-----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, QfH7W663sku9/XrHLNuzMShuAJ118iK776OOEW0b6lY1kC4aOr5vGKjN1zgkAkXt R6+QlGinr85WwElftRbWGA== 0001047469-98-016802.txt : 19980430 0001047469-98-016802.hdr.sgml : 19980430 ACCESSION NUMBER: 0001047469-98-016802 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980428 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENUS INC CENTRAL INDEX KEY: 0000837913 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942790804 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-17139 FILM NUMBER: 98603103 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/A 1 10-K/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-17139 GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2790804 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1139 Karlstad Drive, Sunnyvale, CA 94089 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 747-7120 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on February 27, 1998, in the over-the-counter market as reported by the NASDAQ National Market, was approximately $29,978,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 27, 1998, Registrant had 17,129,260 shares of Common Stock outstanding. TABLE OF CONTENTS
PART I Item 1. Business Markets Products Marketing, Sales and Service Research and Development Competition Manufacturing and Suppliers Intellectual Property Employees Environmental Regulation Recent Developments Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports of Form 8-K: (1) Financial Statements (2) Financial Statement Schedule (3) Exhibits (4) Reports on Form 8-K
1 PART I ITEM 1. BUSINESS Genus, Inc. ("Genus" or "the Company") designs, manufactures and markets capital equipment and processes for advanced semiconductor manufacturing. The Company's products, high energy millions of electron volts ("MeV") ion implantation systems and chemical vapor deposition ("CVD") equipment, are used worldwide to produce integrated circuits ("ICs") for the data processing, communications, medical, military, transportation and consumer electronics industries. Genus pioneered the technical development of high energy MeV ion implantation and the CVD of tungsten silicide ("WSix"), which perform two critical steps in the manufacture of semiconductors. These technologies enable chip manufacturers to simplify their IC production process and lower their cost-of-ownership. The Company's global customer base consists of semiconductor manufacturers in the United States, Europe and Asia/Pacific including Japan, South Korea and Taiwan. MARKETS MEV ION IMPLANTATION Ion implantation is the process by which a beam of electrically charged dopant atoms (ions) are accelerated and driven into the surface of a silicon wafer. This process alters the electrical characteristics of the silicon by making it more or less conductive. Since its inception, ion implantation has been used to create all of the active devices, such as transistors, in an IC. Genus implanters have led the way to new applications where "wells" are formed to isolate the active devices. The market for ion implanters consists of three primary segments: high current, medium current and high energy. Currently, high and medium current ion implanters make up approximately 80% of the total ion implantation market. However, high energy ion implantation is one of the fastest growing segments in the entire capital equipment industry due to its use in emerging advanced technology simplification applications. High energy MeV ion implantation improves transistor performance and reduces overall manufacturing costs by placing dopants deep into the silicon to create regions that isolate transistors from one another. Ion implantation systems accounted for 68%, 62% and 41% of total revenues for 1997, 1996 and 1995, respectively. THIN FILM (CVD) The manufacture of ICs includes the formation of isolation, transistor and interconnect capabilities. Genus' CVD equipment provides thin films for the gate electrode of the transistor and for barrier metal to clad the interconnect and contact elements. WSix is used as a gate electrode and also improves the conductivity of local interconnects, producing faster Dynamic Random Access Memory ("DRAM"), Static Random Access memory ("SRAM") and flash memory devices. Tungsten nitride ("WN") is emerging as a barrier-of-choice for advanced gate formation, memory cell electrodes and metal interconnect and contact applications in logic. CVD systems accounted for 32%, 38% and 59% of total revenues for 1997, 1996 and 1995, respectively. Information regarding the Company's foreign and domestic operations and export sales is included in Note 14 of Notes to Consolidated Financial Statements. 2 PRODUCTS The primary products manufactured by Genus include four MeV ion implantation systems and three CVD systems. Each of these products is available with a variety of options and/or upgrades. CURRENT MEV ION IMPLANT PRODUCTS THE KESTREL-TM- FAMILY OF ION IMPLANTERS. Introduced in July 1997, Genus' fourth-generation of implanters, the Kestrel Family, offers high productivity manufacturing, low cost-of-ownership and flexibility for MeV, medium current backup, chained implants, mainstream retrograde well and advanced well applications. The Kestrel's accelerator, a direct current ("DC") tandem-based design, simplifies both operation and maintenance while also providing the lowest power consumption and smallest footprint of any high energy system currently in the market. In addition, the system's DC tandem allows fast energy change times resulting in a superior ability to chain multiple implants together without unloading wafers. This enhances overall throughput as well as reducing cost-of-ownership. The system's end station, where the ion beam meets the wafers, is optimized for high energy applications. The large volume of the process chamber and the design of the high vacuum pumping system minimizes a phenomenon known as photoresist outgassing which can hamper throughput and process quality in implanters. All-in-vacuum wafer handling generates the fewest particles added per wafer pass of any high energy implanter. These benefits all translate to higher yields and greater cost savings. As the high energy market has moved from high volume production to a bifurcated one that is application specific, the Kestrel family of products is poised to meet the varying requirements with appropriate price and performance. KESTREL 750. The Kestrel 750, the most recent addition to the Kestrel family, is best used for advanced well applications such as triple wells and Genus developed and patented BILLI (see below). The accelerator technology for the Kestrel 750 has been improved in several dimensions. Most importantly, the maximum energy range has been increased 15% for each charge state. This translates into greater beam currents at critical energies (higher throughput and lower cost-of-ownership) to support advanced well applications. The value of this new accelerator design, higher energy and beam currents, is achieved while increasing the Kestrel's reliability, serviceability and stability. These advantages have been incorporated without expanding the system's small footprint. KESTREL 650. The Kestrel 650 has been optimized to meet the requirements of established retrograde well applications which require a lower price/performance point. The accelerator design is the same as that of the Tandetron-TM- 1520 which is used worldwide for retrograde well, research and development ("R&D") as well as production applications. Both the Kestrel 650 and 750 possess a multi-faceted improvement to process chamber vacuum integrity. All three critical elements for minimizing photoresist outgassing (process chamber volume, cryo pump location and cryo pump size) have been improved. Both products also offer significant improvements in the areas of gas distribution, dose control and low energy control. Additionally, each product comes with an extended warranty on the accelerator. This warranty covers all major accelerator components (except the turbopump) for four years on the Kestrel 650 and five years on the Kestrel 750. In addition to these improvements, the Kestrel products include all of the advantages present in the Tandetron 1520, Genus' third-generation MeV ion implanter introduced in November 1995. The Tandetron 1520 evolved from the highly successful Genus 1500 system, introduced in 1988, and the Genus 1510 system, introduced in 1992. 3 The advantages of the Kestrel products are based on an overall philosophy of design simplicity. Modular construction improves manufacturing cycle times, system installation times and ease of maintenance. In addition, improved features such as a more efficient, longer lasting Bernas Ion Source, provide significant advantages in manufacturing environments. TANDETRON 1520 AND GENUS 1510. Introduced in 1995 and 1992, respectively, the Tandetron 1520 and Genus 1510 are Genus' previous generation MeV ion implant products. While the Company no longer actively sells these products, the Company does continue to provide service and sell spare parts for these products pursuant to service and spare parts purchase agreements. BILLI TECHNOLOGY FOR THE KESTREL FAMILY OF IMPLANTERS To further advance low-cost manufacturing processes, Genus developed, through joint development programs with its customers, a special isolation technology called the Buried Implanted Layer for Lateral Isolation ("BILLI") structure and process. BILLI, an advanced MeV retrograde well formation technology, can be used for process simplification in the manufacture of DRAM, SRAM and flash memory as well as logic. BILLI can eliminate one to two masking steps from current standard MeV retrograde well processes and three to four masking steps from conventional diffused well processes. An additional benefit that BILLI brings to logic IC design is that transistors can be placed closer together on a chip, improving packing densities. Also, when the BILLI structure is used, latch up, a parasitic effect that degrades Complementary Metal Oxide Semiconductor ("CMOS") IC performance, can be improved thus delaying the introduction of complex oxide isolation schemes such as shallow trench isolation. In some cases, use of the BILLI structure has eliminated the need to use expensive silicon epitaxy. Presently, several of the world's leading device makers are engaged with the Company in joint development programs established to develop low-cost manufacturing processes utilizing the BILLI process. A representative list of Genus' ion implant customers include: AMD, Fujitsu, Hyundai, LG Semicon, Mitsubishi, Newport Wafer-Fab Ltd., Philips Semiconductor, Samsung, SGS-Thomson, Sharp, Sony, Symbios Logic and TSMC. 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." CURRENT THIN FILM PRODUCTS Genus' CVD systems are designed for the deposition of WSix and WN on the gate electrode and interconnect. The Company offers the LYNX2-TM- (formerly called the 7000 Series), a single wafer, thin film cluster tool. Genus' two other hardware architectures, the 8700 Series and the 6000 Series, deposit WSix using batch processes. GENUS LYNX2 SYSTEM. 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 16M DRAM generation and beyond. This single wafer, open architecture cluster tool supports silane and dichlorosilane ("DCS") process chemistries. Semiconductor manufacturers benefit by the high throughput offered by the LYNX2, which results in higher productivity and lower cost-of-ownership. By offering the lowest fluorine content, manufacturers using DCS also gain more reliable gate oxides with the Genus LYNX2. In addition, its low deposited stress provides higher process yields with improved step coverage. This system is currently used in production by manufacturers of advanced DRAM and flash memory devices to 0.25 micron. The LYNX2 features a Modular Equipment Standards Committee ("MESC") compatible wafer handling platform from Brooks Automation with a centrally located, dual end effector robot for high throughput operation with up to four process modules. The cluster tool is controlled by an easy-to-use Windows-TM---based graphic user interface. The modular design of the LYNX2 enables the addition of other process modules to the cluster tool. Other manufacturing advantages offered by the 4 LYNX2 include a multi-zone resistive heater for more uniform wafer heating, two-zone showerheads for improved film composition uniformity and a state-of-the-art gas delivery system that minimizes chamber-to-chamber variance. LRS SILICIDE. LRS Silicide, a Low-Resistivity, low-Stress ("LRS") CVD WSix, was introduced by Genus in December 1996. LRS silicide offers a 20% reduction in resistivity and extremely as-deposited low stress, while retaining the advantages of conventional DCS chemistry. Memory device manufacturers using the production-proven DCS and tungsten hexafluoride chemistries can easily insert LRS silicide into existing process flows, providing increased yields and faster devices. TUNGSTEN NITRIDE. In July 1997, Genus announced the industry's first plasma-enhanced CVD WN barrier film. This film, compatible with the LYNX2 product platform, has the potential for broadening Genus' thin film customer base by bringing the Company's CVD products into the logic market. WN enables gigabit-scale DRAM device production by serving as the top barrier electrode for tantalum oxide capacitors. WN is amorphous as deposited (to 500 degrees centigrade), and acts as a superior barrier even when deposited to a thickness of 100 angstroms. It has also been proven to be a superior barrier for copper diffusion relative to titanium nitride, and can be used as an adhesion layer for blanket tungsten. GENUS 8700 SERIES AND 6000 SERIES. The 8700 Series and 6000 Series are Genus's 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 agreements and service agreement. Genus' Thin Films manufacturing facility maintains and operates a Class-1 cleanroom to demonstrate integrated applications with their customers. The Genus technical staff includes an experienced consulting resource for successful process integration of its products and processes. Samsung Electronics Company, Ltd. is the primary customer for the current generation thin film product, and revenue from spare parts and service is provided from AMD, Fujitsu, Hitachi, Hyundai, IBM, Intel, LG Semicon, Sanyo, SGS-Thomson and Sharp, which own earlier generation products. 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 ion implantation and CVD products through direct sales and customer support organizations in the U.S., Western Europe and South Korea and through eight exclusive, independent sales representatives and distributors in the U.S., Europe, Japan, South Korea, Taiwan, Hong Kong and Singapore. Yarbrough Southwest provides sales distribution in the Southwestern region of the U.S. and SemiTorr in the Northwest. Genus Europa supports and sells Genus' equipment in Europe, and Macrotron Systems GmbH represents Genus in Germany. Genus KK provides field service and support in Japan. Innotech Corporation serves as the Company's sales distributor and augments Genus KK's support efforts in Japan. Genus Korea, Ltd., provides in-country field service and support, and in late 1997, assumed all responsibilities for system sales in South Korea. Sales in the Singapore and Taiwan market segments are served by the representative organizations of Spirox Singapore, Pte. Ltd. and Spirox Taiwan, respectively. Hong Kong and the People's Republic of China are served by Katech International, Ltd., based in Hong Kong. The Asia/Pacific organizations provide sales and service, as well as distribution assistance for spare parts. Genus distributes spare parts from several worldwide depots including Sunnyvale, California; Newburyport, Massachusetts; Austin, Texas; Tokyo, Japan; Seoul, Korea; Hsin-Chu City, Taiwan; and Evry, France. To facilitate its marketing efforts, the Company has cleanroom applications laboratories in Sunnyvale, California, and Newburyport, Massachusetts. 5 Genus' products are sold primarily to domestic and foreign device manufacturers, including both foundries (companies producing semiconductors principally for other semiconductor manufacturers) and companies producing semiconductors mainly for outside sales. The Company maintains sales, technical support and service personnel at its principal executive offices located in Sunnyvale, California and Newburyport, Massachusetts. Genus has also established several foreign subsidiaries to facilitate its sales and service activities abroad: Genus Korea, Ltd. in Seoul, Korea; Genus KK in Tokyo, Japan; Genus Europa SARL in Evry, France; Genus Europa Ltd. in Melbourn, Herts, England; Genus Europa GmbH in Stuttgart, Germany; and Genus Europa Srl. in Milan, Italy. These subsidiaries provide installation, field service and maintenance, as well as additional technical support to assist Genus' customers in effectively utilizing the Company's products. Such services are also provided by the Company's distributors in Tokyo, Taipei, Singapore and Hong Kong. The Company warrants its products against defects in material and workmanship for 12 months. In December 1997, Genus announced the industry's first extended factory warranty program covering the accelerators of its new Kestrel 650 and 750 systems. Under this new program, the Company's accelerators are guaranteed against failures or degradation in performance for four years on the Kestrel 650 and five years on the Kestrel 750. While the Company has experienced no difficulty to date in complying with U.S. export controls, these rules could change in the future and make it more difficult or impossible for the Company to export its products to various countries and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company continued its efforts to expand its customer base in 1997 and was successful, with new customers in Taiwan and North America. Historically, the Company has relied on a limited number of customers for a substantial portion of its net sales. In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%, respectively, of the Company's net sales. In 1996, these same two customers accounted for 53% and 18%, respectively, of the Company's net sales. Additionally, 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; and three customers, Samsung Electronics Company, Ltd., Innotech Corporation and Newport Wafer-Fab Ltd., accounted for an aggregate of 71% of accounts receivable at December 31, 1996. 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, 1997, was approximately $25.6 million, compared with approximately $19.8 million at December 31, 1996. Genus includes in its backlog only those orders for which a customer purchase order has been received and a delivery date within 12 months has been specified. The Company's backlog at December 31, 1997, consisted of product shipments of $21.6 million and non-recurring engineering revenue of $4.0 million expected to be delivered during calendar year 1998. However, because of the possibility of customer changes in delivery schedules or cancellations of orders, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. 6 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 has focused on a multipurpose implanter. The Company has a class 1 applications laboratory and a separate thin films development area in California, and the Company has a class 10 applications laboratory that also serves as a test center in Massachusetts. The Company spent $12.3 million, $14.6 million and $12.6 million on R&D during 1997, 1996 and 1995, respectively. To maintain close relationships with its customers and remain responsive to their requirements, continued investment is needed for R&D. R&D expenses may increase in the future. As part of its R&D program, the Company has established technical research relationships with Advanced Micro Devices, Inc., a major semiconductor manufacturer, and the University of Colorado to further enhance its product development and knowledge for advanced Ultra Large Scale Integration ("ULSI") devices. COMPETITION The Company believes that the principal competitive factors in the semiconductor equipment market are product performance, quality and reliability, wafer throughput, customer support, equipment automation, price and relationships. Genus competes with a number of companies that historically have had wider name recognition, broader product acceptance within the industry and substantially greater resources. In addition, the rapid rate of technological change in the industry creates opportunities for firms to enter this market and apply new technologies to meet its needs. Accordingly, the Company anticipates that it will continue to face competition in the domestic as well as foreign market from both well-established and new competitors. There can be no assurance that the Company can successfully compete with such companies. In the ion implantation market, the Company's MeV ion implantation system competes primarily with one other MeV system. The Company believes that its high energy MeV system currently has certain technological advantages over the competing MeV systems, including the simplest system architecture, the lowest power and water requirements, the fastest energy change times to generate the highest production chained implant throughputs, a true MeV process chamber to minimize outgassing and increase MeV production throughput, and the lowest particulate levels in the industry to obtain the highest yields. Genus has new applications for MeV ion implantation technology that it believes will see widespread use in the future since they enable significant manufacturing cost reduction and improved IC performance. The Company estimates that its market share of the high-energy ion implantation market was 33% for 1997, up from 26% for 1996. The Company faces direct competition from Eaton Corporation. The presence of Eaton in the MeV marketplace continued to increase during 1997. There can be no assurance that competition in the Company's particular MeV product market will not intensify or that Genus' technical advantages may not be reduced or lost as a result of technical advances made by competitors or changes in semiconductor processing technology. In the CVD market, Genus competes with other producers of CVD systems, as well as alternative methods of deposition, such as sputtering and thin films other than WSix, WN and DCS. The Company has an installed base of 400 tools worldwide. The Company estimates that its market share for the stand-alone WSi(x) was 38% for 1997, up from 25% for 1996. The Company faces direct competition in all three films from Applied Materials, Inc. and Tokyo Electron, Ltd. The impact of their presence in these niche markets continued to increase during 1997. There can be no assurance that levels of competition in the Company's particular CVD product market will not intensify or that Genus' technical advantages may not be reduced 7 or lost as a result of technical advances made by competitors or changes in semiconductor processing technology. MANUFACTURING AND SUPPLIERS Most of the components for the Company's CVD systems are produced in subassemblies by independent domestic suppliers according to the Company's design and procurement specifications. Many components of the Company's MeV ion implantation systems are also acquired as subassemblies from outside domestic vendors. The Company anticipates that the use of such subassemblies will continue to increase in order to achieve additional manufacturing efficiencies. The Company has alternate sources of supply for the components and parts purchased from outside suppliers, except for certain components used in its CVD tungsten and MeV ion implantation products which are presently available only from a single source. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from existing sources. The inability to develop alternate sources or to obtain sufficient source components as required in the future, however, could result in delays of product shipments that would have a material adverse affect on the Company's operating results. The Company's thin film CVD operation is located in Sunnyvale, California, and its MeV ion implantation technology manufacturing operation is located in Newburyport, Massachusetts. 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 13 United States patents relating to ion implantation and 19 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, 1997, the Company employed 301 people on a full-time basis. Genus reduced its workforce in January 1997 by 8%. The Company believes that its relations with its employees are satisfactory. None of the employees are covered by a collective bargaining agreement. ENVIRONMENTAL REGULATION Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases used in the manufacturing process. The Company believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of semiconductor operations. While the Company has not experienced any materially adverse effects on its operations from governmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements. Any failure by the Company to adequately restrict the discharge of hazardous substances could subject it to future liabilities or could cause its manufacturing operations to be suspended. RECENT DEVELOPMENTS PRIVATE PLACEMENT OF CONVERTIBLE PREFERRED STOCK. In February 1998, the Company issued equity securities through a private placement of Series A Convertible Preferred Stock ("Series A Stock") for gross proceeds of $5 million. Upon fulfillment of certain conditions, the same investors in the Company's Series A Stock (the "Preferred Investors") have committed to providing an additional $5 million in equity financing through the private placement of Series B Convertible Preferred Stock (the "Series B Stock"). Among the conditions that must be satisfied before the Company may require the purchase of the Series B Stock are the following: (a) the closing bid price per share of the Common Stock of the Company shall be 8 no less than $4.00 for the 30 trading days prior to the Company's notice to the Preferred Investors of its intention to require their purchase of the Series B Stock; (b) such notice by the Company may not be given sooner than 90 days after the effectiveness date for the shares registered pursuant to a Registration Statement on Form S-3 (the "Series A Registration") and no suspension or stop order may have been entered against such Series A Registration; (c) the closing bid price for the Common Stock of the Company shall not, in the 30 trading days prior to the completion of the sale of the Series B Stock, have decreased by greater than 35% from the highest closing bid price during such period, (d) the maintenance of a waiver in connection with existing bank line of credit and (e) no change of control of the Company shall have occurred. "Change of control" is defined as, (i) the acquisition of more than 50% of the voting securities of the Company, (ii) the replacement of more than one-half the members of the Board of Directors, (iii) the merger of the Company with or into another entity, (iv) the sale of all or substantially all of the assets of the Company, or (v) the execution of any agreement providing for any of (i), (ii), (iii), or (iv) above). Accordingly, if the Asset Sale, as defined below, is deemed to be a sale of substantially all of the assets of the Company and the Asset Sale is completed, the Company cannot require the Investors to purchase the Series B Stock nor can the Investors require the Company to sell the Series B Stock. SALE OF ASSETS. In April 1998, the Company entered into an agreement with Varian Associates, Inc. to sell selected assets and transfer selected liabilities related to the MeV ion implantation equipment product line for approximately $25 million plus additional payments if certain revenue targets are achieved ("Asset Sale"). The completion of the Asset Sale is subject to approval by the Company's shareholders as well as to expiration of the applicable waiting periods under federal Hart-Scott-Rodino premerger notification requirements. As a result of the Asset Sale, the Company will no longer engage in the ion implant business and will refocus its efforts on thin film deposition. The Company will use 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 and development of thin film products. In connection with the Asset Sale and the refocusing of the Company's business on thin film products, the Company anticipates that it will significantly reduce the workforce at its Sunnyvale, California location. In addition, James Healy will resign as President and Chief Executive Officer of the Company and William W.R. Elder, the Company's Chairman, will return to a full-time role as President and Chief Executive Officer. ITEM 2. PROPERTIES The Company's executive offices, thin film manufacturing and R&D operations are presently located in one building in Sunnyvale, California, totaling approximately 100,500 square feet. The California facilities are occupied under a lease expiring in October 2002, with a current annual rental expense of approximately $680,000. Genus' Ion Technology Product operation is located in Newburyport, Massachusetts. This facility, totaling approximately 70,000 square feet, is occupied under a lease expiring in May 2017, with an annual rental expense of approximately $845,000. The Company also leases sales and support offices in Seoul, Korea; Tokyo, Japan; Evry, France; and Austin, Texas. The Company owns substantially all of the machinery and equipment used in its facilities. See Notes 3 and 8 of Notes to Consolidated Financial Statements. The Company believes that its existing facilities and capital equipment are adequate to meet its current requirements and that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 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 1997 and 1996, set forth below are as reported by the NASDAQ National Market System. At February 27, 1998, the Company has 479 registered shareholders.
1997 1996 ------------------------- ----------------------- HIGH LOW HIGH LOW ------ ----------- ----------- ----- First Quarter............................................... $ 67/8 $ 35/8 $ 9 $ 55/8 Second Quarter.............................................. 67/16 31/8 12 53/4 Third Quarter............................................... 77/8 41/2 91/2 53/4 Fourth Quarter.............................................. 615/16 31/8 71/16 47/8
The Company has not paid cash dividends on its common stock since inception, and its Board of Directors presently intends to reinvest the Company's earnings, if any, in its business. Additionally, the Company's line of credit prohibits the payment of cash dividends. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
1997 1996 1995 1994 1993 --------- --------- ---------- --------- --------- Net sales............................................ $ 84,286 $ 82,509 $ 100,350 $ 63,616 $ 44,236 Gross profit......................................... 29,524 26,972 39,239 24,967 13,900 Gross profit as a percentage of sales................ 35% 33% 39% 39% 31% Income (loss) from operations........................ (3,129) (11,458) 7,976 3,729 (6,974) Net income (loss).................................... (19,336) (9,205) 19,282 4,177 (6,883) Net income (loss) per share--basic................... (1.15) (0.56) 1.26 0.33 (0.57) Net income (loss) per share--diluted................. (1.15) (0.56) 1.20 0.32 (0.57) Cash and cash equivalents............................ 8,700 11,827 12,630 10,188 10,423 Total assets......................................... 76,738 89,132 95,247 54,997 45,205 Long-term obligations, less current portion.......... 971 1,260 1,034 523 1,042 Working capital...................................... 30,774 39,290 50,061 23,201 22,162 Shareholders' equity................................. 48,357 68,251 75,361 36,986 31,751 Backlog.............................................. 25,554 19,846 44,996 44,011 18,945 Number of employees.................................. 301 325 319 264 212
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS IN THIS REPORT WHICH EXPRESS "BELIEF", "ANTICIPATION" OR "EXPECTATION" AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. 1997 COMPARED TO 1996 The components of the Company's statements of income, expressed as percentage of total revenue, are as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Net sales....................................................... 100.0% 100.0% 100.0% Costs and expenses: Cost of goods sold............................................ 65.0 67.3 60.9 Research and development...................................... 14.6 17.7 12.2 Selling, general and administrative........................... 24.1 21.7 18.9 Special charge................................................ -- 7.2 -- --------- --------- --------- Income (loss) from operations............................... (3.7) (13.9) 8.0 Other income, net............................................... (1.6) 0.1 0.3 --------- --------- --------- Income (loss) before provision for income taxes............. (5.3) (13.8) 8.3 Provision for (benefit from) income taxes....................... 17.6 (2.7) (10.9) --------- --------- --------- Net income (loss)........................................... (22.9)% (11.1)% 19.2% --------- --------- --------- --------- --------- ---------
Net sales for the year ended December 31, 1997 were $84.3 million, compared to net sales of $82.5 million in 1996. While 1997 sales showed a modest increase on a year-to-year basis, the Company experienced volatility on a quarterly basis during both years. Sales for the nine month period ended September 30, 1997 increased over the same period for 1996 as the industry and the Company recovered from the slowdown in the DRAM market experienced during the latter half of 1996. However, in the fourth quarter of 1997, the Company's sales fell from the prior quarter due partially to the financial crisis in Asia that caused some customers to push out their required delivery dates. 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% in 1996. Improvements in operating efficiencies as a result of the restructuring were mitigated by pricing pressures, especially from Asian customers. The Company's gross margins have historically been affected by variations in average selling prices, changes in the mix of product sales, unit 11 shipment levels, the level of foreign sales and competitive pricing pressures. The Company anticipates that these conditions will continue for the foreseeable future in light of current market conditions. As a percentage of net sales, R&D expenses for the year ended December 31, 1997 were 15%, compared to 18% in 1996. On a dollar basis, R&D expenses during 1997 decreased $2.3 million when compared to the same period in 1996, primarily due to the restructuring. The Company serves markets that are highly competitive and rapidly changing, and the Company believes that it must continue to maintain its investment in R&D to develop competitive products. Accordingly, the Company anticipates that R&D expenses may increase in the future. Selling, General and Administrative ("SG&A") expenses were 24% of net sales for the year ended December 31, 1997, compared to 22% of net sales for 1996. Included in SG&A for 1997 was a write-off of an outstanding receivable from a Malaysian customer. Absent this bad debt expense, SG&A expense would have increased only approximately $300,000 or 2% from 1996. In 1997, the Company had $1.4 million in other expense, compared to $53,000 in other income for the comparable period in 1996. As a result of the Asian financial crisis and the devaluation of the Korean won, the Company incurred a foreign exchange transaction loss of $1.1 million during the fourth quarter of 1997. Net interest expense for the year was $289,000 as compared to net interest income of $124,000 for 1996 as a result of higher outstanding short-term borrowings and lower levels of invested cash and cash equivalents during the year. During 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," it is more likely than not that the net deferred tax asset at December 31, 1997 will not be realized and has, therefore, provided a full valuation allowance against the net deferred tax asset 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. The amount of the net deferred tax asset that is realizable could be increased in the near term if actual operating results differ significantly from current estimates. Due to the current market conditions, the fluctuation in the Company's order rates in the last 12 months, the Company's continued reliance on one customer for a significant portion of its orders and that customer's recent announcements to reduce or delay semiconductor equipment purchases, the slowdown in the Korean semiconductor market, the continued competitive market environment for the Company's products, and the historically cyclical nature of the semiconductor equipment market, the Company remains cautious about the prospects for its business over the next twelve months. The Company continues to make strategic investments in new product development and manufacturing improvements with a view of augmenting future performance by enhancing product offerings; however, such investment may adversely affect short-term operating performance. The Company is also continuing its efforts to implement productivity improvements for future operating performance. The Company believes that the future economic environment could continue to lengthen the order and sales cycles for its products, causing it to continue to simultaneously book and ship some orders during the same quarter. There can be no assurance that the Company's strategic efforts will be successful. 1996 COMPARED TO 1995 Net sales for the year ended December 31, 1996 were $82.5 million, compared to net sales of $100.4 million in 1995. The 18% decrease in net sales was due primarily to lower tungsten CVD systems sales as a result of the overall slowdown of the DRAM market during the last 12 months (particularly in Korea), offset by greater ion implantation MeV system and non-system sales. Export sales accounted for 84% of the Company's net sales in 1996, compared to 88% in 1995. In 1996, non-system sales increased 13% when compared to non-system sales during same period in 1995. 12 Gross margin for the year ended December 31, 1996 was 33%, compared to 39% in 1995. The decline in gross margin was primarily due to the shift in product sales mix from CVD system sales, which have higher gross margins, to MeV system sales, which have lower gross margins, lower absorption of manufacturing costs as a result of lower sales volumes and higher service costs associated primarily with the opening of Genus Korea, Ltd. The Company's gross margins have historically been affected by variations in average selling prices, changes in the mix of product sales, unit shipment levels, the level of foreign sales and competitive pricing pressures. As a percentage of net sales, R&D expenses for the year ended December 31, 1996 were 18%, compared to 12% in 1995. On a dollar basis, R&D expenses during 1996 increased $2.4 million when compared to the same period in 1995. This increase was primarily due to investments in personnel, product development material costs and engineering tools for new product development. The increase in R&D expenses as a percentage of net sales was due to lower net sales in addition to the increased R&D spending. The Company's R&D expenses in 1996 and 1995 are net of software capitalization costs of $400,000 and $900,000, respectively. SG&A expenses were 22% of net sales for the year ended December 31, 1996, compared to 19% of net sales for 1995. The increase was primarily due to lower net sales. On an absolute dollar basis, SG&A expenses for the year ended December 31, 1996 decreased $1.1 million when compared to the same period in 1995. The decrease was due to lower payroll-related costs associated with the reduction in force during the third and fourth quarters of 1996 and lower commission and incentive expenses. During the year ended December 31, 1996, the Company incurred special charges of $5.9 million, relating primarily to capacity cost reductions in association with the Company's reduction in personnel in the third and fourth quarters of 1996, increased inventory reserves and the write-off of property and equipment. In 1996, the Company had $53,000 in other income, compared to $300,000 in other income for the comparable period in 1995. This decrease was principally due to lower interest income as a result of lower cash balances and higher interest expense associated with lease financing. The effective tax rate for the year ended December 31, 1996 was a 19% benefit compared to a 132% benefit for the same period in 1995. The significant change in the effective tax rate was due primarily to the recognition of lower amounts of deferred tax assets in accordance with SFAS 109. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1997, the Company's cash and cash equivalents decreased by $3.1 million. A total of $3.7 million was used in operating activities, primarily due to a growth in accounts receivable and inventories, partially offset by increased accounts payable. Fourth quarter sales grew over the similar period in 1996, resulting in increased accounts receivable. Inventory levels increased as several customer delivery dates were rescheduled from the fourth quarter of 1997 to early 1998. Capital expenditures during 1997, either by cash or capital lease obligations, were $4.4 million and related primarily to acquisition of machinery and equipment for the Company's R&D and Applications Laboratories and leasehold improvements and equipment for the Ion Technology facility in Newburyport, Massachusetts. The Company financed these expenditures through new or existing lease lines. Furthermore, the Company anticipates that additional capital expenditures, if any, during 1998 will be funded through existing working capital or lease financing. Proceeds from sale of common stock was $1.2 million and net short-term borrowings increased $4.7 million from 1996. The Company's primary source of funds at December 31, 1997 consisted of $8.7 million in cash and cash equivalents. The Company has a $10.0 million revolving line of credit which is secured by substantially all of the assets of the Company and expires in June 1998. At December 31, 1997, the Company had $2.8 13 million in unused letters of credit and borrowings of $7.2 million outstanding under the line of credit. Availability of borrowings is based on eligible accounts receivable and inventory. Based on eligible accounts receivable and inventory at December 31, 1997, the Company's borrowing capacity under the revolving credit facility was in excess of $10 million. A monthly borrowing base certificate is required by the bank. See Note 5 to Consolidated Financial Statements. The Company incurred operating losses during each of the two years in the period ended December 31, 1997 and, as of December 31, 1997, had an accumulated deficit of $48.9 million. Additionally, the Company's bank line of credit is scheduled to expire in June 1998. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. Assuming either (i) the Company fulfills the conditions and receives the proceeds from the Series B Stock financing and is able to secure borrowings upon renewal of its existing bank line of credit or under a new line of credit or (ii) the Asset Sale is completed, the Company believes that its existing cash resources together with funds from the Series B Stock financing and line of credit or the Asset Sale will be sufficient to fund the Company's expected working capital requirements for at least the next 12 months. However, the exact amount and timing of these working capital requirements and the Company's ability to continue as a going concern will be determined by numerous factors, including the level of and gross margin on future sales, the payment terms extended to and by the Company and the timing of capital expenditures. Furthermore, there can be no assurance that funds will be received or become available from the Series B Stock financing, line of credit or the Asset Sale, or that these funds, together with the Company's existing cash resources, will be sufficient to implement the Company's operating strategy or meet the Company's other working capital requirements. Accordingly, the Company may be required to seek additional equity or debt financing. There can be no assurance that the Company would be able to obtain additional debt or equity financing, if and when needed, on terms that the Company finds acceptable. Any additional equity or debt financing may involve substantial dilution to the Company's shareholders, restrictive covenants or high interest costs. If the Company is unable to obtain sufficient funds to satisfy its cash requirements, it will be forced to curtail operations, dispose of assets or seek extended payment terms from its vendors. There can be no assurance that the Company would be able to reduce expenses or successfully complete other steps necessary to continue as a going concern. Such events would materially and adversely affect the value of the Company's equity securities. RISK FACTORS CERTAIN SECTIONS OF MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH ABOVE IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THIS RISK FACTORS SECTION. THE DISCUSSION OF THESE FACTORS IS INCORPORATED BY THIS REFERENCE AS IF SAID DISCUSSION WAS FULLY SET FORTH IN MANAGEMENT'S DISCUSSION AND ANALYSIS. HISTORICAL PERFORMANCE. Although the Company had net income of $19.3 million and $4.2 million in the years ended December 31, 1995 and 1994, the Company experienced losses of $19.3 million, $9.2 million, and $6.9 million for the years ended December 31, 1997, 1996 and 1993, respectively. As a result of the Company's inconsistent sales and operating results in recent years, there can be no assurance that the Company will be able to sustain consistent future revenue growth on a quarterly or annual basis, or that the Company will be able to maintain consistent profitability on a quarterly or annual basis. RELIANCE ON INTERNATIONAL SALES. Export sales accounted for approximately 74%, 84% and 88% of total net sales in the years ended 1997, 1996 and 1995, respectively. In addition, net sales to South Korean 14 customers accounted for approximately 50%, 59% and 63%, respectively, of total net sales during the same periods. The Company anticipates that international sales, including sales to South Korea, will continue to account for a significant portion of net sales. As a result, a significant portion of the Company's sales will be subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Although the Company's foreign system sales are primarily denominated in U.S. dollars and the Company does not engage in hedging transactions, the Company's foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could have the effect of making the Company's products more or less expensive. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company has a wholly owned South Korean subsidiary providing service and support to the installed base of customers and whose functional currency is the won. As a result of the devaluation of the won in the fourth quarter of 1997, the Company incurred a foreign exchange loss of $1.1 million. There can be no assurance that the Company will not incur currency losses or gains in future quarters as the currency fluctuates. A substantial portion of the Company's sales are in Asia. Recent turmoil in the Asian financial markets has resulted in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM prices have fallen dramatically and may continue to do so as some Asian IC manufacturers may be selling DRAMs at less than cost in order to raise cash. These developments may affect the Company in several ways. Currency devaluation may make dollar-denominated goods, such as the Company's, more expensive for Asian clients. Asian manufacturers may limit capital spending. Furthermore, the uncertainty of the DRAM market may cause manufacturers everywhere to delay capital spending plans. These circumstances may also affect the ability of Company customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. Some of the Company's South Korean customers have rescheduled their required delivery dates for orders previously placed and have announced delays in the facilitization of their new manufacturing areas. In addition, some portion of IC fabrication plant construction has been subsidized by Asian governments. Financial turmoil may weaken these governments' willingness to continue such subsidies. Such developments could have a material adverse affect on the Company's business, financial condition and results of operations. RELIANCE ON A SMALL NUMBER OF CUSTOMERS AND CONCENTRATION OF CREDIT RISK. The Company continued its efforts to expand its customer base in 1997 and was successful, with new customers in Taiwan and North America. Historically, the Company has relied on a limited number of customers for a substantial portion of its net sales. In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%, respectively, of the Company's net sales. In 1996, these same two customers accounted for 53% and 18%, respectively, of the Company's net sales. Additionally, 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; and three customers, Samsung Electronics Company, Ltd., Innotech Corporation and Newport Wafer-Fab Ltd., accounted for an aggregate of 71% of accounts receivable at December 31, 1996. 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, 15 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. With the exception of the write-off of one account in the fourth quarter of 1997, the Company has not experienced material bad debt expense over the last four years. However, 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 MeV or CVD products similar to those sold by the Company, it would materially adversely affect the Company's ability to sell its products to these manufacturers. There can be no assurance that the Company will continue to compete successfully in the United States or worldwide. The Company faces direct competition in CVD WSix from Applied Materials, Inc. and Tokyo Electron, Ltd. In the MeV marketplace, the Company's MeV ion implantation systems compete with MeV systems marketed by Eaton Corporation. There can be no assurance that these or other competitors will not succeed in developing new technologies, offering products at lower prices than those of the Company or obtaining market acceptance for products more rapidly than the Company. DEPENDENCE ON NEW PRODUCTS AND PROCESSES. The Company believes that its future performance will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to invest in R&D. The Company also must manage product transitions 16 successfully, as introductions of new products could adversely affect sales of existing products. There can be no assurance that the market will accept the Company's new products or that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it has formed strategic alliances, its ability to sell its products to those manufacturers would be adversely affected. PRODUCT CONCENTRATION; RAPID TECHNOLOGICAL CHANGE. Semiconductor manufacturing equipment and processes are subject to rapid technological change. The Company derives its revenue primarily from the sale of its MeV ion implantation and WSix CVD systems. The Company estimates that the life cycle for these systems is generally three to five years. The Company believes that its future prospects will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to make significant investments in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely affect sales of existing products. There can be no assurance that future technologies, processes or product developments will not render the Company's product offerings obsolete or that the Company will be able to develop and introduce new products or enhancements to its existing and future processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could adversely affect the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it currently does business, its ability to sell its products to those manufacturers would be adversely affected. DEPENDENCE ON 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 MeV ion implantation and CVD products through direct sales and customer support organizations in the U.S., Western Europe and South Korea and through eight exclusive, independent sales representatives and 17 distributors in the U.S., Europe, Japan, South Korea, Taiwan, Hong Kong, and Singapore. 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; EFFECT OF CONVERSION OF SERIES A STOCK ON THE STOCK PRICE. The Company's Common Stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of, or announcements by, the Company, its competitors or its customers, announcements of technological innovations or new products by the Company or its competitors, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which the Company does business, may adversely affect the market price of the Company's Common Stock. Furthermore, trading in the stock is thin and because the Series A Stock is convertible at a discount to the market price, the holders of Series A Stock can convert the Series A Stock into Common Stock and sell such Common Stock at a profit at any time, which may have a depressive effect on the stock price. In addition, the occurrence of any of the events described in these "Risk Factors" could have a material adverse effect on such market price. READINESS FOR YEAR 2000. Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. These computer systems and applications could fail or create erroneous results unless corrected so that they can process data related to the year 2000. The Company relies on its systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll modules), customer service, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company also relies on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governments both domestically and globally, directly for accurate exchange of data and indirectly. During 1997, the Company started the implementation of a new business system. One criteria for the selection of the enterprise software was compliance with Year 2000 issues. Accordingly, the Company's current estimate is that the costs associated with the Year 2000 issue, and the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse effect on the result of operations or financial position of the Company in any given year. However, despite the Company's efforts to address the Year 2000 impact on its internal systems, there can be no assurance that the Company has fully identified such impact or that it can resolve it without disruption of its business and without incurring significant expense. In addition, even if the internal systems of the Company are not materially affected by the Year 2000 issue, the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. The Company has not contacted the entities with which it interacts to determine whether such entities are addressing the Year 2000 issue. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 --------- --------- ASSETS Current Assets: Cash and cash equivalents................................................................ $ 8,700 $ 11,827 Accounts receivable (net of allowance for doubtful accounts of $1,097 in 1997 and $250 in 1996).................................................................................. 19,469 15,555 Inventories.............................................................................. 28,986 26,464 Other current assets..................................................................... 1,029 638 Current deferred taxes................................................................... -- 4,427 --------- --------- Total current assets................................................................... 58,184 58,911 Property and equipment, net.............................................................. 15,276 15,345 Other assets, net........................................................................ 3,278 4,459 Noncurrent deferred taxes................................................................ -- 10,417 --------- --------- $ 76,738 $ 89,132 --------- --------- --------- --------- LIABILITIES Current Liabilities: Short-term bank borrowings............................................................... $ 7,200 $ 2,500 Accounts payable......................................................................... 8,723 5,304 Accrued expenses......................................................................... 10,613 10,808 Current portion of long-term debt and capital lease obligations.......................... 874 1,009 --------- --------- Total current liabilities.............................................................. 27,410 19,621 Long-term debt and capital lease obligations, less current portion......................... 971 1,260 --------- --------- Total liabilities...................................................................... $ 28,381 $ 20,881 --------- --------- Commitments (Note 8) SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized, 2,000,000 shares; Issued and outstanding, none........................................................... -- -- Common stock, no par value: Authorized 50,000,000 shares; Issued and outstanding, 17,120,628 shares (1997) and 16,723,927 shares (1996)............................................................... 99,149 97,915 Accumulated deficit...................................................................... (48,863) (29,527) Cumulative translation adjustment........................................................ (1,929) (137) --------- --------- Total shareholders' equity............................................................. 48,357 68,251 --------- --------- $ 76,738 $ 89,132 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 19 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 ---------- ---------- ---------- Net sales..................................................................... $ 84,286 $ 82,509 $ 100,350 Costs and expenses: Cost of goods sold.......................................................... 54,762 55,537 61,111 Research and development.................................................... 12,327 14,639 12,259 Selling, general and administrative......................................... 20,326 17,901 19,004 Special charge.............................................................. -- 5,890 -- ---------- ---------- ---------- Income (loss) from operations............................................. (3,129) (11,458) 7,976 Other income (expense), net................................................... (1,363) 53 327 ---------- ---------- ---------- Income (loss) before provision for (benefit from) income taxes.............. (4,492) (11,405) 8,303 Provision for (benefit from) income taxes..................................... 14,844 (2,200) (10,979) ---------- ---------- ---------- Net income (loss)......................................................... $ (19,336) $ (9,205) $ 19,282 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share--basic............................................ $ (1.15) $ (0.56) $ 1.26 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share--diluted.......................................... $ (1.15) $ (0.56) $ 1.20 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 20 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CUMULATIVE COMMON ACCUMULATED TRANSLATION STOCK DEFICIT ADJUSTMENT TOTAL --------- ------------ ----------- ---------- Balances, January 1, 1995....................................... $ 76,590 $ (39,604) $ -- $ 36,986 Issuance of 2,539,018 shares of common stock under private placement offering.......................................... 16,222 -- -- 16,222 Issuance of 542,450 shares of common stock under stock option plan........................................................ 1,161 -- -- 1,161 Tax benefit on exercise of stock options...................... 750 -- -- 750 Issuance of 269,043 shares of common stock under employee stock purchase plan......................................... 960 -- -- 960 Net income.................................................... -- 19,282 -- 19,282 --------- ------------ ----------- ---------- Balances, December 31, 1995..................................... 95,683 (20,322) -- 75,361 Issuance of 310,471 shares of common stock under stock option plan........................................................ 1,125 -- -- 1,125 Issuance of 249,917 shares of common stock under employee stock purchase plan......................................... 1,107 -- -- 1,107 Net loss...................................................... -- (9,205) -- (9,205) Translation adjustment........................................ -- -- (137) (137) --------- ------------ ----------- ---------- Balances, December 31, 1996..................................... 97,915 (29,527) (137) 68,251 Issuance of 124,199 shares of common stock under stock option plan........................................................ 364 -- -- 364 Issuance of 272,502 shares of common stock under employee stock purchase plan......................................... 870 -- -- 870 Net loss...................................................... -- (19,336) -- (19,336) Translation adjustment........................................ -- -- (1,792) (1,792) --------- ------------ ----------- ---------- Balances, December 31, 1997..................................... $ 99,149 $ (48,863) $ (1,929) $ 48,357 --------- ------------ ----------- ---------- --------- ------------ ----------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 21 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 ---------- --------- ---------- Cash flows from operating activities: Net income (loss)............................................................ $ (19,336) $ (9,205) $ 19,282 Adjustments to reconcile to net cash from operating activities: Special charge............................................................. -- 5,890 -- Loss on disposal of leasehold improvements................................. -- -- 261 Depreciation and amortization.............................................. 5,073 6,945 4,244 Provision for doubtful accounts............................................ 2,930 -- -- Deferred taxes............................................................. 14,844 (2,534) (11,560) Changes in assets and liabilities: Accounts receivable...................................................... (7,181) 11,191 (11,627) Inventories.............................................................. (2,998) (4,509) (9,760) Other current assets..................................................... (391) (865) 32 Accounts payable......................................................... 3,419 (1,825) 1,271 Accrued expenses......................................................... (543) (1,094) 4,417 Other, net............................................................... 527 (1,545) (701) ---------- --------- ---------- Net cash provided by (used in) operating activities.................... (3,656) 2,449 (4,141) ---------- --------- ---------- Cash flows from investing activities: Acquisition of property and equipment........................................ (3,835) (6,611) (5,594) Capitalization of software development costs................................. -- (360) (937) ---------- --------- ---------- Net cash used in investing activities.................................. (3,835) (6,971) (6,531) ---------- --------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock....................................... 1,234 2,232 18,343 Proceeds from short-term bank borrowings..................................... 50,290 4,000 -- Payment of short-term bank borrowings........................................ (45,590) (1,500) (3,800) Payments of long-term debt................................................... (939) (990) (1,429) ---------- --------- ---------- Net cash provided by financing activities.............................. 4,995 3,742 13,114 ---------- --------- ---------- Effect of exchange rate changes on cash........................................ (631) (23) -- Net increase (decrease) in cash and cash equivalents........................... (3,127) (803) 2,442 Cash and cash equivalents, beginning of year................................... 11,827 12,630 10,188 ---------- --------- ---------- Cash and cash equivalents, end of year......................................... $ 8,700 $ 11,827 $ 12,630 ---------- --------- ---------- ---------- --------- ---------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest..................................................................... $ 445 $ 210 $ 172 Income taxes................................................................. 94 105 209 Non-cash investing activities: Purchase of property and equipment under long-term debt obligations.......... 515 1,544 1,416 Tax benefit on exercise of stock options..................................... -- -- 750
The accompanying notes are an integral part of the consolidated financial statements. 22 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Genus, Inc. develops, manufactures, markets and services advanced thin film deposition and high energy MeV ion implantation equipment used in the fabrication of advanced semiconductor integrated circuits. The Company's products are marketed worldwide either directly to end-users or through exclusive sales representative arrangements. In January 1996, the Company opened a subsidiary in South Korea to provide sales and service support to Korean customers. In April 1997, the Company's Japanese subsidiary commenced significant operations, providing sales and service support to Japanese customers. The Company's customers include semiconductor manufacturers located throughout the United States, Europe and in the Pacific Rim including Japan, South Korea and Taiwan. Genus conducts its business within one industry segment. The following is a summary of Genus' significant accounting policies. BASIS OF PRESENTATION The Company incurred operating losses during each of the two years in the period ended December 31, 1997 and, as of December 31, 1997, had an accumulated deficit of $48,863. Additionally, the Company's bank line of credit is scheduled to expire in June 1998. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. In February 1998, the Company issued equity securities through a private placement of convertible preferred stock ("Series A Stock") for gross proceeds of $5,000. Upon fulfillment of certain conditions, the same investors in the Company's Series A Stock have committed to providing additional equity financing. Assuming the Company fulfills these conditions and receives the proceeds from this additional preferred stock financing and assuming the Company is able to secure borrowings upon renewal of its existing bank line of credit or under a new line of credit, the Company believes that its existing cash resources together with funds from this additional preferred stock financing and line of credit will be sufficient to fund the Company's expected working capital requirements for at least the next 12 months. However, the exact amount and timing of these working capital requirements and the Company's ability to continue as a going concern will be determined by numerous factors, including the level of and gross margin on future sales, the payment terms extended to and by the Company and the timing of capital expenditures. Furthermore, there can be no assurance that funds will be received or become available from the additional preferred stock financing or line of credit or that these funds, together with the Company's existing cash resources, will be sufficient to implement the Company's operating strategy or meet the Company's other working capital requirements. Accordingly, the Company may be required to seek additional equity or debt financing. There can be no assurance that the Company would be able to obtain additional debt or equity financing, if and when needed, on terms that the Company finds acceptable. Any additional equity or debt financing may involve substantial dilution to the Company's shareholders, restrictive covenants or high interest costs. If the Company is unable to obtain sufficient funds to satisfy its cash requirements, it will be forced to curtail operations, dispose of assets or seek extended payment terms from its vendors. There can be no assurance that the Company would be able to reduce expenses or successfully complete other steps necessary to continue as a going concern. Such events would materially and adversely affect the value of the Company's equity securities. 23 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of significant intercompany accounts and transactions. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents approximate estimated fair value because of the short maturity of those financial instruments. Based on rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of debt approximate estimated fair values. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions located in the United States. The Company does not require collateral from its customers and maintains an allowance for credit losses. Three customers accounted for an aggregate of 75% and 71% of accounts receivable at December 31, 1997 and 1996, respectively. South Korean and Japanese customers accounted for an aggregate of 70% and 60% of accounts receivable at December 31, 1997 and 1996, respectively. INVENTORIES Inventories are stated at the lower of cost or market, using standard costs that approximate actual costs, under the first-in, first-out method. LONG-LIVED ASSETS Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Other assets include goodwill and software development costs and are stated at cost. Goodwill represents the cost in excess of an acquired business and is amortized on a straight-line basis over 15 years. Software development costs represent costs incurred subsequent to establishing the technological feasibility of software products and are amortized over the expected life of the products, estimated to be three years. Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets and goodwill related to those assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their 24 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997 and, accordingly, has restated all prior-period net income (loss) per share data presented. Pursuant to the requirements of SFAS 128, the Company has computed and presented net income (loss) per share under two methods, basic and diluted. Basic net income (loss) 25 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing income (loss) available to common shareholders, adjusted for convertible preferred dividends and after-tax interest expense on convertible debt, if any, by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). NOTE 2. INVENTORIES Inventories comprise the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Raw materials and parts................................................. $ 15,210 $ 14,776 Work in process......................................................... 6,879 6,847 Finished goods.......................................................... 6,897 4,841 --------- --------- $ 28,986 $ 26,464 --------- --------- --------- ---------
NOTE 3. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and comprise the following:
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- Equipment............................................................. $ 19,510 $ 16,145 Demonstration equipment............................................... 14,352 14,047 Furniture and fixtures................................................ 2,645 2,631 Leasehold improvements................................................ 6,631 6,900 ---------- ---------- 43,138 39,723 Less accumulated depreciation and amortization........................ (28,833) (24,669) ---------- ---------- 14,305 15,054 Construction in process............................................... 971 291 ---------- ---------- $ 15,276 $ 15,345 ---------- ---------- ---------- ----------
Equipment includes $3,745 and $3,479 of assets under capital leases at December 31, 1997 and 1996, respectively. Accumulated amortization on these assets is $2,628 and $1,402 at December 31, 1997 and 1996, respectively. 26 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 4. OTHER ASSETS Other assets comprise the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Goodwill................................................................. $ 3,802 $ 3,802 Software development costs............................................... 1,347 1,347 --------- --------- 5,149 5,149 Accumulated amortization--goodwill....................................... (2,675) (2,421) Accumulated amortization--software development costs..................... (980) (579) --------- --------- 1,494 2,149 Other.................................................................... 1,784 2,310 --------- --------- $ 3,278 $ 4,459 --------- --------- --------- ---------
Amortization expense for software development costs was $401, $507 and $376 in 1997, 1996 and 1995, respectively. NOTE 5. LINE OF CREDIT The Company has a revolving line of credit agreement with a bank that provides for maximum borrowings of $10,000 and expires in June 1998. Borrowings under the line of credit, which are collateralized by substantially all of the assets of the Company, bear interest at the bank's prime rate minus .25% (8.25% at December 31, 1997) or LIBOR plus 2% (7.625% at December 31, 1997). The agreement requires the Company to comply with certain financial covenants and restricts the payment of dividends. At December 31, 1997, the Company had $2,800 in unused letters of credit and borrowings of $7,200 outstanding under the line of credit. Availability of borrowings is based on eligible accounts receivable and inventory. Based on eligible accounts receivable and inventory at December 31, 1997, the Company's borrowing capacity under the revolving credit facility was in excess of $10,000. A monthly borrowing base certificate is required by the bank. NOTE 6. ACCRUED EXPENSES Accrued expenses comprise the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- System installation and warranty........................................ $ 3,741 $ 4,884 Accrued commissions and incentives...................................... 2,062 1,344 Accrued payroll and related items....................................... 1,264 1,003 Other................................................................... 3,546 3,577 --------- --------- $ 10,613 $ 10,808 --------- --------- --------- ---------
27 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt comprises the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Capital lease obligations with interest rates ranging from 4.9-- 15.6%.... $ 1,737 $ 2,153 Mortgage loan payable in monthly installments through October 2000 at 9 1/4% interest per annum and collateralized by a building.............. 108 116 --------- --------- 1,845 2,269 Less amounts due within one year.......................................... (874) (1,009) --------- --------- $ 971 $ 1,260 --------- --------- --------- ---------
The future aggregate payments of long-term debt and capital lease obligations are as follows:
1998................................................................ $ 954 1999................................................................ 543 2000................................................................ 358 2001................................................................ 110 --------- 1,965 Less amounts representing interest on long-term debt and capital lease obligations................................................. (120) --------- Principal payments and present value of minimum capital lease obligations....................................................... $ 1,845 --------- ---------
Certain of the capital lease agreements require the Company to comply with specific financial covenants and to pay stipulated amounts upon default or termination prior to the expiration of the basic lease terms. NOTE 8. LEASE COMMITMENTS The Company leases certain of its facilities and various office equipment under operating leases expiring through 2017. The Company is responsible for property taxes, insurance and maintenance under the facility leases. Certain of these leases contain renewal options. 28 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 8. LEASE COMMITMENTS (CONTINUED) At December 31, 1997, minimum lease payments required under these operating leases are as follows:
1998............................................................... $ 1,854 1999............................................................... 1,585 2000............................................................... 1,600 2001............................................................... 1,681 2002............................................................... 1,584 Thereafter......................................................... 10,215 --------- $ 18,519 --------- ---------
Rent expense for 1997, 1996 and 1995 was $2,215, $2,218 and $1,251, respectively. 29 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK NET INCOME (LOSS) PER SHARE A reconciliation of the numerator and denominator of basic and diluted income (loss) per share is as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- --------- --------- Numerator-Basic: Net income (loss)......................................... $ (19,336) $ (9,205) $ 19,282 ---------- --------- --------- ---------- --------- --------- Denominator-Basic: Weighted average common stock outstanding................. 16,860 16,423 15,334 ---------- --------- --------- ---------- --------- --------- Basic net income (loss) per share........................... $ (1.15) $ (0.56) $ 1.26 ---------- --------- --------- ---------- --------- --------- Numerator-Diluted: Net income (loss)......................................... $ (19,336) $ (9,205) $ 19,282 ---------- --------- --------- ---------- --------- --------- Denominator-Diluted: Weighted average common stock outstanding................. 16,860 16,423 15,334 Effect of dilutive securities: Stock options........................................... -- -- 729 ---------- --------- --------- 16,860 16,423 16,063 ---------- --------- --------- ---------- --------- --------- Diluted net income (loss) per share......................... $ (1.15) $ (0.56) $ 1.20 ---------- --------- --------- ---------- --------- ---------
Stock options to purchase 1,979,000 shares of common stock were outstanding in 1997 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1997. Stock options to purchase 1,838,000 shares of common stock were outstanding in 1996 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1996. Stock options to purchase 152,000 shares of common stock were outstanding in 1995 on a weighted average basis, but were not included in the computation of diluted income per share because the exercise price was greater than the average market value of the common shares. PRIVATE PLACEMENT OFFERING On February 17, 1995, the Company sold 2,539,018 shares of common stock for $16,200 through a private placement offering. STOCK OPTION PLAN The Company has a 1991 Incentive Stock Option Plan (the "Plan") under which the Board of Directors may issue incentive and nonstatutory stock options. The Plan expires ten years after adoption and the Board of Directors has the authority to determine to whom options will be granted, the number of 30 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) shares, the term and exercise price. The options are exercisable at times and increments as specified by the Board of Directors, and expire five years from date of grant. These options generally vest over a three-year period. At December 31, 1997, the Company had reserved 3,503,006 shares of common stock for issuance under the Plan. A total of 785,340 shares remained available for future grants at December 31, 1997. At December 31, 1995, 351,866 options were exercisable at a weighted average exercise price of $3.28. At December 31, 1996, 492,729 options were exercisable at a weighted average exercise price of $5.56. At December 31, 1997, 789,670 options were exercisable at a weighted average exercise price of $6.50. Activity under the Plan is set forth in the table below:
WEIGHTED OUTSTANDING AVERAGE SHARES OPTIONS PRICE EXERCISE (IN 000'S) PER SHARE TOTAL PRICE ----------- ---------------- --------- ----------- Balance, January 1, 1995....................................... 1,279 $ 1.25 to $6.88 $ 3,682 $ 2.88 Granted...................................................... 1,277 7.75 to 15.63 12,084 9.46 Exercised.................................................... (542) 1.25 to 6.88 (1,161) 2.14 Terminated................................................... (428) 1.25 to 15.63 (4,658) 10.88 ----- ---------------- --------- ----- Balance, December 31, 1995..................................... 1,586 1.75 to 15.63 9,947 6.27 Granted...................................................... 1,027 5.94 to 8.38 6,705 6.53 Exercised.................................................... (310) 1.75 to 8.63 (1,125) 3.63 Terminated................................................... (213) 2.75 to 15.63 (1,776) 8.34 ----- ---------------- --------- ----- Balance, December 31, 1996..................................... 2,090 1.75 to 8.63 13,751 6.58 Granted...................................................... 537 3.88 to 6.94 2,707 5.04 Exercised.................................................... (124) 1.75 to 6.13 (364) 2.94 Terminated................................................... (652) 2.25 to 8.63 (4,473) 6.86 ----- ---------------- --------- ----- Balance, December 31, 1997..................................... 1,851 $ 2.25 to $8.63 $ 11,621 6.28 ----- ---------------- --------- ----- ----- ---------------- --------- -----
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income (loss) and net income (loss) per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1995 under the fair value method prescribed by SFAS 123. 31 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) The fair value of these options was estimated at the date of grant using a Black-Scholes single option pricing model with the following weighted average assumptions for 1997, 1996 and 1995:
1997 1996 1995 ---------- ---------- ---------- Risk free interest rates................................. 6.220% 6.070% 6.320% Expected life............................................ 3.5 years 3.5 years 3.5 years Expected volatility...................................... 77.7% 77.7% 77.7% Expected dividend yield.................................. --% --% --%
The weighted average fair value of options granted in 1997, 1996 and 1995 was $2.92, $3.81 and $4.58, respectively. Under the 1989 Employee Stock Purchase Plan, the Company does not recognize compensation cost related to employee purchase rights under the Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 1997, 1996 and 1995.
1997 1996 1995 ---------- ---------- ---------- Risk free interest rates................................. 5.630% 5.340% 6.250% Expected life............................................ 0.5 years 0.5 years 0.5 years Expected volatility...................................... 77.7% 77.7% 77.7% Expected dividend yield.................................. --% --% --%
The weighted average fair value of those purchase rights granted in 1997, 1996 and 1995 was $1.80, $3.26 and $3.88, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income (loss) and basic and diluted net income (loss) per share would have been the pro forma amounts indicated below:
1997 1996 1995 ----------- ----------- --------- Pro forma net income (loss).............................. $ (21,537) $ (12,053) $ 17,858 Pro forma net income (loss) per share--basic............. $ (1.28) $ (0.73) $ 1.16 Pro forma net income (loss) per share--diluted........... $ (1.28) $ (0.73) $ 1.13
The above pro forma effects on net income (loss) may not be representative of the effects on future results as options granted typically vest over several years and additional option grants are expected to be made in future years. 32 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) The options outstanding and currently exercisable by exercise price under the option plan at December 31, 1997 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- ---------------------------------- RANGE OF NUMBER WEIGHTED AVERAGE NUMBER EXERCISE OUTSTANDING REMAINING WEIGHTED AVERAGE OUTSTANDING WEIGHTED AVERAGE PRICES (IN 000'S) CONTRACTUAL LIFE EXERCISE PRICE (IN 000'S) EXERCISE PRICE - -------------- ------------- ------------------- ----------------- --------------- ----------------- $2.25-$5.25 538 3.12 $ 4.24 192 $ 3.66 $5.56-$6.13 580 3.67 6.01 202 5.99 $6.38-$8.38 486 2.93 7.70 229 7.77 $8.63-$8.63 247 2.95 8.55 167 8.63 ----- --- $2.25-$8.63 1,851 3.22 $ 6.28 790 $ 6.50 ----- --- ----- ---
EMPLOYEE STOCK PURCHASE PLAN The Company has reserved a total of 1,750,000 shares of common stock for issuance under a qualified stock purchase plan, which provides substantially all Company employees with the right to acquire shares of the Company's common stock through payroll deductions. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85% of fair market value at either the beginning of each two-year offering period or the end of each six-month purchase period within the two-year offering period. At December 31, 1997, 1,625,086 shares have been issued under the plan. COMMON STOCK PURCHASE RIGHTS In July 1990, the Company distributed a dividend to shareholders comprised of a right to purchase one share of common stock (a "Right") for each outstanding share of common stock of the Company they hold. These rights do not become exercisable or transferable apart from the common stock until the Distribution Date which is either the tenth day after a person or group (a) acquires beneficial ownership of 20% or more of the Company's common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 30% or more of the Company's common stock. After the Distribution Date, each Right will entitle the holder to purchase from the Company one share of common stock at a price of $28.00 per share. If the Company is acquired in a merger or other business combination transaction, or if 50% or more of its consolidated assets or earnings power is sold, each Right will entitle the holder to purchase at the exercise price that number of shares of the acquiring company having a then current market value of two times the exercise price of the Right. In the event that the Company is the surviving corporation in a merger and the Company's common stock remains outstanding, or in the event that an acquiring party engages in certain self-dealing transactions, each Right not owned by the acquiring party will entitle the holder to purchase at the exercise price that number of shares of the Company's common stock having a then current market value of two times the exercise price of the Right. 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. 33 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10. EMPLOYEE BENEFIT PLAN During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit Plan") to provide retirement and incidental benefits for eligible employees. The Benefit Plan provides for Company contributions as determined by the Board of Directors which may not exceed 6% of the annual aggregate salaries of those employees eligible for participation. In 1997, 1996 and 1995, the Company made $92, $87 and $61, respectively, in contributions to the Benefit Plan. NOTE 11. SPECIAL CHARGE During 1996, the Company incurred special charges of $5,890 relating 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, ------------------------------- 1997 1996 1995 --------- --------- --------- Interest income................................................ $ 156 $ 334 $ 790 Interest expense............................................... (445) (210) (172) Loss on disposal of leasehold improvements..................... -- -- (261) Foreign exchange............................................... (1,107) -- -- Other, net..................................................... 33 (71) (30) --------- --------- --------- $ (1,363) $ 53 $ 327 --------- --------- --------- --------- --------- ---------
NOTE 13. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 --------- --------- ---------- Federal: Current................................................... $ -- $ -- $ 431 Deferred.................................................. 14,004 (2,343) $ (11,036) --------- --------- ---------- 14,004 (2,343) (10,605) --------- --------- ---------- State: Current................................................... -- -- 150 Deferred.................................................. 840 (191) (524) --------- --------- ---------- 840 (191) (374) --------- --------- ---------- Foreign: Current................................................... -- 334 -- --------- --------- ---------- $ 14,844 $ (2,200) $ (10,979) --------- --------- ---------- --------- --------- ----------
34 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 13. INCOME TAXES (CONTINUED) The Company's effective tax rate for the years ended December 31, 1997, 1996 and 1995 differs from the U.S. federal statutory income tax rate as follows:
1997 1996 1995 ----- ----- --------- Federal income tax at statutory rate................................ (34)% (35)% 34% Change in valuation allowance....................................... 372 13 (173) Alternative minimum tax............................................. -- -- 5 State income taxes.................................................. -- -- 2 Foreign income taxes................................................ -- 3 -- Other............................................................... (8) -- -- -- --- --- 330% (19)% (132)% -- -- --- --- --- ---
The components of the net deferred tax asset comprise the following:
1997 1996 --------- --------- Deferred tax assets (liabilities): Net operating loss carryforwards...................................... $ 13,097 $ 9,447 Tax credit carryforward............................................... 1,867 1,288 Inventory, accounts receivable and other reserves..................... 401 1,835 Non-deductible accrued expenses....................................... 1,152 1,264 Other reserves........................................................ -- 1,245 Depreciation and amortization......................................... 215 (235) Valuation allowance................................................... (16,732) -- --------- --------- Net deferred tax assets................................................. $ -- $ 14,844 --------- --------- --------- ---------
Temporary differences represent the cumulative taxable or deductible amounts recorded in the financial statements in different years than recognized in the tax returns. At December 31, 1997, the Company had the following income tax carryforwards available:
EXPIRATION TAX REPORTING DATES ------------- --------------- U.S. regular tax operating losses............................ $ 36,700 2005-2012 U.S. business tax credits.................................... $ 1,867 2002-2009 State net operating losses................................... $ 11,800 1998-2003
Based on the weight of available evidence as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), management has determined that it is more likely than not that the net deferred tax asset at December 31, 1997 will not be realized and has, therefore, provided a full valuation allowance against the net deferred tax asset. The amount of the net deferred tax asset that is realizable could be increased in the near term if actual operating results differ significantly from current estimates. The utilization of the Company's net operating losses may be limited upon certain changes in ownership. 35 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 14. SEGMENT INFORMATION The Company is engaged in the design, manufacture, marketing and servicing of advanced thin film deposition systems and MeV ion implantation systems used primarily in the semiconductor manufacturing industry. The Company's sales are primarily generated from two products, CVD WSix and MeV ion implantation systems. The Company's CVD system is designed for the deposition of WSix to create multiple interconnect layers on ICs. The MeV ion implantation system drives electrically charged ions into the surface of a silicon wafer to convert the electrical characteristics of the wafer. Both products are primarily used in the manufacturing of DRAMs. Its business serves the semiconductor manufacturing industry only. EXPORT SALES Export sales (principally from sales to customers in the Far East and Europe) for 1997, 1996 and 1995 represented 74%, 84% and 88% of net sales, respectively. DOMESTIC AND FOREIGN OPERATIONS Substantially all of the Company's operations were located domestically in 1995. Revenues, income (loss) from operations, and identifiable assets for the Company's foreign and domestic operations for 1997 and 1996 are as follows:
1997 1996 --------- ---------- Sales to unaffiliated customers: Domestic operations............................................................ $ 73,182 $ 80,827 Foreign operations............................................................. 11,104 1,682 --------- ---------- $ 84,286 $ 82,509 --------- ---------- --------- ---------- Sales between geographic areas: Domestic operations............................................................ $ 5,864 $ 848 Foreign operations............................................................. 1,269 2,837 Eliminations and other......................................................... (7,133) (3,685) --------- ---------- $ -- $ -- --------- ---------- --------- ---------- Income (loss) from operations: Domestic operations............................................................ $ (4,897) $ (12,631) Foreign operations............................................................. 1,464 1,152 Eliminations and other......................................................... 304 21 --------- ---------- $ (3,129) $ (11,458) --------- ---------- --------- ---------- Identifiable assets: Domestic operations............................................................ $ 75,975 $ 87,932 Foreign operations............................................................. 4,363 2,370 Eliminations and other......................................................... (3,600) (1,170) --------- ---------- $ 76,738 $ 89,132 --------- ---------- --------- ----------
36 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 14. SEGMENT INFORMATION (CONTINUED) MAJOR CUSTOMERS In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech Corporation, accounted for 47% and 17%, respectively, of net sales, and in 1996, these same two customers accounted for 53% and 18%, respectively, of net sales. In 1995, Samsung Electronics Company, Ltd. accounted for 63% of net sales. NOTE 15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
1997 QUARTERS ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 *DECEMBER 31 ----------- --------- ------------ ------------- Net sales..................................................... $ 19,681 $ 19,351 $ 24,375 $ 20,879 Gross profit.................................................. 7,368 7,811 8,351 5,994 Net income (loss)............................................. 181 296 512 (20,325) Net income (loss) per share-basic and diluted................. 0.01 0.02 0.03 (1.20)
1996 QUARTERS ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- --------- ------------ ------------ Net sales...................................................... $ 26,360 $ 25,095 $ 13,892 $ 17,162 Gross profit................................................... 9,438 9,176 3,399 4,959 Net income (loss).............................................. 593 645 **(8,105) **(2,338) Net income (loss) per share--basic and diluted................. 0.04 0.04 (0.49) (0.14)
* During the fourth quarter of 1997, delays in shipments to Asian customers resulted in lower sales. In addition, the Company incurred a net charge of $2,930 for bad debt expense. The lower sales, coupled with this write-off, resulted in an operating loss of $4,930 for the fourth quarter. Other income (loss) for the quarter included $1,107 in foreign exchange losses as a result of the effect of the devaluation of the Korean won on intercompany transactions. In addition, based on the weight of available evidence as prescribed by SFAS 109, management determined that it is more likely than not that the net deferred tax asset at December 31, 1997 will not be realized and, therefore, provided a full valuation allowance against the net deferred tax asset during the fourth quarter of 1997. ** During the third and fourth quarters of 1996, the Company recognized special charges aggregating $5,890 (see Note 11). NOTE 16. SUBSEQUENT EVENTS 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. 37 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 16. SUBSEQUENT EVENTS (CONTINUED) On February 12, 1998 the Company completed a private equity placement of $5,000 of convertible preferred stock to a group of institutional investors. Upon fulfillment of certain specified conditions, these same investors have also committed to provide additional financing of up to $5,000. NOTE 17.ASSET SALE AGREEMENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT ACCOUNTANTS' REPORT In April 1998, the Company entered into an agreement with Varian Associates, Inc. to sell selected assets and transfer selected liabilities related to the MeV ion implantation equipment product line for approximately $25 million plus additional payments if certain revenue targets are achieved ("Asset Sale"). The completion of the Asset Sale is subject to approval by the Company's shareholders as well as to expiration of the applicable waiting periods under federal Hart-Scott-Rodino premerger notification requirements. As a result of the Asset Sale, the Company will no longer engage in the ion implant business and will refocus its efforts on thin film deposition. The Company will use 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 and development of thin film products. In connection with the Asset Sale and the refocusing of the Company's business on thin film products, the Company anticipates that it will significantly reduce the workforce at its Sunnyvale, California location. In addition, James Healy will resign as President and Chief Executive Officer of the Company and William W.R. Elder, the Company's Chairman, will return to a full-time role as President and Chief Executive Officer. 38 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Genus, Inc. We have audited the accompanying consolidated balance sheets of Genus, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genus, Inc. and subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations during each of the past two years and has an accumulated deficit, that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. San Jose, California January 26, 1998, except for Notes 1, 5 and 16, as to which the date is March 2, 1998 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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, 1998, are as follows:
NAME AGE POSITION - ------------------------------------- --- --------------------------------------------------------------------- William W.R. Elder................... 59 Chairman of the Board James T. Healy....................... 57 President, Chief Executive Officer and Director Mary F. Bobel........................ 48 Executive Vice President, Chief Financial Officer John E. Aldeborgh.................... 41 Executive Vice President, Chief Customer Satisfaction Officer Frederick E. Heslet, Ed.D............ 58 Executive Vice President, Chief Quality Officer Thomas E. Seidel, Ph.D............... 62 Executive Vice President, Chief Technical Officer James McEleney....................... 40 Vice President, General Manager, Ion Technology Products Mario M. Rosati...................... 51 Secretary and Director Todd S. Myhre........................ 52 Director Stephen F. Fisher.................... 44 Director G. Frederick Forsyth................. 52 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. From April 1990 to September 1996, he was Chairman of the Board, President and Chief Executive Officer of the Company. From November 1981 to April 1990, he was President and a director of the Company. Mr. Healy joined the Company in September 1996 as President and Chief Executive Officer of the Company. From December 1990 to September 1996, Mr. Healy was associated with Credence Systems Corporation, a manufacturer of semiconductor test equipment, in various senior executive management positions, most recently as President and a director of the Company. Ms. Bobel joined the Company in March 1997 as Executive Vice President and Chief Financial Officer. From October 1994 to September 1996, Ms. Bobel served as Vice President and Chief Financial Officer at Educational Publishing Corporation, a publisher of supplementary educational materials. From March 1990 to September 1994, she was employed at Adobe Systems, a publicly held software company, most recently as Vice President and Corporate Controller. Mr. Aldeborgh joined the Company in June 1989 and serves as the Executive Vice President and Chief Customer Satisfaction Officer. From January 1997 to September 1997, Mr. Aldeborgh served as Executive Vice President and Chief Operating Officer. From January 1993 to January 1997, he was Vice President and General Manager, Ion Technology Products of the Company. From June 1989 to January 1993, he was the Director of Operations of the Ion Technology Products. From May 1983 to May 1989, 40 Mr. Aldeborgh was with LTX Corporation, a manufacturer of semiconductor test equipment, in various management positions, most recently as Director of Manufacturing for the Linear Manufacturing Division. Dr. Heslet joined the Company in November 1996 as Chief Quality Officer and Executive Vice President, Human Resources. In addition, he also is employed by California State University, Hayward, where he has been a professor of educational psychology since 1968. From November 1990 to December 1996, he served as Vice President of Quality and Development at Credence Systems Corporation, a manufacturer of semiconductor test equipment. Dr. Seidel joined the Company in January 1996 and is the Executive Vice President and Chief Technical Officer of the Company. From July 1988 to January 1996, Dr. Seidel was associated with SEMATECH, a semiconductor-industry consortium, in various senior management positions, most recently as Chief Technologist and Director of Strategic Technology. Mr. McEleney joined the Company in April 1996 as Vice President, Marketing of Ion Technology Products and was promoted to Vice President and General Manager of Ion Technology Products in March 1998. From January 1995 to April 1996, Mr. McEleney was the Director, Sales & Marketing for Thermedics Detection, Inc., a manufacturer of precision analytical instruments. From December 1984 to January 1995, Mr. McEleney held various sales and marketing positions for Teradyne, Inc., a manufacturer of automatic test equipment. 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. From July 1995 to April 1996, Mr. Rosati was the Assistant Secretary of the Company. He is also a director of 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, he has served as President and Chief Executive Officer of GameTech International, an electronic gaming manufacturer. From February 1996 to October 1996, Mr. Myhre was an international business consultant. From September 1995 to January 1996, he served as President and Chief Executive Officer of GameTech International. 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. Myhre is currently a business consultant. Mr. Fisher has served as a director of the Company since April 1995, when he was elected pursuant to the terms of the Stock Purchase Agreement to serve as a representative of Bachow Group. He has been the Managing Director of Bachow & Associates, Inc., an investment firm, since June 1993. For more than five years prior to joining Bachow & Associates, Inc., he served in numerous executive capacities with Westinghouse Broadcasting Company, Inc., a media and communications company, most recently as Executive Vice President. Mr. Forsyth has been a director of the Company since February 12, 1996. Since August 25, 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. 41 SECTION 16(a) REPORTS Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file certain reports regarding ownership of, and transactions in, the Company's Securities with the Securities and Exchange Commission (the "SEC"). Such officers, directors and 10% shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that during fiscal 1997, its executive officers, directors and ten percent shareholders filed all required Section 16(a) reports on a timely basis with the following exceptions: John Aldeborgh filed a Form 5 disclosing one transaction that should have been reported earlier on a Form 4; and Thomas Seidel filed a Form 5 disclosing two transactions that should have been reported earlier on Forms 4. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS SUMMARY COMPENSATION TABLE The following table discloses compensation received by the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company (the "Named Executive Officers") for the three fiscal years ended December 31, 1997:
LONG-TERM COMPENSATION AWARDS(2) ANNUAL COMPENSATION ----------------------------- -------------------------------- OPTIONS/ ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) SARS(#) COMPENSATION($)(3) - ------------------------------------------------- ---- --------- ----------- -------- ------------------ William W.R. Elder .............................. 1997 305,000 -- 50,000 43,890 Chairman of the Board 1996 304,167 42,750 100,000 2,947 1995 282,917 18,422 James T. Healy .................................. 1997 300,000 90,000 -- 11,500 President and Chief Executive Officer 1996(4) 87,500 -- 250,000 -- Mary F. Bobel ................................... 1997(5) 137,500 16,500 75,000 6,539 Executive Vice President and Chief Financial Officer John E. Aldeborgh ............................... 1997 206,845 20,976 30,000 8,716 Executive Vice President, Chief Customer 1996 182,390 -- 50,000 -- Satisfaction Officer 1995 152,096 30,000 62,500 9,816 Thomas E. Seidel ................................ 1997 209,200 21,000 5,000 8,692 Executive Vice President and Chief Technical 1996(4) 183,333 -- 125,000 948 Officer
- ------------------------ (1) Except as otherwise noted, all bonuses were earned by the named officer in the fiscal year indicated and paid to the named officer in early 1998 pursuant to the Company's Management Incentive Plan. (2) The Company did not make any awards of restricted stock or make any payments under long-term incentive plans during the periods covered in the table. (3) Represents amounts contributed to the Company's 401(k) plan on behalf of the officer by the Company and automobile allowances. Premiums in the amount of $2,947 and $3,540 were also paid by the Company on behalf of Mr. Elder for a term life insurance policy (the proceeds of which are payable to his named beneficiaries) in fiscal 1996 and fiscal 1997, respectively. 42 (4) Mr. Healy and Mr. Seidel were not employed by the Company prior to fiscal 1996. Mr. Healy joined the Company in September 1996. Mr. Seidel joined the Company in January 1996. (5) Ms. Bobel was not employed by the Company prior to fiscal 1997. Ms. Bobel joined the Company in March 1997. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table provides information on option grants made in fiscal 1997 to the Named Executive Officers:
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE -------------------------------------------------- AT ASSUMED ANNUAL % OF TOTAL RATES OF STOCK OPTION/SARS PRICE GRANTED TO EXERCISE APPRECIATION FOR EMPLOYEES OR BASE OPTION TERM(3) OPTION/SARS IN FISCAL PRICE PER EXPIRATION ----------------- NAME GRANTED(1) YEAR(2) SHARE DATE 5% 10% - --------------------------------------- ----------- ----------- --------- ---------- ------- -------- William W.R. Elder..................... -- -- -- -- -- -- James T. Healy......................... -- -- -- -- -- -- Mary F. Bobel.......................... 75,000 14 3.87 2002 $80,191 $177,201 John E. Aldeborgh...................... 30,000 6 5.25 2002 43,514 96,155 Thomas E. Seidel....................... 5,000 1 5.25 2002 7,252 16,026
- ------------------------ (1) The indicated options were granted at various dates in 1997, vest at the rate of 1/3 per year and become fully exercisable at various dates in 2000. (2) The Company granted options to purchase 537,000 shares to employees in fiscal 1997. (3) Potential realizable value assumes that the stock price increases from the date of grant until the end of the option term (5 years) at the annual rate specified (5% and 10%). AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following table provides information on option/SAR exercises in fiscal 1997 by the Named Executive Officers and the value of such officers' unexercised options/SARs at December 31, 1997. Options were exercised by Named Executive Officers during fiscal 1997.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY SHARES OPTION/SARS AT 12/31/97 OPTION/SARS AT 12/31/97(2): ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE REALIZED(1) (EXERCISABLE) (UNEXERCISABLE) (EXERCISABLE) (UNEXERCISABLE) - -------------------------- ----------- ----------- ------------ -------------- ------------ -------------- William W.R. Elder........ 20,000 61,260 99,999 50,001 -- -- James T. Healy............ 833,325 166,675 -- -- Mary F. Bobel............. 25,000 50,000 -- -- John E. Aldeborgh......... 58,311 61,670 -- -- Thomas E. Seidel.......... 68,327 61,673 -- --
- ------------------------ (1) Fair market value of the Company's Common Stock on the date of exercise minus the exercise price. (2) Market value of underlying securities based on the closing price of Company's Common Stock on December 31, 1997, on NASDAQ of $3.334, less the exercise price. The Company has not established any long-term incentive plans or defined benefit or actuarial plans covering any of the Named Executive Officers. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements. Consolidated Balance Sheets--December 31, 1997 and 1996 Consolidated Statements of Operations--Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity--Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Accountants 2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule of Genus, Inc. for the years ended December 31, 1997, 1996 and 1995 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Genus, Inc.
PAGE ----- Report of Independent Accountants........................................ 49 II-- Valuation and Qualifying Accounts........................................ 50
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, 1997. 48 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Genus, Inc. Our report on the consolidated financial statements of Genus, Inc. is included on page 39 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Jose, California January 26, 1998 49 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS CHANGE OF CONTROL SEVERANCE AGREEMENTS Certain executive officers and key employees have severance agreements with the Company that provide severance benefits in the event that the executive or employee's employment with the Company is "Involuntarily Terminated" or otherwise terminated without "Cause" within a specified period of time (either six months or one year) following a "Change of Control." The severance benefits include a cash payment of a specified percentage (either 600% or 1200%) of the executive's or employee's monthly base pay. The severance agreements define "Cause" to include an act of dishonesty intended to result in substantial gain or personal enrichment; conviction of an illegal act with respect to his or her employment by the Company; and willful violations of the executive's or key employee's obligations to the Company. The severance agreements define "Involuntary Termination" as a reduction in base compensation; a relocation of the executive or key employee to a location more than 50 miles from the executive or key employee's present location; a material reduction in benefits or a material increase in the executive's or employee's cost of benefits; significant reduction of the executive's or key employee's duties or responsibilities; or the failure or refusal of a successor company to assume the Company's obligations under the severance agreements. The severance agreements define "Change of Control" to mean the occurrence of any of the following events: (i) any person becomes the beneficial owner of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) an change in the composition of the Board of Directors occurring within a two-year period, as a result of which fewer than a majority of the directors are incumbent directors; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. The immediate applicability of the change of control severance benefits to any specific executive officer or key employee is unknown at this time. TERMINATION OF EMPLOYMENT AGREEMENT On April 20, 1998, the Company entered into a Settlement Agreement and Mutual Release with James T. Healy (the "Healy Agreement") in connection with Mr. Healy's planned resignation from the positions of President and Chief Executive Officer of the Company effective as of April 30, 1998. Pursuant to the Healy Agreement, the Company will continue to pay Mr. Healy $25,000 per month, less applicable withholding, for nine months from the date of his resignation. Mr. Healy will not be entitled to the accrual or continuation of any employee benefits, including but not limited to, vacation benefits and bonuses. The exercise of any stock options will continue to be subject to the terms and conditions of the Company's Stock Option Plan and the applicable Stock Option Agreement between Mr. Healy and the Company. TRANSITION AGREEMENT On April 30, 1996, the Company entered into a Management Transition Agreement with William W.R. Elder (the "Elder Agreement"). The Elder Agreement provides for the cessation of Mr. Elder's services to the Company in his capacity as Chief Executive Officer, the continuation of his role as Chairman of the Board and the commencement of his role as an employee of the Company until December 31, 1997 and as a consultant to the Company until December 31, 1999. The terms of the Elder Agreement provide for Mr. Elder to continue to receive his salary as in effect on April 30, 1996 until December 31, 1997 and $100,000 per year for the period of January 1, 1998 to December 31, 1999, provided Mr. Elder does not cease to be an employee of or consultant to the Company prior to such dates. In addition, the Elder Agreement provides that Mr. Elder will receive all of the employee benefits that he received as of April 30, 44 1996 so long as he is an employee of the Company, and will receive only health benefits and an automobile allowance so long as he is a consultant to the Company. Mr. Elder's options to purchase Common Stock of the Company will be governed by the provisions of the applicable option agreements between Mr. Elder and the Company, and the vesting, post-termination exercisability and other provisions of such options shall not be affected by the Elder Agreement. Following the planned resignation of Mr. Healy, Mr. Elder will resume the position of President and Chief Executive Officer and continue as Chairman of the Board. DIRECTOR COMPENSATION The Company currently pays to its directors who are not employees a fee of $1,000 per meeting and $500 per telephonic meeting. In addition, the Company pays non-employee members of the board an annual fee of $10,000. The Company also reimburses directors for reasonable expenses incurred in attending meetings. Under the Company's 1991 Option Plan, each of the non-employee directors receives an automatic grant of an option to purchase 5,000 shares of Common Stock on the date of his or her appointment or election to the Board and, for so long as he or she continues to serve as a director, an automatic grant of an option to purchase 5,000 shares of Common Stock on February 7 of each year. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company held a total of 7 meetings during the year ended December 31, 1997. The Board of Directors has an Audit Committee and a Compensation Committee. It does not have a nominating committee or a committee performing the functions of a nominating committee. During the year ended December 31, 1997, the Audit Committee of the Board of Directors consisted of directors Fisher, Forsyth and Rosati and held one meeting. As of March 31, 1998 the Audit Committee consisted of directors Forsyth, Myhre and Rosati. The Audit Committee recommends engagement of the Company's independent accountants and is primarily responsible for approving the services performed by the Company's independent accountants and for reviewing and evaluating the Company's accounting principles and its system of internal accounting controls. During the year ended December 31, 1997, the Compensation Committee of the Board of Directors consisted of directors Fisher, Forsyth and Rosati and held three meetings. As of March 31, 1998 the Compensation Committee consisted of directors Forsyth, Myhre and Rosati. The Compensation Committee makes recommendations to the Board of Directors regarding the Company's executive compensation policy. See "Compensation Committee Report on Executive Compensation." No director serving in the year ended December 31, 1997, attended fewer than 75% of the aggregate number of meetings of the Board of Directors and meetings of the committees of the Board on which he or she serves. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 1997, the Company paid legal fees and expenses to Wilson Sonsini Goodrich & Rosati, Professional Corporation, general counsel to the Company. Mario M. Rosati, a director and Secretary of the Company, is a member of the firm of Wilson Sonsini Goodrich & Rosati. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company regarding beneficial ownership of the Company's Common Stock as of March 31, 1998, by (i) each of the Company's directors, (ii) each Named Executive Officer, (iii) all directors and executive officers of the Company as a group and 45 (iv) each person known by the Company to beneficially own more than 5% of the Company's Common Stock:
NUMBER OF PERCENT OF NAME OF BENEFICIAL OWNER SHARES(1) CLASS(2) - ------------------------------------------------------------------------------------------ ---------- ------------- The Parnassus Fund........................................................................ 1,150,000 6.71% 244 California Street, Ste. 400 San Francisco, CA 94111 Anthony T. Winn........................................................................... 1,000,000 5.84% c/o Herbert H. Davis III, Esq. 1200 17th Street Suite 3000 Denver, CO 80202 Bachow Investment Partners III, L.P.(3)................................................... 997,876 5.83% 3 Bala Plaza East, Suite 502 Bala Cynwyd, PA 19004 Dimensional Fund Advisors................................................................. 868,400 5.07% 1299 Ocean Ave. 11th Floor Santa Monica, CA William W.R. Elder(4)..................................................................... 230,599 1.35% James T. Healy............................................................................ 5,000 * Paul S. Bachow Co-Investment Fund, L.P.(5)................................................ 138,671 * 3 Bala Plaza East, Suite 502 Bala Cynwyd, PA 19004 Paul S. Bachow(6)......................................................................... 63,392 * 3 Bala Plaza East, Suite 502 Bala Cynwyd, PA 19004 Mary F. Bobel(7).......................................................................... 27,032 * Mario M. Rosati(8)........................................................................ 11,500 * Thomas E. Seidel.......................................................................... 3,841 * John E. Aldeborgh......................................................................... 2,593 * Stephen F. Fisher(9)...................................................................... 0 * G. Frederick Forsyth...................................................................... 0 * Todd S. Myhre............................................................................. 0 * All directors and executive officers as a group (11 persons)(10).......................... 1,485,076 8.67%
- ------------------------ * Less than 1%. (1) Except as otherwise indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Applicable percentage ownership is based on 17,129,260 shares of Common Stock outstanding as of March 31, 1998 together with applicable options for such shareholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, based on factors including voting and investment power with respect to shares. Shares of Common Stock subject to the options currently exercisable, or exercisable within 60 days after March 31, 1998, are deemed 46 outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other person. (3) Does not include 138,671 shares held by Paul S. Bachow Co-Investment Fund, L.P. and 63,392 shares held by Paul S. Bachow, as to which Bachow Investment Partners III, L.P. disclaims beneficial ownership. (4) Consists of 230,599 shares held in William R. Elder and Gloria S. Elder Family Trust. (5) Does not include 977,876 shares held by Bachow Investment Partners III, L.P. and 63,392 shares held by Paul S. Bachow, as to which Paul S. Bachow Co-Investment Fund, L.P. disclaims beneficial ownership. (6) Does not include 977,876 shares held by Bachow Investment Partners III, L.P. and 138,671 shares held by Paul S. Bachow Co-Investment Fund, L.P., as to which Paul S. Bachow disclaims beneficial ownership. (7) Consists of 2,032 shares of Common Stock and options to purchase 25,000 shares of Common Stock exercisable within 60 days of March 31, 1998. (8) Consists of 2,500 shares held by Mr. Rosati, 9,000 shares held by WS Investments 92A and options to purchase 5,000 shares of Common Stock exercisable within 60 days of March 31, 1998. Mr. Rosati is a general partner of WS Investments 92A and disclaims beneficial ownership of the shares held by such entity except to the extent of his proportionate partnership interest therein. (9) On April 3, 1995, pursuant to the terms of a Stock Purchase Agreement dated February 10, 1995 (the "Stock Purchase Agreement") by and among the Company and Bachow Investment Partners III, L.P., Paul S. Bachow Co-Investment Fund, L.P. and Paul S. Bachow, (collectively the "Bachow Group"), Mr. Fisher was elected as a representative of the Bachow Group to fill an existing vacancy on the Company's Board of Directors. This figure does not include the 1,179,939 shares held by the Bachow Group, as to which shares Mr. Fisher has neither voting nor investment power. (10) Includes options to purchase 25,000 shares of Common Stock exercisable within 60 days of March 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to "Employment Contracts and Termination of Employment and Change-in-Control Arrangements" above. 47 SCHEDULE II GENUS, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD - ------------------------------------------------------------ ------------- ----------- ----------- ------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------ ------------- ----------- ----------- ------------- 1995 Allowance for doubtful accounts............................. $ 250 $ -- $ -- $ 250 Inventory reserves.......................................... 2,665 995 389 3,271 Product warranty and installation accruals.................. 2,394 3,640 1,716 4,318 1996 Allowance for doubtful accounts............................. 250 -- -- 250 Inventory reserves.......................................... 3,271 4,603 1,338 6,536 Product warranty and installation accruals.................. 4,318 4,022 3,456 4,884 1997 Allowance for doubtful accounts............................. 250 4,589 3,742 1,097 Inventory reserves.......................................... 6,536 910 2,040 5,406 Product warranty and installation accruals.................. 4,884 3,620 4,754 3,750
50 GENUS, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1997 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 (2) 4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between Registrant and Bank of America, N.T. and S.A., as Rights Agent (4) 4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.3 Registration Rights Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.4 Certificate of Determination (14) 10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4 Mulliken Way, Newburyport, Massachusetts, and amendment and extension of lease, dated March 17, 1987 (1) 10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1) 10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5) 10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10) 10.5 International Distributor Agreement, dated November 23, 1987, between General Ionex Corporation and Innotech Corporation (1) 10.6 Distributor/Representative Agreement, dated August 1, 1984, between Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.) (1) 10.7 Exclusive Sales and Service Representative Agreement, dated October 1, 1989, between Registrant and AVBA Engineering Ltd. (3) 10.8 Exclusive Sales and Service Representative Agreement, dated as of April 1, 1990, between Registrant and Indosale PVT Ltd. (3) 10.9 License Agreement, dated November 23, 1987, between Registrant and Eaton Corporation (1) 10.10 Exclusive Sales and Service Representative Agreement, dated May 1, 1989, between Registrant and Spirox Taiwan, Ltd. (2) 10.11 Lease, dated April 7, 1992, between Registrant and The John A. and Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive, Sunnyvale, California (6) 10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the Registrant and Advantage Production Technology, Inc. (7) 10.13 License and Distribution Agreement, dated September 8, 1992, between the Registrant and Sumitomo Mutual Industries, Ltd. (8) 10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9) 10.15 International Distributor Agreement, dated July 18, 1997, between Registrant and Macrotron Systems GmbH (12)
51
EXHIBIT NO. DESCRIPTION - --------- -------------------------------------------------------------------------------------------- 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 10.18 Form of Change of Control Severance Agreement 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule 27.2 Financial Data Schedule (Restated Fiscal Year Ends 1995, 1996 and Quarters 1, 2, 3 of 1996) 27.3 Financial Data Schedule (Restated Quarters 1, 2, 3 of 1997)
- ------------------------ (1) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10, 1988, and December 15, 1988, which Registration Statement became effective November 10, 1988. (2) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and amended May 24, 1989, which Registration Statement became effective May 24, 1989. (3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (4) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. (7) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K dated June 12, 1992. (8) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 21, 1992. (9) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (11) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (12) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (13) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (14) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated February 12, 1998. (15) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated April 15, 1998. 52 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 28th day of April 1998. GENUS, INC. By: /s/ MARY F. BOBEL ----------------------------------------- Mary F. Bobel EXECUTIVE VICE PRESIDENT 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 April 28, 1998 William W. R. Elder /s/ JAMES T. HEALY President, Chief Executive - ------------------------------ Officer (Principal April 28, 1998 James T. Healy Executive Officer) Executive Vice President, /s/ MARY F. BOBEL Chief Financial Officer - ------------------------------ (Principal Financial April 28, 1998 Mary F. Bobel Officer and Principal Accounting Officer) /s/ STEPHEN F. FISHER* - ------------------------------ Director April 28, 1998 Stephen F. Fisher /s/ G. FREDERICK FORSYTH* - ------------------------------ Director April 28, 1998 G. Frederick Forsyth /s/ TODD S. MYHRE* - ------------------------------ Director April 28, 1998 Todd S. Myhre /s/ MARIO M. ROSATI* - ------------------------------ Director April 28, 1998 Mario M. Rosati *By: /s/ MARY F. BOBEL ------------------------- Mary F. Bobel April 28, 1998 ATTORNEY-IN-FACT EX-10.17 2 EXHIBIT 10.17 EXHIBIT 10.17 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release ("Agreement") is made by and between GENUS, INC. (the "Company"), and JAMES T. HEALY ("Employee"). WHEREAS, Employee was employed by the Company; WHEREAS, Employee and the Company entered into a Letter Agreement dated August 21, 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 from his position as the Company's President and Chief Executive Officer and from his position as a member of the Company's Board of Directors on April 30, 1998. 2. CONSIDERATION. The Company agrees to pay Employee at his normal rate of pay of twenty-five thousand Dollars ($25,000) per month, less applicable withholding, for nine (9) months from the effective date of his resignation (the "payment period") in accordance with the Company's payroll practices. 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. 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; -2- (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. -3- 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 tortious 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. -4- 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 -5- 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 counterparts, 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; (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: April 20, 1998 By /s/ WILLIAM W.R. ELDER ------------------------------- William W. R. Elder Chairman of the Board -6- James T. Healy, an individual Dated: April 17, 1998 /s/ JAMES T. HEALY ---------------------------------- James T. Healy -7- EX-10.18 3 EXHIBIT 10.18 EXHIBIT 10.18 GENUS, INC. CHANGE OF CONTROL SEVERANCE AGREEMENT This Change of Control Severance Agreement (the "Agreement") is made and entered into by and between [name of employee] (the "Employee") and Genus, Inc., a California corporation (the "Company"), effective as of the latest date set forth by the signatures of the parties hereto below (the "Effective Date"). R E C I T A L S A. It is expected that the Company from time to time will consider the possibility of an acquisition by another company or other change of control. The Board of Directors of the Company (the "Board") recognizes that such consideration can be a distraction to the Employee and can cause the Employee to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Employee with an incentive to continue his employment and to motivate the Employee to maximize the value of the Company upon a Change of Control for the benefit of its shareholders. C. The Board believes that it is imperative to provide the Employee with certain severance benefits upon Employee's termination of employment following a Change of Control which provides the Employee with enhanced financial security and provides incentive and encouragement to the Employee to remain with the Company notwithstanding the possibility of a Change of Control. D. Certain capitalized terms used in the Agreement are defined in Section 5 below. The parties hereto agree as follows: 1. TERM OF AGREEMENT. This Agreement shall terminate two years following the Effective Date, unless a Change of Control has occurred as of such time, in which case this Agreement shall terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied. 2. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law, except as may otherwise be specifically provided under the terms of any written formal employment agreement between the Company and Employee (an "Employment Agreement"). If the Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or under his or her Employment Agreement (if any) together with, or as may otherwise be available in accordance with the Company's established employee plans and practices or pursuant to other agreements with the Company. 3. SEVERANCE BENEFITS. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Employee's employment terminates at any time within [six (6) or twelve (12)] months following a Change of Control, then, subject to Section 4, the Employee shall be entitled to receive the following severance benefits: (i) INVOLUNTARY TERMINATION; NOT FOR CAUSE TERMINATION. If the Employee's employment is terminated as a result of Involuntary Termination (whether such termination is initiated by the Company or by the Employee), or as a result of termination other than for Cause, then the Employee shall receive from the Company a severance payment (or payments) in cash in an amount equal to [six hundred or twelve hundred] percent [(600%) or (1200%)] of the Employee's Monthly Base Pay. The Employee shall not be entitled to and the Company shall not obligated to provide any employee benefits to Employee other than those required by law. (b) TIMING OF SEVERANCE PAYMENTS. The severance payment or payments to which Employee is entitled shall be paid by the Company to Employee either: (a) in cash and in full, not later than ten (10) calendar days after the date of termination of Employee's employment, or, (b) as salary continuation on the same basis and timing as in effect immediately prior to the Change of Control; (a) or (b) will be chosen at the Company's discretion. The Company will make this choice known to Employee at the time of termination. However, Employee may, prior to the date a Severance Payment becomes payable, elect another method of payment if reasonable and pre-approved by the Company. No alternative method of payment shall defer payment of the Severance Payment more than [six (6) or twelve (12)] months and a day after the date of termination of Employee's employment. If Employee should die before all amounts payable to him or her have been paid, such unpaid amounts shall be paid to Employee's designated beneficiary, if living, or otherwise to the personal representative of Employee's estate. (c) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the Employee's employment terminates by reason of the Employee's voluntary resignation (and is not an Involuntary Termination), or if the Employee is terminated for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with the Company. (d) DISABILITY; DEATH. If the Company terminates the Employ-ee's employment as a result of the Employee's Disability, or such Employee's employment is terminated due to the death of the Employee, then the Employee shall not be entitled to receive severance or other benefits except for -2- those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other written agreements with the Company. (e) TERMINATION APART FROM CHANGE OF CONTROL. In the event the Employee's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the [six (6) or twelve (12)] month period following a Change of Control, then the Employee shall be entitled to receive severance and any other benefits only as may then be established under the Company's existing severance and benefits plans and practices or pursuant to other written agreements with the Company. 4. LIMITATION ON PAYMENTS. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 4, would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee's severance benefits under Section 3(a)(i) shall be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 4 shall be made in writing by the Company's independent public accountants immediately prior to Change of Control (the "Accountants"), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4. 5. DEFINITION OF TERMS. The following terms referred to in this Agreement shall have the following meanings: (a) "MONTHLY BASE PAY" means all base straight-time gross earnings, exclusive of payments for overtime, shift premiums, incentive compensation, incentive payments, bonuses, commissions or other compensation, for the last full calendar month preceding the date of the Change of Control. -3- (b) CAUSE. "Cause" shall mean (i) any act of dishonesty taken by the Employee and intended to result in substantial gain or personal enrichment of the Employee, (ii) persistent failure or inability to perform the duties and obligations of Employee's employment which are demonstrably willful and deliberate on the Employee's part and which are not remedied in a reasonable period of time after receipt of written notice from Company, (iii) conviction of Employee of an illegal act with respect to his or her employment by the Company. (c) CHANGE OF CONTROL. "Change of Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (d) DISABILITY. "Disability" shall mean that the Employee has been unable to perform his Company duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Employee's employment. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean (i) a reduction by the Company in the Monthly Base Pay of Employee as in effect immediately prior to such reduction, -4- except when a reduction in Monthly Base Pay is implemented for a majority of the Company's employees; (ii) without the Employee's express written consent, the Company requires the Employee to change the location of his or her job or office, so that he or she will be based at a location more than fifty (50) miles from the location of his job or office immediately prior to the Change of Control; (iii) the cost to the Company of Company-provided benefits to Employee, taken as a whole, under plans, arrangements policies and procedures, materially decreases below the cost of the Company-provided benefits to Employee immediately prior to the Change of Control, or the cost to the Employee of such benefits materially increases above the cost to the Employee immediately prior to the Change of Control; however, if such decrease or increase results either from the Company's good faith exercise of business judgment, a decrease that is implemented affecting the majority of Company's employees, or in response to changes in federal or state law, such decrease or increase shall not constitute Involuntary Termination; (iv) the significant reduction of the Employee's duties and responsibilities, relative to the Employee's duties and responsibilities as in effect immediately prior to such reduction; (v) a successor company fails or refuses to assume the Company's obligations under this Agreement. 6. SUCCESSORS. (a) COMPANY'S SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of this Agreement by operation of law. (b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 7. NOTICE. (a) GENERAL. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) NOTICE OF TERMINATION. Any termination by the Company for Cause or by the Employee as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for -5- termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 8. MISCELLANEOUS PROVISIONS. (a) NO DUTY TO MITIGATE. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) WAIVER. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) ENTIRE AGREEMENT. This Agreement, together with the Employment Agreement (if any), constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior undertakings and agreements of the parties with respect to the subject matter hereof. (d) CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) SEVERABILITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) WITHHOLDING. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (g) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. -6- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below. COMPANY GENUS, INC. By:____________________________________ Title:_________________________________ Date:_________________ EMPLOYEE __________________________________ Date:_________________ -7- EX-21.1 4 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT Genus Subsidiary Corporation, a California corporation. General Ionex Corporation, a Massachusetts corporation. Ionex/HEI Corporation, a Massachusetts corporation. Genus Europa GmbH, a German company. Genus Europa Ltd., a British company. Genus Europa SARL, a French company. Genus Europa S.r.l., an Italian company. Genus KK, a Japanese company. Genus Korea, Ltd., a Korean company. EX-23.1 5 EXHIBIT 23.1 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 and 333-29999) of our report, which includes an explanatory paragraph regarding the Company's ability to continue as a going concern, dated January 26, 1998, except for Notes 1, 5 and 16 as to which the date is March 2, 1998, and of our report dated January 26, 1998, on our audits of the consolidated financial statements and financial statement schedule, respectively, of Genus, Inc. and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which reports are included in this Annual Report on Form 10-K/A. COOPERS & LYBRAND L.L.P. San Jose, California April 28, 1998 EX-27.1 6 EXHIBIT 27.1
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 8,700 0 20,566 (1,097) 28,986 58,184 44,109 (28,833) 76,738 27,410 0 0 0 99,149 (50,792) 76,738 84,286 84,286 54,762 87,415 (1,363) 0 0 (4,492) 14,844 0 0 0 0 (19,336) (1.15) (1.15)
EX-27.2 7 EXHIBIT 27.2
5 1,000 YEAR YEAR 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 12630 11827 15259 11129 10961 0 0 0 0 0 27046 15805 23430 27035 16456 (250) (250) (250) (250) (250) 24437 26464 24517 27195 28584 68913 58911 68185 70242 61169 34571 40014 36460 39566 40213 (19944) (24669) (21307) (22643) (23891) 95247 89132 94879 98581 89628 18852 19621 17673 19431 18065 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 95683 97915 95904 97196 97329 (20322) (29664) (19729) (19084) (27189) 95247 89132 94879 98581 89628 100350 82509 26360 51455 65347 100350 82509 26360 51455 65347 61,111 55537 16922 32841 43334 92374 93967 25412 49505 72252 327 53 17 63 38 0 0 0 0 0 0 0 0 0 0 8303 (11405) 965 2013 0 (10979) (2200) 372 775 (6867) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 19282 (9205) 593 1,238 (6867) 1.26 (0.56) 0.04 0.08 (0.42) 1.20 (0.56) 0.04 0.07 (0.42)
EX-27.3 8 EXHIBIT 27.3
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 7644 11480 12460 0 0 0 21851 25778 29637 (250) (250) (250) 25346 24835 25839 60186 67130 73697 40835 41157 41332 (25715) (26771) (27841) 89769 95888 101420 19806 25175 30415 0 0 0 0 0 0 0 0 0 97965 98630 98697 (29596) (29274) (28842) 89769 95888 101420 19681 39032 63407 19681 39032 63407 12313 23853 39877 19371 38158 61606 (15) (97) (191) 0 0 0 0 0 0 295 777 1610 114 300 621 0 0 0 0 0 0 0 0 0 0 0 0 181 477 989 0.01 0.03 0.06 0.01 0.03 0.06
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