotiate licenses on commercially reasonable terms where considered appropriate. However, no assurance can be given that the Company will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on the Company's business and financial results. Dependence on Key Suppliers. Certain of the components and sub-assemblies included in the Company's products are obtained from a single supplier or a limited group of suppliers. Disruption or termination of these sources could have a temporary adverse effect on the Company's operations. The Company believes that alternative sources could be obtained and qualified to supply these products, if necessary. Nevertheless, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Independent Distributors. The Company currently sells and supports its CVD products through direct sales and customer support organizations in the U.S., Western Europe and South Korea and through seven exclusive, independent sales representatives and distributors in the U.S., Europe, Japan, South Korea, Taiwan, China and Malaysia. The Company does not have any long-term contracts with its sales representatives and distributors. Although the Company believes that alternative sources of distribution are available, the disruption or termination of its existing distributor relationships could have a temporary adverse effect on the Company's business, financial condition and results of operations. Volatility of Stock Price. The Company's common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of, or announcements by, the Company, its competitors or its customers, announcements of technological innovations or new products by the Company or its competitors, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which the Company does business, may adversely effect the market price of the Company's common stock. In addition, the occurrence of any of the events described in these "Risk Factors" could have a material adverse effect on such market price. Readiness for Year 2000. Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. These computer systems and applications could fail or create erroneous results unless corrected so that they can process data related to the year 2000. The Company relies on its systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll modules), customer service, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company also relies on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governments both domestically and globally, directly for accurate exchange of data and indirectly. The Company is currently completing the planning process for its Year 2000 readiness project, although many mission critical issues have already been addressed. The director of operations and facilities chairs the project team and it includes project managers from the finance, information technology, facilities, engineering, and customer support organizations. The team is meeting weekly, and has conducted a thorough analysis to identify systems that will possibly be impacted by the Year 2000 problem. These systems have been classified into four major segments: facilities, mission critical business operations systems, non-mission critical business operations systems and general office equipment. The project team has assigned one of its members to be the project manager for each segment, and each of these segment project managers is in the process of identifying an implementation manager for each system identified as part of their segment. Each implementation manager is responsible for developing a detailed plan that includes an assessment of Year 2000 compliance, followed by phases to define a contingency plan, evaluate alternatives, select a solution, design and implement the solution and, finally, to test and verify compliance. Some of the critical systems already addressed are discussed in the following paragraphs. End Products. The control systems for each of the Company's products are computer driven. Thorough testing of these products was completed during 1998. Testing addressed not only the Company designed elements of the system, but also the embedded controls in manufactured components integrated into the end products. Each product requires a software upgrade, and the oldest systems in the product line require a control system computer replacement as well. The Company is charging a nominal amount for these upgrades on the older generation systems, while upgrades for the current Lynx2 products are supplied at no charge. The design and testing of each of these product upgrades have been completed, and the upgrades have been shipped and installed at some of the Company's customer's sites worldwide. The Company has contacted and offered this upgrade to all of its customers, but some customers have decided not to upgrade their systems. Enterprise Resources Program. During 1997, the Company started implementation of a new business system. One criterion for the selection of the enterprise software was compliance with Year 2000 issues. The system was installed and implemented at the Company's Newburyport, MA facility in September 1997, but implementation at the Sunnyvale, CA headquarters was postponed during 1998 due to the Asset Sale. The system hardware and software was recently returned to Sunnyvale, and cutover from the existing system to the new system is scheduled for August 1, 1999. Year 2000 compliance on the new system was tested on the system while it was installed in Newburyport. The system is considered to be the most critical internal Company resource at risk to the Year 2000 problem, so timely implementation is essential. Supplier Readiness. Each implementation manager is responsible for assessing the readiness of the suppliers who support their system to ensure there will be no lapses in service that may interrupt operations. This is in addition to addressing readiness of the hardware and software products provided by these suppliers. Suppliers of inventory material for the Company's products will be surveyed during the second quarter of 1999. This is one of the projects under the mission critical business operations systems segment. Readiness of the supplier's products has already been established under the end product project, but disruption of the supply pipeline due to supplier business readiness still needs to be addressed. Preliminary discussions with some of the Company's critical suppliers indicate that most are ahead of the Company in establishing their own readiness. The Company's estimated expenses incurred through December 31, 1998 are $300,000. The 1999 projected costs are $115,000. The single largest risk element is the business system, and implementation of the new system is adequately budgeted in 1999. The Company believes that costs to fix the Company's products have already been fully incurred. Several capital investments have already been made in 1999 to replace aging equipment, and Year 2000 compliant systems were purchased in all cases. This includes new network and electronic mail file servers. The Company's voicemail system is not Year 2000 compliant, and replacement is already budgeted as a 1999 capital improvement. There are a number of hardware and software systems, both mission critical and non-mission critical, which may require upgrades at the Company's expense over the next few quarters, but preliminary estimates indicate these expenses will not be material. There can be no assurance that the Company's current estimated costs associated with the Year 2000 issue, or the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse effect on the result of operations or financial position of the Company in any given year. The Company has not yet identified any specific contingency plans in the event that projects are not completed in time or if planned fixes fail to operate as expected. Each implementation project manager is responsible for completing contingency plans for assigned projects as part of the planning process. At this time, the Company does not plan to use any outside agencies to provide independent verification of readiness, although individual implementation project managers may decide to include independent verification as part of their project plans. The independent verification requirement will be based on the risk associated with failure of the particular project/system. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 8,125 $ 8,700 Accounts receivable (net of allowance for doubtful accounts of $500 in 1998 and $1,097 in 1997) 13,008 19,469 Inventories 5,338 28,986 Other current assets 379 1,029 --------- --------- Total current assets 26,850 58,184 Property and equipment, net 4,659 15,276 Other assets, net 318 3,278 --------- --------- $ 31,827 $ 76,738 ========= ========= LIABILITIES AND REDEEMABLE PREFERRED STOCK Current Liabilities: Short-term bank borrowings $ 4,000 $ 7,200 Accounts payable 2,193 8,723 Accrued expenses 4,794 10,613 Current portion of long-term debt and capital lease obligations 64 874 --------- --------- Total current liabilities 11,051 27,410 Long-term debt and capital lease obligations, less current portion 50 971 --------- --------- Total liabilities 11,101 28,381 --------- --------- Commitments (Note 8) Redeemable Series B convertible preferred stock, no par value: Authorized 28,000 shares; Issued and outstanding, 16,000 shares (1998) and none (1997), liquidation preference, $50 per share (1998) and none (1997) 773 0 --------- --------- SHAREHOLDERS' EQUITY Common stock, no par value: Authorized 50,000,000 shares; Issued and outstanding, 18,113,791 shares (1998) and 17,120,628 shares (1997) 99,849 99,149 Accumulated deficit (78,255) (48,863) Accumulated other comprehensive loss (1,641) (1,929) --------- --------- Total shareholders' equity 19,953 48,357 --------- --------- $ 31,827 $ 76,738 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 --------- --------- --------- Net sales $ 32,431 $ 84,286 $ 82,509 Costs and expenses: Cost of goods sold 24,201 54,762 55,537 Research and development 8,921 12,327 14,639 Selling, general and administrative 14,115 20,326 17,901 Special charge 12,707 0 5,890 --------- --------- --------- Income (loss) from operations (27,513) (3,129) (11,458) Other income (expense), net (86) (1,363) 53 --------- --------- --------- Income (loss) before provision for (benefit from) income taxes (27,599) (4,492) (11,405) Provision for (benefit from) income taxes 1 14,844 (2,200) --------- --------- --------- Net income (loss) (27,600) (19,336) (9,205) Deemed dividends on preferred stock (1,903) 0 0 --------- --------- --------- Net income (loss) available to common shareholders (29,503) (19,336) (9,205) Comprehensive income (loss) Deemed dividends on preferred stock 1,903 0 0 Currency exchange adjustment 288 (1,792) (137) --------- --------- --------- Comprehensive income (loss) $(27,312) $(21,128) $ (9,342) ========= ========= ========= Net income (loss) per share-basic $ (1.71) $ (1.15) $ (0.56) ========= ========= ========= Net income (loss) per share-diluted $ (1.71) $ (1.15) $ (0.56) ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ACCUMULATED OTHER PREFERRED COMMON ACCUMULATED COMPREHENSIVE STOCK STOCK DEFICIT LOSS TOTAL -------- ------- --------- ---------- -------- Balances, January 1, 1996 $ 0 $95,683 $(20,322) $ 0 $ 75,361 Issuance of 310,471 shares of common stock under stock option plan 0 1,125 0 0 1,125 Issuance of 249,917 shares of common stock under employee stock purchase plan 0 1,107 0 0 1,107 Net loss 0 0 (9,205) 0 (9,205) Translation adjustment 0 0 0 (137) (137) ------- ------- --------- --------- --------- Balances, December 31, 1996 0 97,915 (29,527) (137) 68,251 Issuance of 124,199 shares of common stock under stock option plan 0 364 0 0 364 Issuance of 272,502 shares of common stock under employee stock purchase plan 0 870 0 0 870 Net loss 0 0 (19,336) 0 (19,336) Translation adjustment 0 0 0 (1,792) (1,792) ------- ------- --------- --------- --------- Balances, December 31, 1997 0 99,149 (48,863) (1,929) 48,357 Issuance of 100,000 shares of Series A convertible preferred stock and warrants for 400,000 shares of common stock (Note 9) 6,222 385 (1,792) 0 4,815 Conversion of 2,000 shares of Series A convertible preferred stock to common stock (124) 124 0 0 0 Redemption of 70,000 shares of Series A convertible preferred stock (4,725) 0 0 0 (4,725) Exchange of 28,000 shares of Series A convertible preferred stock for 28,000 shares of Series B convertible preferred stock (1,373) 0 0 0 (1,373) Issuance of 5,000 shares of common stock under stock option plan 0 14 0 0 14 Issuance of 237,522 shares of common stock under employee stock purchase plan 0 177 0 0 177 Net loss 0 0 (27,600) 0 (27,600) Translation adjustment 0 0 0 288 288 -------- ------- --------- --------- --------- Balances, December 31, 1998 $ 0 $99,849 $(78,255) $ (1,641) $ 19,953 ======== ======= ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 --------- --------- -------- Cash flows from operating activities: Net income (loss) $(27,600) $(19,336) $(9,205) Adjustments to reconcile to net cash from operating activities: Depreciation and amortization 2,480 5,073 6,945 Provision for doubtful accounts 1,670 2,930 0 Deferred taxes 0 14,844 (2,534) Special charge 12,707 0 5,890 Changes in assets and liabilities: Accounts receivable 4,781 (7,181) 11,191 Inventories (2,461) (2,998) (4,509) Other current assets 650 (391) (865) Accounts payable (6,530) 3,419 (1,825) Accrued expenses (5,153) (543) (1,094) Other, net 626 527 (1,545) --------- --------- -------- Net cash provided by (used in) operating activities (18,830) (3,656) 2,449 --------- --------- -------- Cash flows from investing activities: Acquisition of property and equipment (919) (3,835) (6,611) Sale of MeV ion implantation products 23,151 0 0 Capitalization of software development costs 0 0 (360) --------- --------- -------- Net cash provided by (used in) investing activities 22,232 (3,835) (6,971) --------- --------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 191 1,234 2,232 Proceeds from issuance of preferred stock and warrants 4,815 0 0 Redemption of preferred stock (5,325) 0 0 Proceeds from short-term bank borrowings 4,000 50,290 4,000 Payments of short-term bank borrowings (7,200) (45,590) (1,500) Payments of long-term debt and capital leases (761) (939) (990) --------- --------- -------- Net cash provided by (used in) financing activities (4,280) 4,995 3,742 --------- --------- -------- Effect of exchange rate changes on cash 303 (631) (23) --------- --------- -------- Net increase (decrease) in cash and cash equivalents (575) (3,127) (803) Cash and cash equivalents, beginning of year 8,700 11,827 12,630 --------- --------- -------- Cash and cash equivalents, end of year $ 8,125 $ 8,700 $11,827 ========= ========= ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 186 $ 445 $ 210 Cash paid for income taxes 6 94 105 Non-cash investing and financing activities: Purchase of property and equipment under long-term debt obligations 0 515 1,544 Deemed dividends on preferred stock 1,792 0 0 Conversion of Series A Stock to common stock 124 0 0 The accompanying notes are an integral part of the consolidated financial statements.
GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Genus, Inc. designs, manufactures and markets capital equipment and deposition processes for advanced semiconductor manufacturing. The Company's products are marketed worldwide either directly to end-users or through exclusive sales representative arrangements. In January 1996, the Company opened a subsidiary in South Korea to provide sales and service support to Korean customers. The Company's customers include semiconductor manufacturers located throughout the United States, Europe and in the Pacific Rim including Japan, South Korea and Taiwan. Genus conducts its business within one industry segment. The following is a summary of Genus' significant accounting policies. Principles of Consolidation The consolidated financial statements include the accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of significant intercompany accounts and transactions. Sale of Assets In July 1998, the Company sold selected assets and transferred selected liabilities related to the Millions of Electron Volts ("MeV") ion implantation equipment product line to Varian Associates, Inc. for approximately $24,150 ("Asset Sale"). As a result of the Asset Sale, the Company no longer engages in the ion implant business and has refocused its efforts on thin film deposition. In connection with the Asset Sale and the refocusing of the Company's business on thin film products, the Company significantly reduced the workforce at its Sunnyvale, California location. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents approximate estimated fair value because of the short maturity of those financial instruments. Based on rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of debt approximate estimated fair values. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions located in the United States. The Company does not require collateral from its customers and maintains an allowance for credit losses. Three customers accounted for an aggregate of 78% and 75% of accounts receivable at December 31, 1998 and 1997, respectively. South Korean and Japanese customers accounted for an aggregate of 61% and 70% of accounts receivable at December 31, 1998 and 1997, respectively. Inventories Inventories are stated at the lower of cost or market, using standard costs that approximate actual costs, under the first-in, first-out method. Long-Lived Assets Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Other assets include goodwill and software development costs and are stated at cost. Goodwill represented the cost in excess of the fair market value of net assets of an acquired business and was amortized on a straight-line basis over 15 years. Software development costs represent costs incurred subsequent to establishing the technological feasibility of software products and were amortized over the expected life of the products, estimated to be three years. Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets and goodwill related to those assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual disposition. If the sum of the future cash flows is less than the carrying amounts of those assets, the Company recognizes an impairment loss based on the excess of the carrying amounts over the fair values of the assets. Revenue Recognition Revenue related to systems is recognized upon shipment or, prior to shipment, upon completion of customer source inspection and factory acceptance of the system where risk of loss and title to the system passes to the customer. A provision for the estimated future cost of system installation, warranty and commissions is recorded when revenue is recognized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company accounts for income taxes using a method that requires deferred tax assets to be computed annually on an asset and liability method and adjusted when new tax laws or rates are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense (benefit) is the tax payable (refundable) for the period plus or minus the change in deferred tax assets and liabilities during the period. Foreign Currency The Company has foreign sales and service operations. With respect to all foreign subsidiaries excluding South Korea and Japan, the functional currency is the U.S. dollar, and transaction and translation gains and losses are included in net income (loss) and have not been material in any year presented. The functional currency of the Company's South Korean subsidiary is the won, and the functional currency of the Company's Japanese subsidiary is the yen. The translation from the applicable foreign currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate during the period. Adjustments resulting from such translation are reflected as a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions, including intercompany transactions, are included in the results of operations. Net Income (Loss) Per Share The Company has computed and presented net income (loss) per share under two methods, basic and diluted. Basic net income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing income (loss) available to common shareholders, adjusted for convertible preferred dividends and after-tax interest expense on convertible debt, if any, by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). Recent Account Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for accounting for derivatives and hedging activities as is effective for the Company's fiscal year 1999. The impact of the implementation of SFAS 133 on the consolidated financial statements of the Company has not yet been determined. In March 1998, the Accounting Standards Executive Committee ("AcSEC"), released Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires certain costs of computer software developed or obtained for internal use to be capitalized, provided that those costs are not research and development. SOP 98-1 is effective for the Company's fiscal year 1999, and the impact of the adoption of SOP 98-1 on the Company's consolidated financial statements has not yet been determined. In April 1998, AcSEC released Statement of Position 98-5, "Accounting for Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires the costs of start-up activities to be expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, initiating a new process in an existing facility, or commencing some new operation. SOP 98-5 is effective for the Company's fiscal year 1999, and the impact of the adoption of SOP 98-5 on the Company's consolidated financial statements has not yet been determined. NOTE 2. INVENTORIES Inventories comprise the following:
DECEMBER 31, --------------- 1998 1997 ------ ------- Raw materials and parts $4,796 $15,210 Work in process 244 6,879 Finished goods 298 6,897 ------ ------- $5,338 $28,986 ====== =======
NOTE 3. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and comprise the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- Equipment (useful life is 3 years) $ 7,227 $ 19,510 Demonstration equipment (useful life ranges from 3-5 years) 14,345 14,352 Furniture and fixtures (useful life is 3 years) 1,015 2,645 Leasehold improvements (useful life ranges from 4-10 years) 3,003 6,631 --------- --------- 25,590 43,138 Less accumulated depreciation and amortization (21,243) (28,833) --------- --------- 4,347 14,305 Construction in process 312 971 --------- --------- $ 4,659 $ 15,276 ========= =========
Equipment includes $584 and $3,745 of assets under capital leases at December 31, 1998 and 1997, respectively. Accumulated amortization on these assets is $584 and $2,628 at December 31, 1998 and 1997, respectively. NOTE 4. OTHER ASSETS Other assets comprise the following:
DECEMBER 31, --------------- 1998 1997 ----- -------- Goodwill $ 0 $ 3,802 Software development costs 0 1,347 ----- -------- 0 5,159 Accumulated amortization-goodwill 0 (2,675) Accumulated amortization-software development costs 0 (980) ----- -------- 0 1,494 Other 318 1,784 ----- -------- $ 318 $ 3,278 ===== ========
Amortization expense for software development costs was $128, $401 and $507 in 1998, 1997 and 1996, respectively. NOTE 5. LINE OF CREDIT The Company secured an Accounts Receivable Purchase Agreement with a bank on September 30, 1998. This agreement allows the Company to sell qualified receivables to the bank for a transaction fee of .1875%, and pay interest at the rate of 1% per month on the average outstanding balance. The bank will advance 80% of the qualified receivables ($4,000 maximum outstanding at any one time). This agreement expires September 30, 1999. On December 31, 1998, the Company had $4,000 in outstanding borrowings under the Accounts Receivable Purchase Agreement, which was repaid in January 1999. NOTE 6. ACCRUED EXPENSES Accrued expenses comprise the following:
DECEMBER 31, -------------- 1998 1997 ------ ------- System installation and warranty $ 583 $ 3,741 Accrued commissions and incentives 538 2,062 Accrued payroll and related items 536 1,264 Restructuring reserves (Note 11) 1,240 0 Other 1,897 3,546 ------ ------- $4,794 $10,613 ====== =======
NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations comprise the following:
DECEMBER 31, ---------------- 1998 1997 ------- ------- Capital lease obligations with interest rates ranging from 4.5-15.6% $ 114 $1,737 Mortgage loan payable in monthly installments through October 2000 at 9.25% interest per annum and collateralized by a building 0 108 ------- ------- 114 1,845 Less amounts due within one year (64) (874) ------- ------- $ 50 $ 971 ====== =======
The future aggregate payments of capital lease obligations are as follows:
1999 $ 68 2000 51 ----- 119 Less amounts representing interest on capital lease obligations (5) ----- Principal payments and present value of minimum capital lease obligations $114 =====
Certain of the capital lease agreements require the Company to comply with specific financial covenants and to pay stipulated amounts upon default or termination prior to the expiration of the basic lease terms. NOTE 8. LEASE COMMITMENTS The Company leases certain of its facilities and various office equipment under operating leases expiring through 2002. The Company is responsible for property taxes, insurance and maintenance under the facility leases. Certain of these leases contain renewal options. The Company subleases approximately 40,000 square feet of its facility to two other companies. One company began subleasing in April 1998 and the other company began subleasing in December 1998. At December 31, 1998, minimum lease payments required under these operating leases are as follows:
1999 $ 714 2000 757 2001 772 2002 579 ------- $ 2,822 =======
Rent expense for 1998, 1997 and 1996 was $1,169 (net of sublease income of $146), $2,215 and $2,218 respectively. There was no sublease income in 1997 and 1996. At December 31, 1998, sublease receipts are expected as follows:
1999 $ 793 2000 625 2001 625 2002 521 ------- $ 2,564 =======
NOTE 9. CAPITAL STOCK Net Income (Loss) Per Share A reconciliation of the numerator and denominator of basic and diluted income (loss) per share is as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 --------- --------- -------- Numerator-Basic: Net income (loss) $(27,600) $(19,336) $(9,205) Deemed dividends on preferred stock (1,903) 0 0 --------- --------- -------- Net income (loss) available to common shareholders $(29,503) $(19,336) $(9,205) ========= ========= ======== Denominator-Basic: Weighted average common stock outstanding 17,248 16,860 16,423 ========= ========= ======== Basic net income (loss) per share $ (1.71) $ (1.15) $ (0.56) ========= ========= ======== Numerator-Diluted: Net income (loss) $(27,600) $(19,336) $(9,205) Deemed dividends on preferred stock (1,903) 0 0 --------- --------- -------- Net income (loss) available to common shareholders $(29,503) $(19,336) $(9,205) ========= ========= ======== Denominator-Diluted: Weighted average common stock outstanding 17,248 16,860 16,423 ========= ========= ======== Diluted net income (loss) per share $ (1.71) $ (1.15) $ (0.56) ========= ========= ========
Stock options to purchase 2,289,000 shares of common stock were outstanding in 1998 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1998. A total of 16,000 shares of Series B Convertible Preferred Stock and warrants for the purchase of 400,000 shares of common stock were outstanding at December 31, 1998 but were not included in the computation of diluted loss per share because the Company has a net loss for 1998. Stock options to purchase 1,979,000 shares of common stock were outstanding in 1997 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1997. Stock options to purchase 1,838,000 shares of common stock were outstanding in 1996 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1996. Private Placement of Convertible Preferred Stock In February 1998, the Company issued an aggregate of 100,000 shares of 6% Series A Convertible Preferred Stock (the "Series A Stock") and warrants to purchase an aggregate of up to 400,000 shares of its common stock, all for an aggregate purchase price of $5,000 in cash. In 1998, the Company recorded deemed dividends on preferred stock of approximately $1,903, reflecting the beneficial conversion feature, which is the difference between the proceeds allocated to the Series A Stock and the fair value of the Series A Stock (assuming immediate conversion) upon issuance, and the accrual of the 6% dividends thereon. In June 1998, 2,000 shares of the Series A Stock were converted into common stock of the Company. This conversion was accounted for at book value. In July 1998, the Company redeemed 70,000 shares of the outstanding Series A Stock for $4,725 in cash (the "Redemption"), and the remaining 28,000 shares of Series A Stock were exchanged for 28,000 shares of Redeemable Series B Convertible Preferred Stock (the "Series B Stock") by the existing holders of the Series A Stock (the "Exchange"). The Redemption and Exchange were accounted for by comparing the fair value of the Series B Stock and the $4,725 in cash with the carrying amount of the Series A Stock redeemed and with the fair value of the Series A Stock converted (pursuant to the original conversion terms of the Series A Stock); there was no material difference between these amounts. In November 1998, the Company redeemed 12,000 shares of the Series B Stock for approximately $600 in cash. As of December 31, 1998, there were 16,000 shares of Series B Stock outstanding, all of which were converted into common stock of the Company in February 1999. Warrants In connection with the issuance of the Series A Stock, the Company issued warrants for 400,000 shares of the Company's common stock to the holders of the Series A Stock. The warrants are exercisable at any time until February 2001 for 300,000 shares of common stock at a price of $3.67 per share and for 100,000 shares at a price of $4.50 per share. Rights and Privileges of Series B Convertible Preferred Stock Conversion Rights. Each share of the Series B Stock was issued with a stated value of $50 (the "Stated Value"). Each holder of shares of Series B Stock has the right at any time, and from time-to-time, to convert some or all such shares into cash at the Stated Value or common stock at a conversion price of $1.25 per share. Dividends. Series B Stock accrues a dividend at a rate per share (as a percentage of the Stated Value per share) of 6% per annum, payable in cash or shares of common stock at the option of the Company. The shares must be held until February 12, 1999 to receive this dividend. Redemption. The Series B Stock may be redeemed at the option of the Company on or after July 30, 2003 at a redemption price equal to the product of (i) the average of the closing bid prices for the five trading days immediately preceding (a) July 30, 2003 or (b) the date of payment by the Company of the redemption price, which ever is greater, and (ii) the conversion ratio applicable to the Series B Stock calculated on July 30, 2003. Each selling security holder may require the Company at any time to redeem all of its shares of the Series B Stock at a redemption price equal to the stated value per share. In addition, the Series B Stock may be redeemed at the option of the selling security holder upon the occurrence of certain triggering events at a price per share equal to the product of (i) the average closing bid prices of the Company's common stock for the five trading days immediately preceding (a) the date of the triggering event or (b) the date of payment in full of such redemption price, which ever is greater, and (ii) the conversion ratio on the date of the triggering event. Liquidation Rights. In the event of the dissolution, liquidation or winding-up of the Company, whether voluntary or involuntary, the holders of the Series B Stock will be entitled to receive before any payment or distribution will be made on the common stock of the Company, out of the assets of the Company available for distribution to shareholders, the Stated Value per share of Series B Stock and all accrued and unpaid dividends to and including the date of payment thereof. Upon the payment in full of all amounts due to holders of the Series B Stock, then the holders of the common stock of the Company will receive, ratably, all remaining assets of the Company legally available for distribution. If the assets of the Company available for distribution to the holders of the Series B Stock are insufficient to permit payment in full of the amounts payable as aforesaid to the holders of Series B Stock upon such liquidation, dissolution or winding-up, whether voluntary or involuntary, then all such assets of the Company will be distributed to the exclusion of the holders of shares of common stock ratably among the holders of Series B Stock. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies shall not be deemed to be a liquidation, dissolution or winding-up of the Company for the purposes of the liquidation rights that would be available to the holders of Series B Stock, but instead will be subject to the conversion provisions outlined above. Stock Option Plan The Company has a 1991 Incentive Stock Option Plan (the "Plan") under which the Board of Directors may issue incentive and nonstatutory stock options. The Plan expires ten years after adoption and the Board of Directors have the authority to determine to whom options will be granted, the number of shares, the term and exercise price. The options are exercisable at times and increments as specified by the Board of Directors, and expire five years from date of grant. These options generally vest over a three-year period. At December 31, 1998, the Company had reserved 3,653,006 shares of common stock for issuance under the Plan. A total of 329,006 shares remained available for future grants at December 31, 1998. At December 31, 1996, 492,729 options were exercisable at a weighted average exercise price of $5.56. At December 31, 1997, 789,670 options were exercisable at a weighted average exercise price of $6.50. At December 31, 1998, 573,484 options were exercisable at a weighted average exercise price of $3.094. Activity under the Plan is set forth in the table below:
WEIGHTED OUTSTANDING AVERAGE SHARES OPTIONS PRICE EXERCISE (IN 000's) PER SHARE TOTAL PRICE --------- ---------------- --------- ------ Balance, January 1, 1996 1,586 $ 1.75 to $15.63 $ 9,947 $ 6.27 Granted 1,027 5.94 to 8.38 6,705 6.53 Exercised (310) 1.75 to 8.63 (1,125) 3.63 Terminated (213) 2.75 to 15.63 (1,776) 8.34 -------- ---------------- --------- ------ Balance, December 31, 1996 2,090 1.75 to 8.63 13,751 6.58 Granted 537 3.88 to 6.94 2,707 5.04 Exercised (124) 1.75 to 6.13 (364) 2.94 Terminated (652) 2.25 to 8.63 (4,473) 6.86 -------- ---------------- --------- ------ Balance, December 31, 1997 1,851 2.25 to 8.63 11,621 6.28 Granted 3,764 0.88 to 3.21 8,500 2.26 Exercised (5) 2.87 to 2.87 (14) 2.87 Terminated (3,309) 1.63 to 8.63 (15,600) 4.71 -------- ---------------- --------- ------ Balance, December 31, 1998 2,301 $ 0.88 to $ 8.00 $ 4,507 $ 1.96 ======== ================ ========= ======
Employee Stock Purchase Plan The Company has reserved a total of 2,050,000 shares of common stock for issuance under a qualified stock purchase plan, which provides substantially all Company employees with the right to acquire shares of the Company's common stock through payroll deductions. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85% of fair market value at either the beginning of each two-year offering period or the end of each six-month purchase period within the two-year offering period. At December 31, 1998, 1,889,608 shares have been issued under the plan. Common Stock Purchase Rights In July 1990, the Company distributed a dividend to shareholders comprised of a right to purchase one share of common stock (a "Right") for each outstanding share of common stock of the Company they hold. These rights do not become exercisable or transferable apart from the common stock until the Distribution Date which is either the tenth day after a person or group (a) acquires beneficial ownership of 20% or more of the Company's common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 30% or more of the Company's common stock. After the Distribution Date, each Right will entitle the holder to purchase from the Company one share of common stock at a price of $28.00 per share. If the Company is acquired in a merger or other business combination transaction, or if 50% or more of its consolidated assets or earnings power is sold, each Right will entitle the holder to purchase at the exercise price that number of shares of the acquiring company having a then current market value of two times the exercise price of the Right. In the event that the Company is the surviving corporation in a merger and the Company's common stock remains outstanding, or in the event that an acquiring party engages in certain self-dealing transactions, each Right not owned by the acquiring party will entitle the holder to purchase at the exercise price that number of shares of the Company's common stock having a then current market value of two times the exercise price of the Right. The Rights are redeemable at the Company's option for $.01 per Right prior to becoming exercisable, may be amended at the Company's option on or prior to the Distribution Date and expire on July 3, 2000. Stock Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income (loss) and net income (loss) per share is presented in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires that the information be determined as if the Company had accounted for its employee stock-based compensation plans under the fair value method prescribed by SFAS 123. The fair value of these options was estimated at the date of grant using a Black-Scholes single option pricing model with the following weighted average assumptions for 1998, 1997 and 1996:
1998 1997 1996 --------- --------- --------- Risk free interest rates 5.335% 6.220% 6.070% Expected life 3.3 years 3.5 years 3.5 years Expected volatility 61.4% 77.7% 77.7% Expected dividend yield 0% 0% 0%
The weighted average fair value of options granted in 1998, 1997 and 1996 was $1.60, $2.92 and $3.81, respectively. Under the 1989 Employee Stock Purchase Plan, the Company does not recognize compensation cost related to employee purchase rights under the Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 1998, 1997 and 1996.
1998 1997 1996 --------- --------- --------- Risk free interest rates 5.415% 5.630% 5.340% Expected life 0.5 years 0.5 years 0.5 years Expected volatility 61.4% 77.7% 77.7% Expected dividend yield 0% 0% 0%
The weighted average fair value of those purchase rights granted in 1998, 1997 and 1996 was $0.48, $1.80 and $3.26, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income (loss) and basic and diluted net income (loss) per share would have been the pro forma amounts indicated below:
1998 1997 1996 --------- --------- --------- Pro forma net income (loss) available to common shareholders $(32,830) $(21,537) $(12,053) Pro forma net income (loss) per share-basic $ (1.88) $ (1.28) $ (0.73) Pro forma net income (loss) per share-diluted $ (1.88) $ (1.28) $ (0.73)
The above pro forma effects on net income (loss) may not be representative of the effects on future results as options granted typically vest over several years and additional option grants are expected to be made in future years. The options outstanding and currently exercisable by exercise price under the option plan at December 31, 1998 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------- --------------------------- WEIGHTED RANGE OF AVG. REMAINING WEIGHTED EXERCISE NUMBER CONTRACTUAL AVG. EXERCISE NUMBER WEIGHTED AVG. PRICES OUTSTANDING LIFE PRICE OUTSTANDING EXERCISE PRICE - - ---------- ----------- ------------- ----------- ---------- --------------- 0.88-$1.25 729,500 4.45 $ 0.93 12,500 $ 0.88 1.31-$1.63 741,500 4.27 $ 1.62 0 $ 0.00 2.03-$3.03 778,140 3.25 $ 2.98 523,816 $ 3.03 3.22-$8.00 52,250 2.91 $ 4.84 37,168 $ 4.73 --------- ------- 0.88-$8.00 2,301,390 3.95 $ 1.94 573,484 $ 3.09 ========= =======
Option Repricing On January 28, 1998 the Board of Directors offered employees the opportunity to reprice outstanding stock options as of February 9, 1998. The repriced options, both vested and unvested, are precluded from exercise for a period of one year from the repricing date. Approximately 1,544,750 options with original exercise prices ranging from $3.88 to $8.63 were repriced at $3.03, the fair market value as of February 9, 1998. NOTE 10. EMPLOYEE BENEFIT PLAN During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit Plan") to provide retirement and incidental benefits for eligible employees. The Benefit Plan provides for Company contributions as determined by the Board of Directors that may not exceed 6% of the annual aggregate salaries of those employees eligible for participation. In 1998, 1997 and 1996, the Company made $62, $92 and $87, respectively, in contributions to the Benefit Plan. NOTE 11. SPECIAL CHARGE In 1998, the Company recorded a special charge of approximately $12,707 (Note 15). Included in this special charge are personnel charges of $1,746 associated with the Company's reduction in workforce as well as $5,400 in inventory write-downs, and $1,113 in leasehold improvement write-offs. In addition, this charge included $1,402 for expenses associated with the closing of several sales offices and transaction losses as a result of the sale of the ion implant products to Varian and $1,053 for legal, accounting, and banking fees associated with the Varian transaction. Finally, the special charge included a $1,993 write-off of ion implant inventory that is currently a matter of dispute with Varian in connection with the Asset Sale. The Company and Varian are in the process of resolving the dispute through arbitration to determine whether the Company or Varian has rights to the one ion implant sale and related inventory. If and when the Company prevails in the arbitration, any adjustments to the Company's financial statements as a result of this gain contingency will be made in the quarter in which the decision is rendered and the collection from the end customer of the amount in question is probable. The Company is not conceding any rights to the disputed sale. At December 31, 1998, the following cash components of the special charge remain unpaid: $300 in payroll costs associated with the reduction in force, $220 in foreign subsidiary closing costs, and $720 in transaction costs. The Company expects these amounts to be paid by the end of the second quarter of 1999. During 1996, the Company incurred special charges of $5,890 relating to $860 in payroll costs associated with two reductions in workforce, $3,332 in inventory write-downs, $1,253 in demonstration equipment write-downs and $445 in capitalized software and other write-downs. NOTE 12. OTHER INCOME (EXPENSE), NET Other income (expense), net, comprises the following:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ -------- ------ Interest income $ 77 $ 156 $ 334 Interest expense (186) (445) (210) Foreign exchange 301 (1,107) 0 Other, net (278) 33 (71) ------ -------- ------ $ (86) $(1,363) $ 53 ====== ======== ======
NOTE 13. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996 ----- ------- -------- Federal: Current $ 0 $ 0 $ 0 Deferred 0 14,004 (2,343) ----- ------- -------- 0 14,004 (2,343) State: Current 1 0 0 Deferred 0 840 (191) ----- ------- -------- 1 840 (191) Foreign: Current 0 0 334 ----- ------- -------- $ 1 $14,844 $(2,200) ===== ======= ========
The Company's effective tax rate for the years ended December 31, 1998, 1997 and 1996 differs from the U.S. federal statutory income tax rate as follows:
1998 1997 1996 ----- ----- ----- Federal income tax at statutory rate (35)% (34)% (35)% Change in valuation allowance 0 372 13 Foreign income taxes 0 0 3 Other 0 (8) 0 Net operating loss not benefited 35 0 0 ----- ----- ----- 0% 330% (19)% ===== ===== =====
The components of the net deferred tax asset comprise the following:
1998 1997 1996 --------- --------- -------- Deferred tax assets (liabilities): Net operating loss carryforwards $ 26,079 $ 13,097 $ 9,447 Tax credit carryforwards 1,950 1,867 1,288 Inventory, accounts receivable and other reserves 2,100 401 1,835 Non-deductible accrued expenses 1,100 1,152 1,264 Other reserves 0 0 1,245 Depreciation and amortization 1,411 215 (235) Valuation allowance (32,640) (16,732) 0 --------- --------- -------- Net deferred tax assets $ 0 $ 0 $14,844 ========= ========= ========
Temporary differences represent the cumulative taxable or deductible amounts recorded in the financial statements in different years than recognized in the tax returns. At December 31, 1998, the Company had the following income tax carryforwards available:
TAX REPORTING EXPIRATION DATES -------------- ---------------- U.S. regular tax operating losses $ 74,287 2006-2013 U.S. business tax credits $ 1,953 2003-2010 State net operating losses $ 21,981 1999-2004
Utilization of the net operating losses and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating loss carryforwards and credits before utilization. NOTE 14. SEGMENT INFORMATION Effective for 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." Management of the Company has identified its operating segments based on differences in products and services. The Company's operations have consisted of thin film and MeV ion implantation product lines. The Company sold its MeV ion implantation product line to Varian in July 1998. The Company has aggregated its two operating segments for financial reporting purposes because its operating segments have similar long-term economic characteristics and because the products and services, production processes, types of customers, and the methods used to distribute the products and provide the services of the operating segments are similar. All reportable segment information is equal to the financial information reported in the Company's consolidated financial statements and notes thereto. The Company is engaged in the design, manufacture, marketing and servicing of advanced thin film deposition systems used in the semiconductor manufacturing industry. The Company's sales are primarily generated from CVD WSiX systems. The Company's CVD system is designed for the deposition of WSiX to create multiple interconnect layers on ICs. This product is primarily used in the manufacturing of DRAMs. Net sales from thin film products and services accounted for 35%, 32% and 38% of the Company's net sales for 1998, 1997 and 1996. Net sales from MeV ion implantation products and services accounted for 65%, 68%, and 62 % of the Company's net sales in 1998, 1997 and 1996. Export Sales For reporting purposes, export sales are determined by the location of the parent company of the Company's customer, regardless of where the delivery was made by the Company. Export sales for 1998, 1997 and 1996 represented 56%, 74% and 84% of net sales, respectively. Sales to South Korea for 1998, 1997 and 1996 represented 30%, 50% and 59% of net sales, respectively. Sales to Japan for 1998, 1997 and 1996 represented 14%, 21% and 19% of net sales, respectively. Domestic and Foreign Operations Revenues, for the Company's foreign and domestic operations for 1998, 1997 and 1996 are as follows:
1998 1997 1996 --------- -------- --------- Sales to unaffiliated customers: Domestic operations $ 27,303 $73,182 $ 80,827 Foreign operations 5,128 11,104 1,682 --------- -------- --------- $ 32,431 $84,286 $ 82,509 ========= ======== =========
The Company did not hold any material long-lived assets in countries other than the United States at December 31, 1998, 1997 or 1996. Major Customers In 1998, three customers, Samsung Electronics Company, Ltd., Advanced Micro Devices and Micron Technology, Inc., accounted for 28%, 15% and 12%, respectively, of net sales. In 1998, three customers, Samsung Electronics Company, Ltd., M/A Com and SGS Thomson accounted for 68%, 8% and 5%, respectively of the Company's CVD net sales and three customers, Advanced Micro Devices, Micron Technology, Inc. and Atmel accounted for 21%, 18% and 14%, respectively, of the Company's ion implantation net sales. In 1997, Samsung Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%, respectively, of net sales. In 1996, these same two customers accounted for 53% and 18%, respectively, of net sales. NOTE 15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
1998 QUARTERS ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 * DECEMBER 31 --------- --------- ------------- ------------- Net sales $ 7,238 $ 10,270 $ 9,804 $ 5,119 Gross profit 297 546 3,915 3,472 Net income (loss) available to common shareholders (9,243) (21,603) 40 1,301 Net income (loss) per share-basic and diluted (0.54) (1.26) 0.00 0.07
1997 QUARTERS ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 ** DECEMBER 31 --------- --------- ------------- ------------- Net sales $ 19,681 $ 19,351 $ 24,375 $ 20,879 Gross profit 7,368 7,811 8,351 5,994 Net income (loss) 181 296 512 (20,325) Net income (loss) per share-basic and diluted 0.01 0.02 0.03 (1.20)
* The fourth quarter of 1998 was the first quarter that was entirely thin film business. Sales were lower than the previous quarter, which included shipments from the ion implant product line that was sold to Varian in July 1998. Gross profit of $3,472 included inventory reserve reversals of $1,423 and warranty reserve reversals of $200. The Company also reversed excess restructuring reserves of $509, resulting in a net profit of $1,301. Exclusive of these non-recurring adjustments, the Company incurred an operating loss of $831. ** During the fourth quarter of 1997, delays in shipments to Asian customers resulted in lower sales. In addition, the Company incurred a net charge of $2,930 for bad debt expense. The lower sales, coupled with this write-off, resulted in an operating loss of $4,930 for the fourth quarter. Other income (loss) for the quarter included $1,107 in foreign exchange losses as a result of the effect of the devaluation of the Korean won on intercompany transactions. In addition, based on the weight of available evidence as prescribed by SFAS 109, management determined that it was more likely than not that the net deferred tax asset at December 31, 1997 would not be realized and, therefore, provided a full valuation allowance against the net deferred tax asset during the fourth quarter of 1997. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity and cash flows, present fairly, in all material respects, the financial position of Genus, Inc. and its subsidiaries (the "Company") at December 31, 1998 and December 31, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP - - -------------------------------- PricewaterhouseCoopers LLP San Jose, California February 3, 1999 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K in that the Registrant will file a definitive proxy statement within 120 days after the end of the fiscal year covered by this Report pursuant to Regulation 14A relating to the Registrant's 1999 Annual Meeting of Shareholders (the "Proxy Statement") to be held on May 19, 1999, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, and their ages at March 31, 1999, are as follows:
NAME AGE POSITION - - ----------------------- --- -------------------------------------------------- William W.R. Elder 60 Chairman of the Board, President and Chief Executive Officer Thomas E. Seidel, Ph.D. 63 Executive Vice President, Chief Technical Officer Kenneth Schwanda 41 Vice President, Finance, Chief Financial Officer Jeff Farrell 51 Vice President, Engineering Michael Mitchell 36 Director, Operations and Facilities Mario M. Rosati 52 Secretary and Director Todd S. Myhre 53 Director G. Frederick Forsyth 55 Director
Except as set forth below, all of the executive officers have been associated with the Company in their present or other capacities for more than the past five years. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships among executive officers of the Company. Mr. Elder, a founder of the Company, is the Chairman of the Board, President and Chief Executive Officer of the Company. From October 1996 to April 1998, he served only as Chairman of the Board. From April 1990 to September 1996, he was Chairman of the Board, President and Chief Executive Officer of the Company. From November 1981 to April 1990, he was President and a director of the Company. Dr. Seidel joined the Company in January 1996 and is the Executive Vice President and Chief Technical Officer of the Company. From July 1988 to January 1996, Dr. Seidel was associated with SEMATECH, a semiconductor-industry consortium, in various senior management positions, most recently as Chief Technologist and Director of Strategic Technology. Mr. Schwanda has been Vice President of Finance and Chief Financial Officer of the Company since February 1999. Mr. Schwanda joined the Company in December 1992 and has held various financial management positions, most currently as Vice President of Finance. Mr. Schwanda began his professional career in 1979 at Harris Corporation, a global communications company, where he held accounting and finance positions. Mr. Farrell joined the Company in March 1996 and is the Vice President of Engineering for the Company. From August 1979 to March 1996, Mr. Farrell was employed by Advanced Micro Devices, a semiconductor manufacturer in Sunnyvale, California. Mr. Mitchell has been Director of Operations and Facilities for the Company since November 1997. Mr. Mitchell joined the Company in June 1995 and has held various management positions, most currently as Operations Manager. From 1985 to 1995, Mr. Mitchell was a Second Lieutenant in the United States Air Force. Mr. Rosati has been Secretary of the Company since May 1996 and a director of the Company since the Company's inception in November 1981. He is also a director of Aehr Test Systems, a manufacturer of semiconductor test equipment; CATS Software Inc., a supplier of client/server software products for financial risk management; Meridian Data, Inc., a developer of compact disc-read only memory (CD-ROM) and compact disc-recordable (CD-R) systems and related software for both networks and personal computers; Ross Systems, Inc., a supplier of enterprise-wide business systems and related services to companies installing open systems/client server software products; and Sanmina Corporation, an electronics manufacturer of multilayered printed circuit boards, backplane assemblies, subassemblies, and printed circuit board assemblies. He is a member of Wilson Sonsini Goodrich & Rosati, P.C., general counsel to the Company. Mr. Myhre has served as a director of the Company since January 1994. Since April 1998, and from September 1995 to January 1996, Mr. Myhre has served as President and Chief Executive Officer of GameTech International, an electronic gaming manufacturer. From September 1995 to March 1998, Mr. Myhre was an international business consultant. From January 1993 to August 1993, from August 1993 to December 1993 and from January 1994 to August 1995, Mr. Myhre served as Vice President and Chief Financial Officer of the Company, as Executive Vice President and Chief Operating Officer of the Company and as President and a director of the Company, respectively. Mr. Forsyth has been a director of the Company since February 1996. Since August 1997, Mr. Forsyth has served as President, Professional Products Division of Iomega, Inc. From June 1989 to February 1997, Mr. Forsyth was associated with Apple Computer, Inc., a personal computer manufacturer, in various senior management positions, most recently as Senior Vice President and General Manager, Macintosh Product Group. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements. Consolidated Balance Sheets-December 31, 1998 and 1997 Consolidated Statements of Operations and Comprehensive Income (Loss)-Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity-Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows-Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Accountants 2. Financial Statement Schedule. The following financial statement schedule of Genus, Inc. for the years ended December 31, 1998, 1997 and 1996 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Genus, Inc. PAGE ---- Report of Independent Accountants 43 II- Valuation and Qualifying Accounts 44 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Report. 4. Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 1998. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Genus, Inc. and Subsidiary: Our audits of the consolidated financial statements referred to in our report dated February 3, 1999 appearing on page 39 of the 1998 Annual Report on Form 10-K of Genus, Inc. and Subsidiaries also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP - - -------------------------------- PricewaterhouseCoopers LLP San Jose, California February 3, 1999 SCHEDULE II
GENUS, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS) BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD - - --------------------------- ---------- ----------- ---------- --------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - - --------------------------- ---------- ----------- ---------- --------- 1996 Allowance for doubtful accounts $ 250 $ 0 $ 0 $ 250 Inventory reserves 3,271 4,603 1,338 6,536 Product warranty and installation accruals 4,318 4,022 3,456 4,884 Valuation allowance on deferred taxes 0 0 0 0 1997 Allowance for doubtful accounts 250 2,930 2,083 1,097 Inventory reserves 6,536 910 2,040 5,406 Product warranty and installation accruals 4,884 3,620 4,754 3,750 Valuation allowance on deferred taxes 0 16,732 0 16,732 1998 Allowance for doubtful accounts 1,097 1,670 2,267 500 Inventory reserves 5,406 5,150 6,787 3,770 Product warranty and installation accruals 3,750 (143) 3,024 583 Valuation allowance on deferred taxes 16,732 15,908 0 32,640
GENUS, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1998 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - - --- ----------- 2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian Associates, Inc. and Registrant and exhibits thereto (15) 3.1 Amended and Restated Articles of Incorporation of Registrant as filed June 6, 1997 (11) 3.2 By-laws of Registrant, as amended (13) 4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between Registrant and Bank of America, N.T. and S.A., as Rights Agent (4) 4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.3 Registration Rights Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.4 Certificate of Determination of Rights, Preferences and Privileges of Series A Convertible Preferred Stock (14) 4.5 Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Preferred Stock (17) 4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the Registrant and the Investors (17) 10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4 Mulliken Way, Newburyport, Massachusetts, and amendment and extension of lease, dated March 17, 1987 (1) 10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1) 10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5) 10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10) 10.5 International Distributor Agreement, dated November 23, 1987, between General Ionex Corporation and Innotech Corporation (1) 10.6 Distributor/Representative Agreement, dated August 1, 1984, between Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.) (1) 10.7 Exclusive Sales and Service Representative Agreement, dated October 1, 1989, between Registrant and AVBA Engineering Ltd. (3) 10.8 Exclusive Sales and Service Representative Agreement, dated as of April 1, 1990, between Registrant and Indosale PVT Ltd. (3) 10.9 License Agreement, dated November 23, 1987, between Registrant and Eaton Corporation (1) 10.10 Exclusive Sales and Service Representative Agreement, dated May 1, 1989, between Registrant and Spirox Taiwan, Ltd. (2) 10.11 Lease, dated April 7, 1992, between Registrant and The John A. and Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive, Sunnyvale, California (6) 10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the Registrant and Advantage Production Technology, Inc. (7) 10.13 License and Distribution Agreement, dated September 8, 1992, between the Registrant and Sumitomo Mutual Industries, Ltd. (8) 10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9) 10.15 International Distributor Agreement, dated July 18, 1997, between Registrant and Macrotron Systems GmbH (12) 10.16 Credit Agreement, dated August 18, 1997, between Registrant and Sumitomo Bank of California (12) 10.17 Settlement Agreement and Mutual Release, dated April 20, 1998, between Registrant and James T. Healy (16) 10.18 Form of Change of Control Severance Agreement (16) 10.19 Settlement Agreement and Mutual Release, dated January 1998, between the Registrant and John Aldeborgh (18) 10.20 Settlement Agreement and Mutual Release, dated May 1998, between the Registrant and Mary Bobel (18) 10.21 Settlement Agreement and Mutual Release, dated May 1998, between the Registrant and Fred Heslet 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule (1) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10, 1988, and December 15, 1988, which Registration Statement became effective November 10, 1988. (2) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and amended May 24, 1989, which Registration Statement became effective May 24, 1989. (3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (4) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. (7) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K dated June 12, 1992. (8) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 21, 1992. (9) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (11) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (12) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (13) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (14) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated February 12, 1998. (15) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated April 15, 1998. (16) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1997. (17) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated July 29, 1998. (18) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 29th day of March 1999. GENUS, INC. By: /s/Kenneth Schwanda -------------------- Kenneth Schwanda Vice President, Finance Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE - - ----------------------- -------------------------------- --------------- /s/William W.R. Elder Chairman of the Board, President March 29, 1999 - - ----------------------- and Chief Executive Officer William W.R. Elder /s/Kenneth Schwanda Vice President, Finance March 29, 1999 - - -------------------- Chief Financial Officer Kenneth Schwanda /s/G. Frederick Forsyth Director March 29, 1999 - - ------------------------- G. Frederick Forsyth /s/Todd S. Myhre Director March 29, 1999 - - ------------------ Todd S. Myhre /s/Mario M. Rosati Director March 29, 1999 - - -------------------- Mario M. Rosati EX-10.21 2 SETTLEMENT AGREEMENT AND MUTUAL RELEASE EXHIBIT 10.21 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release ("Agreement") is made by and between GENUS, INC. (the "Company"), and FRED HESLET ("Employee"). WHEREAS, Employee was employed by the Company; WHEREAS, Employee and the Company entered into a Letter Agreement dated November 4, 1996. WHEREAS, the Company and Employee have entered into a Change of Control Severance Agreement (the "Change of Control Agreement"). WHEREAS, the Company and Employee have mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship; NOW THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as "the Parties") hereby agree as follows: 1. Resignation. Employee resigns his employment with the Company effective May 15, 1998. 2. Consideration. The Company agrees to pay Employee at his normal rate of pay of eleven thousand six Dollars and twenty five cents ($11,006.25) per month, less applicable withholding, for six (6) months from the effective date of his resignation (the "payment period") in accordance with the Company's payroll practices (provided that Employee does not revoke this Agreement under paragraph 8) up to and including the closing date of the sale of certain assets of the Ion Implantation systems business to Varian Associates, Inc. (the "Closing Date"). As of the Closing Date, however, all remaining pay due under this Agreement shall accelerate and become due and owing. During the payment period, Employee will not be entitled to the accrual or continuation of any employee benefits, including, but not limited to, vacation benefits or bonuses. Employee shall, however, be available to consult with the Company one day per week until June 30, 1998. 3. Vesting of Stock. The Parties agree that for purposes of determining the number of shares of the Company's common stock which Employee is entitled to purchase from the Company, Employee's vesting shall cease as of the date of this Agreement. The exercise of any stock options shall continue to be subject to the terms and conditions of the Company's Stock Option Plan and the applicable Stock Option Agreement between Employee and the Company. 4. Benefits. Employee shall have the right to convert his health insurance benefits to individual coverage pursuant to COBRA. 5. Confidential Information. Employee shall continue to maintain the confidentiality of all confidential and proprietary information of the Company and shall continue to comply with the terms and conditions of any Confidentiality Agreement between Employee and the Company. Employee shall return all the Company property and confidential and proprietary information in his possession to the Company on the Effective Date of this Agreement. 6. Payment of Salary. Employee acknowledges and represents that the Company has paid all salary, wages, bonuses, accrued vacation, commissions and any and all other benefits due to Employee. 7. Release of Claims. Employee agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Employee by the Company. Employee and the Company, on behalf of themselves, and their respective heirs, family members, executors, officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, hereby fully and forever release each other and their respective heirs, family members, executors, officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, from, and agree not to sue concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation, (a) any and all claims relating to or arising from Employee's employment relationship with the Company and the termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law; (c) any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, The Worker Adjustment and Retraining Notification Act, Older Workers Benefit Protection Act; the California Fair Employment and Housing Act, and Labor Code section 201, et seq. and section 970, et seq.; (e) any and all claims for violation of the federal, or any state, constitution; (f) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and (g) any and all claims for attorneys' fees and costs. The Company and Employee agree that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. 8. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Employee and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date of this Agreement. Employee acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Employee was already entitled. Employee further acknowledges that he has been advised by this writing that (a) he should consult with an attorney prior to executing this Agreement; (b) he has at least twenty-one (21) days within which to consider this Agreement; (c) he has at least seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (d) this Agreement shall not be effective until the revocation period has expired. 9. Civil Code Section 1542. The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Employee and the Company acknowledge that they have been advised by legal counsel and are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee and the Company, being aware of said code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect. 10. No Pending or Future Lawsuits. Employee represents that he has no lawsuits, claims, or actions pending in his name, or on behalf of any other person or entity, against the Company or any other person or entity referred to herein. Employee also represents that he does not intend to bring any claims on his own behalf or on behalf of any other person or entity against the Company or any other person or entity referred to herein. 11. Application for Employment. Employee understands and agrees that, as a condition of this Agreement, he shall not be entitled to any employment with the Company, its subsidiaries, or any successor, and he hereby waives any right, or alleged right, of employment or re-employment with the Company. Employee further agrees that he will not apply for employment with the Company, its subsidiaries or related companies, or any successor. 12. Confidentiality. The Parties hereto each agree to use their best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Settlement Information"). Each Party hereto agrees to take every reasonable precaution to prevent disclosure of any Settlement Information to third parties, and each agrees that there will be no publicity, directly or indirectly, concerning any Settlement Information. The Parties hereto agree to take every precaution to disclose Settlement Information only to those employees, officers, directors, attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Settlement Information. 13. No Cooperation. Employee agrees he will not act in any manner that might damage the business of the Company. Employee agrees that he will not counsel or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless under a subpoena or other court order to do so. 14. Non-Disparagement. Each party agrees to refrain from any defamation, libel or slander of the other, or tortuous interference with the contracts and relationships of the other. All inquiries by potential future employers of Employee will be directed to the Company 's Human Resources department. Upon inquiry, the Company shall only state the following: Employee 's last position and dates of employment. A press release announcing Employee's resignation shall be made. 15. Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payment of any sums to Employee under the terms of this Agreement. Employee agrees and understands that he is responsible for payment, if any, of local, state and/or federal taxes on the sums paid hereunder by the Company and any penalties or assessments thereon. Employee further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of Employee's failure to pay federal or state taxes or damages sustained by the Company by reason of any such claims, including reasonable attorneys' fees. 16. Costs. The Parties shall each bear their own costs, expert fees, attorneys' fees and other fees incurred in connection with this Agreement. 17. Arbitration. The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, shall be subject to binding arbitration in Santa Clara County before the American Arbitration Association under its California Employment Dispute Resolution Rules, or by a judge to be mutually agreed upon. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties agree that the prevailing party in any arbitration shall be awarded its reasonable attorney's fees and costs. 18. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 19. No Representations. Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 20. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 21. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Employee concerning Employee's separation from the Company, and supersedes and replaces any and all prior agreements and understandings concerning Employee's relationship with the Company and his compensation by the Company. 22. No Oral Modification. This Agreement may only be amended in writing signed by Employee and the President of the Company. 23. Governing Law. This Agreement shall be governed by the laws of the State of California. 24. Effective Date. This Agreement is effective seven days after it has been signed by both Parties. 25. Counterparts. This Agreement may be executed in counter-parts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 26. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; and (d) They are fully aware of the legal and binding effect of this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. GENUS, Inc. Dated: May 15, 1998 By: /s/ WILLIAM W.R. ELDER ------------------------- William W.R. Elder Chairman of the Board Fred Heslet, an individual Dated: May 15, 1998 /s/ FRED HESLET ------------------- Fred Heslet EX-21.1 3 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT Genus Subsidiary Corporation, a California corporation. Genus Europa GmbH, a German company. Genus Europa Ltd., a British company. Genus Europa Srl., an Italian company. Genus KK, a Japanese company. Genus Korea, Ltd., a Korean company. EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Genus, Inc. and subsidiaries on Form S-8 (File Nos. 33-28394, 33-38657, 33-56192, 333-29999, and 333-70815) and Form S-3 (File No. 333-48021) of our reports dated February 3, 1999 on our audits of the consolidated financial statements and financial statement schedule of Genus, Inc. and subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which reports are included in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - - -------------------------------- PricewaterhouseCoopers LLP San Jose, California March 31, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 8125 0 13508 (500) 5338 26850 25902 (21243) 31827 11051 0 99849 773 0 (79896) 31827 32431 32431 24201 (59944) (86) 0 0 (27599) 1 (27600) 0 0 0 (29503) (1.71) (1.71) Deemed dividends on preferred stock = (1903)
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