-----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, VKwn6XEJ+y8Lcb8tM7We6xuswCUj7Z4tQIvrwZCV7HlWBZldDXgM0UJpT+t6F8Ic Hu1frj4BTn6tfz0mo5KYEg== 0001047469-98-010048.txt : 19980317 0001047469-98-010048.hdr.sgml : 19980317 ACCESSION NUMBER: 0001047469-98-010048 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 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 SEC ACT: SEC FILE NUMBER: 000-17139 FILM NUMBER: 98566487 BUSINESS ADDRESS: STREET 1: 1139 KARLSTAD DR CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 BUSINESS PHONE: 4087477120 MAIL ADDRESS: STREET 2: 1139 KARLSTAD DR CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 10-K 1 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997 ----------------- OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-17139 ------- GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2790804 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1139 Karlstad Drive, Sunnyvale, CA 94089 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 747-7120 -------------- Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on February 27, 1998, in the over-the-counter market as reported by the NASDAQ National Market, was approximately $29,978,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 27, 1998, Registrant had 17,129,260 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference in Part III of this Form 10-K Report: Proxy Statement for Registrant's 1998 Annual Meeting of Shareholders -- Items 10, 11, 12 and 13. Page 1 TABLE OF CONTENTS PART I Item 1. Business Markets Products Marketing, Sales and Service Research and Development Competition Manufacturing and Suppliers Intellectual Property Employees Environmental Regulation Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports of Form 8-K: (1) Financial Statements (2) Financial Statement Schedule (3) Exhibits (4) Reports on Form 8-K Page 2 PART I ITEM 1. BUSINESS Genus, Inc. ("Genus" or "the Company") designs, manufactures and markets capital equipment and processes for advanced semiconductor manufacturing. The Company's products, high energy millions of electron volts ("MeV") ion implantation systems and chemical vapor deposition ("CVD") equipment, are used worldwide to produce integrated circuits ("ICs") for the data processing, communications, medical, military, transportation and consumer electronics industries. Genus pioneered the technical development of high energy MeV ion implantation and the CVD of tungsten silicide ("WSix"), which perform two critical steps in the manufacture of semiconductors. These technologies enable chip manufacturers to simplify their IC production process and lower their cost-of-ownership. The Company's global customer base consists of semiconductor manufacturers in the United States, Europe and Asia/Pacific including Japan, South Korea and Taiwan. MARKETS MeV ION IMPLANTATION Ion implantation is the process by which a beam of electrically charged dopant atoms (ions) are accelerated and driven into the surface of a silicon wafer. This process alters the electrical characteristics of the silicon by making it more or less conductive. Since its inception, ion implantation has been used to create all of the active devices, such as transistors, in an IC. Genus implanters have led the way to new applications where "wells" are formed to isolate the active devices. The market for ion implanters consists of three primary segments: high current, medium current and high energy. Currently, high and medium current ion implanters make up approximately 80% of the total ion implantation market. However, high energy ion implantation is one of the fastest growing segments in the entire capital equipment industry due to its use in emerging advanced technology simplification applications. High energy MeV ion implantation improves transistor performance and reduces overall manufacturing costs by placing dopants deep into the silicon to create regions that isolate transistors from one another. THIN FILM (CVD) The manufacture of ICs includes the formation of isolation, transistor and interconnect capabilities. Genus' CVD equipment provides thin films for the gate electrode of the transistor and for barrier metal to clad the interconnect and contact elements. WSix is used as a gate electrode and also improves the conductivity of local interconnects, producing faster Dynamic Random Access Memory ("DRAM"), Static Random Access memory ("SRAM") and flash memory devices. Tungsten nitride ("WN") is emerging as a barrier-of-choice for advanced gate formation, memory cell electrodes and metal interconnect and contact applications in logic. PRODUCTS The primary products manufactured by Genus include four MeV ion implantation systems and three CVD systems. Each of these products is available with a variety of options and/or upgrades. Ion implantation systems have accounted for 68%, 62% and 41% of total revenues for 1997, 1996 and 1995, respectively, while CVD systems have accounted for 32%, 38% and 59%, respectively, for the same period. CURRENT MeV ION IMPLANT PRODUCTS THE KESTREL-TM- FAMILY OF ION IMPLANTERS. Introduced in July 1997, Genus' fourth-generation of implanters, the Kestrel Family, offers high productivity manufacturing, low cost-of-ownership and Page 3 flexibility for MeV, medium current backup, chained implants, mainstream retrograde well and advanced well applications. The Kestrel's accelerator, a direct current ("DC") tandem-based design, simplifies both operation and maintenance while also providing the lowest power consumption and smallest footprint of any high energy system currently in the market. In addition, the system's DC tandem allows fast energy change times resulting in a superior ability to chain multiple implants together without unloading wafers. This enhances overall throughput as well as reducing cost-of-ownership. The system's end station, where the ion beam meets the wafers, is optimized for high energy applications. The large volume of the process chamber and the design of the high vacuum pumping system minimizes a phenomenon known as photoresist outgassing which can hamper throughput and process quality in implanters. All-in-vacuum wafer handling generates the fewest particles added per wafer pass of any high energy implanter. These benefits all translate to higher yields and greater cost savings. As the high energy market has moved from high volume production to a bifurcated one that is application specific, the Kestrel family of products is poised to meet the varying requirements with appropriate price and performance. KESTREL 750. The Kestrel 750, the most recent addition to the Kestrel family, is best used for advanced well applications such as triple wells and Genus developed and patented BILLI (see below). The accelerator technology for the Kestrel 750 has been improved in several dimensions. Most importantly, the maximum energy range has been increased 15% for each charge state. This translates into greater beam currents at critical energies (higher throughput and lower cost-of-ownership) to support advanced well applications. The value of this new accelerator design, higher energy and beam currents, is achieved while increasing the Kestrel's reliability, serviceability and stability. These advantages have been incorporated without expanding the system's small footprint. KESTREL 650. The Kestrel 650 has been optimized to meet the requirements of established retrograde well applications which require a lower price/performance point. The accelerator design is the same as that of the Tandetron-TM- 1520 which is used worldwide for retrograde well, research and development ("R&D") as well as production applications. Both the Kestrel 650 and 750 possess a multi-faceted improvement to process chamber vacuum integrity. All three critical elements for minimizing photoresist outgassing (process chamber volume, cryo pump location and cryo pump size) have been improved. Both products also offer significant improvements in the areas of gas distribution, dose control and low energy control. Additionally, each product comes with an extended warranty on the accelerator. This warranty covers all major accelerator components (except the turbopump) for four years on the Kestrel 650 and five years on the Kestrel 750. In addition to these improvements, the Kestrel products include all of the advantages present in the Tandetron 1520, Genus' third-generation MeV ion implanter introduced in November 1995. The Tandetron 1520 evolved from the highly successful Genus 1500 system, introduced in 1988, and the Genus 1510 system, introduced in 1992. The advantages of the Kestrel products are based on an overall philosophy of design simplicity. Modular construction improves manufacturing cycle times, system installation times and ease of maintenance. In addition, improved features such as a more efficient, longer lasting Bernas Ion Source, provide significant advantages in manufacturing environments. TANDETRON 1520. In November 1995, Genus introduced the Tandetron 1520, a third-generation MeV ion implanter that evolved from the Genus 1500 system, introduced in 1988, and the Genus 1510 system, introduced in 1992. Although specifically designed for high energy applications, the Tandetron uses a wide range of energies from 10 keV (thousands of electron volts) to three MeV for implantation. This broad range allows the system to effectively meet high energy applications and also serve as an alternative (back-up) for medium current/medium energy application requirements. The system's accelerator, a DC tandem-based design, simplifies both operation and maintenance while also providing the lowest power consumption of any Page 4 high energy system currently in the market. Additionally, the system's DC tandem allows fast energy change times resulting in a superior ability to chain multiple implants together without unloading wafers. This enhances overall throughput as well as reducing cost-of-ownership. The system's end station, where the ion beam meets the wafers, is optimized for high energy applications. The large volume of the process chamber and the design of the high vacuum pumping system minimize photoresist outgassing which can hamper throughput and process quality in implanters of poorer design. All-in-vacuum wafer handling generates the fewest particles added per wafer pass of any high energy implanter. This translates to higher yields and greater cost savings. The improvements of the Tandetron 1520 are based on an overall philosophy of design simplicity. Modular construction improves manufacturing cycle times, system installation times and ease of maintenance. The system's footprint has been reduced by 20%, making the 1520 the smallest MeV implanter on the market. In addition, improved features such as a more efficient, longer lasting Bernas Ion Source, provide significant advantages in manufacturing environments. GENUS 1510. The Company's 1510 MeV ion implantation system was designed to meet low and medium dose requirements in the 40 keV to three MeV range. Introduced in September 1992, the 1510 is Genus' second generation MeV ion implanter and incorporates the basic design and field experience of its predecessor, the 1500. It is a fully automated, highly reliable implanter with excellent beam purity at throughput approaching 180 wafers per hour on 200mm wafers. BILLI TECHNOLOGY FOR THE KESTREL FAMILY OF IMPLANTERS To further advance low-cost manufacturing processes, Genus developed, through joint development programs with its customers, a special isolation technology called the Buried Implanted Layer for Lateral Isolation ("BILLI") structure and process. BILLI, an advanced MeV retrograde well formation technology, can be used for process simplification in the manufacture of DRAM, SRAM and flash memory as well as logic. BILLI can eliminate one to two masking steps from current standard MeV retrograde well processes and three to four masking steps from conventional diffused well processes. An additional benefit that BILLI brings to logic IC design is that transistors can be placed closer together on a chip, improving packing densities. Also, when the BILLI structure is used, latch up, a parasitic effect that degrades Complementary Metal Oxide Semiconductor ("CMOS") IC performance, can be improved thus delaying the introduction of complex oxide isolation schemes such as shallow trench isolation. In some cases, use of the BILLI structure has eliminated the need to use expensive silicon epitaxy. Presently, several of the world's leading device makers are engaged with the Company in joint development programs established to develop low-cost manufacturing processes utilizing the BILLI process. A partial list of Genus' ion implant customers include: AMD, Fujitsu, Hyundai, LG Semicon, Mitsubishi, Newport Wafer-Fab Ltd., Philips Semiconductor, Samsung, SGS-Thomson, Sharp, Sony, Symbios Logic and TSMC. CURRENT THIN FILM PRODUCTS Genus' CVD systems are designed for the deposition of WSix and WN on the gate electrode and interconnect. The Company offers the LYNX2-TM- (formerly called the 7000 Series), a single wafer, thin film cluster tool. Genus' two other hardware architectures, the 8700 Series and the 6000 Series, deposit WSix using batch processes. GENUS LYNX2 SYSTEM. In July 1997, in conjunction with the introduction of two new films, Genus changed the name of the Genus 7000 Series system to the LYNX2. Launched in December 1994, the LYNX2 system was designed to meet the advanced technology requirements of the 16M DRAM generation and beyond. This single wafer, open architecture cluster tool supports silane and dichlorosilane ("DCS") process chemistries. Semiconductor manufacturers benefit by the high throughput offered by the LYNX2, which results in higher productivity and lower cost-of-ownership. By offering the lowest fluorine content, manufacturers using DCS Page 5 also gain more reliable gate oxides with the Genus LYNX2. In addition, its low deposited stress provides higher process yields with improved step coverage. This system is currently used in production by manufacturers of advanced DRAM and flash memory devices to 0.25 micron. The LYNX2 features a Modular Equipment Standards Committee ("MESC") compatible wafer handling platform from Brooks Automation with a centrally located, dual end effector robot for high throughput operation with up to four process modules. The cluster tool is controlled by an easy-to-use Windows-TM--based graphic user interface. The modular design of the LYNX2 enables the addition of other process modules to the cluster tool. Other manufacturing advantages offered by the LYNX2 include a multi-zone resistive heater for more uniform wafer heating, two-zone showerheads for improved film composition uniformity and a state-of-the-art gas delivery system that minimizes chamber-to-chamber variance. LRS SILICIDE. LRS Silicide, a Low-Resistivity, low-Stress ("LRS") CVD WSix, was introduced by Genus in December 1996. LRS silicide offers a 20% reduction in resistivity and extremely as-deposited low stress, while retaining the advantages of conventional DCS chemistry. Memory device manufacturers using the production-proven DCS and tungsten hexafluoride chemistries can easily insert LRS silicide into existing process flows, providing increased yields and faster devices. TUNGSTEN NITRIDE. In July 1997, Genus announced the industry's first plasma-enhanced CVD WN barrier film. This film, compatible with the LYNX2 product platform, has the potential for broadening Genus' thin film customer base by bringing the Company's CVD products into the logic market. WN enables gigabit-scale DRAM device production by serving as the top barrier electrode for tantalum oxide capacitors. WN is amorphous as deposited (to 500 degrees centigrade), and acts as a superior barrier even when deposited to a thickness of 100 angstroms. It has also been proven to be a superior barrier for copper diffusion relative to titanium nitride, and can be used as an adhesion layer for blanket tungsten. GENUS 8700 SERIES. A batch CVD WSix product, the 8700 Series incorporates six heated chucks in the batch chamber and six gas injection ports, which enable individual wafer process adjustments of gas flows and chuck temperature for superior wafer-to-wafer repeatability. The dual cassette load-lock system provides continuous wafer loading and unloading capability, which results in high system throughput (wafers per hour). The cold wall reaction chamber and robotic wafer handling system are designed to ensure highly reliable operation with a minimum of foreign material generation. The system's through-the-wall mounted main frame design is ideally suited for use in Class-1 or above cleanrooms. All models of the 8700 can be configured to process from 100mm (4") to 200mm (8") wafers. GENUS 6000 SERIES. Similar in design to the 8700 Series, the 6000 Series is a third-generation product incorporating new designs to ensure reliability and ease of maintenance. It was designed to meet the factory automation needs of the industry. The 6000 Series consists of a closed architecture cluster system that incorporates the 8700-style six-chuck batch CVD chamber. This system also offers dual cassette load-lock architecture that enables continuous batch processing. A new robotic handling system allows mechanical set-up through computer-controlled recipes. The overall design features component upgrades that provide production-worthy processing of 100mm (4") to 200mm (8") wafers. Genus' Thin Films manufacturing facility maintains and operates a Class-1 cleanroom to demonstrate integrated applications with their customers. The Genus technical staff includes an experienced consulting resource for successful process integration of its products and processes. Genus' thin film customers include: AMD, Fujitsu, Hitachi, Hyundai, IBM, Intel, LG Semicon, Samsung, Sanyo, SGS-Thomson and Sharp. Page 6 MARKETING, SALES AND SERVICE Genus sells and supports its ion implantation and CVD products through direct sales and customer support organizations in the U.S., Western Europe and South Korea and through eight exclusive sales representatives and distributors in the U.S., Europe, Japan, South Korea, Taiwan, Hong Kong and Singapore. Yarbrough Southwest provides sales distribution in the Southwestern region of the U.S. and SemiTorr in the Northwest. Genus Europa supports and sells Genus' equipment in Europe, and Macrotron Systems GmbH represents Genus in Germany. Genus KK provides field service and support in Japan. Innotech Corporation serves as the Company's sales distributor and augments Genus KK's support efforts in Japan. Genus Korea, Ltd., provides in-country field service and support, and in late 1997, assumed all responsibilities for system sales in South Korea. Sales in the Singapore and Taiwan market segments are served by the representative organizations of Spirox Singapore, Pte. Ltd. and Spirox Taiwan, respectively. Hong Kong and the People's Republic of China are served by Katech International, Ltd., based in Hong Kong. The Asia/Pacific organizations provide sales and service, as well as distribution assistance for spare parts. Genus distributes spare parts from several worldwide depots including Sunnyvale, California; Newburyport, Massachusetts; Austin, Texas; Tokyo, Japan; Seoul, Korea; Hsin-Chu City, Taiwan; and Evry, France. To facilitate its marketing efforts, the Company has cleanroom applications laboratories in Sunnyvale, California, and Newburyport, Massachusetts. Genus' products are sold primarily to domestic and foreign device manufacturers, including both foundries (companies producing semiconductors principally for other semiconductor manufacturers) and companies producing semiconductors mainly for outside sales. The Company maintains sales, technical support and service personnel at its principal executive offices located in Sunnyvale, California and Newburyport, Massachusetts. Genus has also established several foreign subsidiaries to facilitate its sales and service activities abroad: Genus Korea, Ltd. in Seoul, Korea; Genus KK in Tokyo, Japan; Genus Europa SARL in Evry, France; Genus Europa Ltd. in Melbourn, Herts, England; Genus Europa GmbH in Stuttgart, Germany; and Genus Europa Srl. in Milan, Italy. These subsidiaries provide installation, field service and maintenance, as well as additional technical support to assist Genus' customers in effectively utilizing the Company's products. Such services are also provided by the Company's distributors in Tokyo, Taipei, Singapore and Hong Kong. The Company warrants its products against defects in material and workmanship for 12 months. In December 1997, Genus announced the industry's first extended factory warranty program covering the accelerators of its new Kestrel 650 and 750 systems. Under this new program, the Company's accelerators are guaranteed against failures or degradation in performance for four years on the Kestrel 650 and five years on the Kestrel 750. While the Company has experienced no difficulty to date in complying with U.S. export controls, these rules could change in the future and make it more difficult or impossible for the Company to export its products to various countries and could have a material adverse effect on the Company's business, financial condition and results of operations. BACKLOG. The Company's backlog at December 31, 1997, was approximately $25.6 million, compared with approximately $19.8 million at December 31, 1996. Genus includes in its backlog only those orders for which a customer purchase order has been received and a delivery date within 12 months has been specified. The Company's backlog at December 31, 1997, consisted of product shipments of $21.6 million and non-recurring engineering revenue of $4.0 million expected to be delivered during calendar year 1998. However, because of the possibility of customer changes in delivery schedules or cancellations of orders, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. RESEARCH AND DEVELOPMENT Constant technological change, fierce competition and a high rate of technical obsolescence are key characteristics of the semiconductor equipment industry. Genus' future prospects depend in part on the Company's ability to broaden its market acceptance by differentiating its products on the basis of production-worthiness, technical capability, productivity, particle control and customer support. To maintain Page 7 close relationships with its customers and remain responsive to their requirements, continued investment is needed for R&D. R&D expenses may increase in the future. As part of its R&D program, the Company has established technical research relationships with certain major semiconductor manufacturers and universities to further enhance its product development and knowledge for advanced Ultra Large Scale Integration ("ULSI") devices. COMPETITION The Company believes that the principal competitive factors in the semiconductor equipment market are product performance, quality and reliability, wafer throughput, customer support, equipment automation, price and relationships. Genus competes with a number of companies that historically have had wider name recognition, broader product acceptance within the industry and substantially greater resources. In addition, the rapid rate of technological change in the industry creates opportunities for firms to enter this market and apply new technologies to meet its needs. Accordingly, the Company anticipates that it will continue to face competition in the domestic as well as foreign market from both well-established and new competitors. There can be no assurance that the Company can successfully compete with such companies. In the ion implantation market, the Company's MeV ion implantation system competes primarily with one other MeV system. The Company believes that its high energy MeV system currently has certain technological advantages over the competing MeV system. Genus has new applications for MeV ion implantation technology that it believes will see widespread use in the future since they enable significant manufacturing cost reduction and improved IC performance. The Company faces direct competition from Eaton Corporation. The presence of Eaton in the MeV marketplace continued to increase during 1997. There can be no assurance that competition in the Company's particular MeV product market will not intensify or that Genus' technical advantages may not be reduced or lost as a result of technical advances made by competitors or changes in semiconductor processing technology. In the CVD market, Genus competes with other producers of CVD systems, as well as alternative methods of deposition, such as sputtering and thin films other than WSix, WN and DCS. The Company faces direct competition in all three films from Applied Materials, Inc. and Tokyo Electron, Ltd. The impact of their presence in these niche markets continued to increase during 1997. There can be no assurance that levels of competition in the Company's particular CVD product market will not intensify or that Genus' technical advantages may not be reduced or lost as a result of technical advances made by competitors or changes in semiconductor processing technology. MANUFACTURING AND SUPPLIERS Most of the components for the Company's CVD systems are produced in subassemblies by independent domestic suppliers according to the Company's design and procurement specifications. Many components of the Company's MeV ion implantation systems are also acquired as subassemblies from outside domestic vendors. The Company anticipates that the use of such subassemblies will continue to increase in order to achieve additional manufacturing efficiencies. The Company has alternate sources of supply for the components and parts purchased from outside suppliers, except for certain components used in its CVD tungsten and MeV ion implantation products which are presently available only from a single source. To date, the Company has been able to obtain adequate supplies of such components in a timely manner from existing sources. The inability to develop alternate sources or to obtain sufficient source components as required in the future, however, could result in delays of product shipments that would have a material adverse affect on the Company's operating results. The Company's thin film CVD operation is located in Sunnyvale, California, and its MeV ion implantation technology manufacturing operation is located in Newburyport, Massachusetts. Page 8 INTELLECTUAL PROPERTY The Company believes that because of the rapid technological change in the industry, its future prospects will depend primarily upon the expertise and creative skills of its personnel in process technology, new product development, marketing, application engineering and product engineering, rather than on patent protection. Nevertheless, the Company has a policy to actively pursue domestic and foreign patent protection to cover technology developed by the Company. The Company's current patents include technology relating to cold wall CVD of WSix, ion beam formation, high energy ion acceleration, ion implant angle control, wafer cleaning, and wafer heating and handling in vacuum. In 1987, the Company's Ion Technology Products (formerly General Ionex) and Eaton Corporation entered into a licensing agreement whereby the Company uses certain ion implantation-related technology. EMPLOYEES As of December 31, 1997, the Company employed 301 people on a full-time basis. Genus reduced its workforce in January 1997 by 8%. The Company believes that its relations with its employees are satisfactory. None of the employees are covered by a collective bargaining agreement. ENVIRONMENTAL REGULATION Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases used in the manufacturing process. The Company believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of semiconductor operations. While the Company has not experienced any materially adverse effects on its operations from governmental regulations, there can be no assurance that changes in such regulations will not impose the need for additional capital equipment or other requirements. Any failure by the Company to adequately restrict the discharge of hazardous substances could subject it to future liabilities or could cause its manufacturing operations to be suspended. ITEM 2. PROPERTIES The Company's executive offices, thin film manufacturing and R&D operations are presently located in one building in Sunnyvale, California, totaling approximately 100,500 square feet. The California facilities are occupied under a lease expiring in October 2002, with a current annual rental expense of approximately $680,000. Genus' Ion Technology Product operation is located in Newburyport, Massachusetts. This facility, totaling approximately 70,000 square feet, is occupied under a lease expiring in May 2017, with an annual rental expense of approximately $845,000. The Company also leases sales and support offices in Seoul, Korea; Tokyo, Japan; Evry, France; and Austin, Texas. The Company owns substantially all of the machinery and equipment used in its facilities. See Notes 3 and 8 of Notes to Consolidated Financial Statements. The Company believes that its existing facilities and capital equipment are adequate to meet its current requirements and that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 9 SPART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK INFORMATION The common stock of Genus, Inc., is traded in the over-the-counter market under the NASDAQ symbol GGNS. The high and low last sales prices for 1997 and 1996, set forth below are as reported by the NASDAQ National Market System. At February 27, 1998, the Company has 479 registered shareholders.
1997 1996 -------------------- -------------------- HIGH LOW HIGH LOW --------- ------- --------- -------- First Quarter.............. $ 6 7/8 $ 3 5/8 $ 9 $ 5 5/8 Second Quarter............. 6 7/16 3 1/8 12 5 3/4 Third Quarter.............. 7 7/8 4 1/2 9 1/2 5 3/4 Fourth Quarter............. 6 15/16 3 1/8 7 1/16 4 7/8
The Company has not paid cash dividends on its common stock since inception, and its Board of Directors presently intends to reinvest the Company's earnings, if any, in its business. Additionally, the Company's line of credit prohibits the payment of cash dividends. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
1997 1996 1995 1994 1993 ---------- ---------- --------- -------- -------- Net sales............................................ $ 84,286 $ 82,509 $ 100,350 $ 63,616 $ 44,236 Gross profit......................................... 29,524 26,972 39,239 24,967 13,900 Gross profit as a percentage of sales................ 35% 33% 39% 39% 31% Income (loss) from operations........................ (3,129) (11,458) 7,976 3,729 (6,974) Net income (loss).................................... (19,336) (9,205) 19,282 4,177 (6,883) Net income (loss) per share-basic.................... (1.15) (0.56) 1.26 0.33 (0.57) Net income (loss) per share-diluted.................. (1.15) (0.56) 1.20 0.32 (0.57) Cash and cash equivalents............................ 8,700 11,827 12,630 10,188 10,423 Total assets......................................... 76,738 89,132 95,247 54,997 45,205 Long-term obligations, less current portion.......... 971 1,260 1,034 523 1,042 Working capital...................................... 30,774 39,290 50,061 23,201 22,162 Shareholders' equity................................. 48,357 68,251 75,361 36,986 31,751 Backlog.............................................. 25,554 19,846 44,996 44,011 18,945 Number of employees.................................. 301 325 319 264 212
Page 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS IN THIS REPORT WHICH EXPRESS "BELIEF", "ANTICIPATION" OR "EXPECTATION" AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. 1997 COMPARED TO 1996 The components of the Company's statements of income, expressed as percentage of total revenue, are as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ------- ------- ------- Net sales................................. 100.0% 100.0% 100.0% Costs and expenses: Cost of goods sold...................... 65.0 67.3 60.9 Research and development................ 14.6 17.7 12.2 Selling, general and administrative..... 24.1 21.7 18.9 Special charge.......................... -- 7.2 -- ------- ------- ------- Income (loss) from operations......... (3.7) (13.9) 8.0 Other income, net......................... (1.6) 0.1 0.3 ------- ------- ------- Income (loss) before provision for income taxes......................... (5.3) (13.8) 8.3 Provision for (benefit from) income taxes. 17.6 (2.7) (10.9) ------- ------- ------- Net income (loss)..................... (22.9)% (11.1)% 19.2% ------- ------- ------- ------- ------- -------
Net sales for the year ended December 31, 1997 were $84.3 million, compared to net sales of $82.5 million in 1996. While 1997 sales showed a modest increase on a year-to-year basis, the Company experienced volatility on a quarterly basis during both years. Sales for the nine month period ended September 30, 1997 increased over the same period for 1996 as the industry and the Company recovered from the slowdown in the DRAM market experienced during the latter half of 1996. However, in the fourth quarter of 1997, the Company's sales fell from the prior quarter due partially to the financial crisis in Asia that caused some customers to push out their required delivery dates. International sales accounted for 82% of the Company's net sales in 1997, compared to 86% in 1996. Non-system sales remained relatively flat year-to-year, accounting for 20% of revenue in 1997, compared to 23% in 1996. During 1996, in response to the industry slowdown, the Company incurred $5.9 million in special charges during the third and fourth quarters as it restructured its operations to attain profitability at a decreased sales level. These charges reflected capacity cost reductions, including reductions in headcount, write-off of some manufacturing equipment and increased inventory reserves. During 1997, these measures resulted in lower expenses in cost of goods sold and R&D. Gross margin for the year ended December 31, 1997 was 35%, a two percentage point improvement compared to 33% in 1996. Improvements in operating efficiencies as a result of the restructuring were mitigated by pricing pressures, especially from Asian customers. The Company's gross margins have historically been affected by variations in average selling prices, changes in the mix of product sales, unit Page 11 shipment levels, the level of foreign sales and competitive pricing pressures. The Company anticipates that these conditions will continue for the foreseeable future in light of current market conditions. As a percentage of net sales, R&D expenses for the year ended December 31, 1997 were 15%, compared to 18% in 1996. On a dollar basis, R&D expenses during 1997 decreased $2.3 million when compared to the same period in 1996, primarily due to the restructuring. The Company serves markets that are highly competitive and rapidly changing, and the Company believes that it must continue to maintain its investment in R&D to develop competitive products. Accordingly, the Company anticipates that R&D expenses may increase in the future. Selling, General and Administrative ("SG&A") expenses were 24% of net sales for the year ended December 31, 1997, compared to 22% of net sales for 1996. Included in SG&A for 1997 was a write-off of an outstanding receivable from a Malaysian customer. Absent this bad debt expense, SG&A expense would have increased only approximately $300,000 or 2% from 1996. In 1997, the Company had $1.4 million in other expense, compared to $53,000 in other income for the comparable period in 1996. As a result of the Asian financial crisis and the devaluation of the Korean won, the Company incurred a foreign exchange transaction loss of $1.1 million during the fourth quarter of 1997. Net interest expense for the year was $289,000 as compared to net interest income of $124,000 for 1996 as a result of higher outstanding short-term borrowings and lower levels of invested cash and cash equivalents during the year. During 1997, the Company provided a full valuation allowance for the deferred tax assets which were recorded in 1995 and 1996 in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), resulting in a tax provision of $14.8 million. Accordingly, the effective tax rate for the year ended December 31, 1997 was 330% compared to an effective tax rate of (19)% for the same period in 1996. Due to the current market conditions, the fluctuation in the Company's order rates in the last 12 months, the Company's continued reliance on one customer for a significant portion of its orders and that customer's recent announcements to reduce or delay semiconductor equipment purchases, the slowdown in the Korean semiconductor market, the continued competitive market environment for the Company's products, and the historically cyclical nature of the semiconductor equipment market, the Company remains cautious about the prospects for its business over the next twelve months. The Company continues to make strategic investments in new product development and manufacturing improvements with a view of augmenting future performance by enhancing product offerings; however, such investment may adversely affect short-term operating performance. The Company is also continuing its efforts to implement productivity improvements for future operating performance. The Company believes that the future economic environment could continue to lengthen the order and sales cycles for its products, causing it to continue to simultaneously book and ship some orders during the same quarter. There can be no assurance that the Company's strategic efforts will be successful. 1996 COMPARED TO 1995 Net sales for the year ended December 31, 1996 were $82.5 million, compared to net sales of $100.4 million in 1995. The 18% decrease in net sales was due primarily to lower tungsten CVD systems sales as a result of the overall slowdown of the DRAM market during the last 12 months (particularly in Korea), offset by greater ion implantation MeV system and non-system sales. Foreign sales accounted for 86% of the Company's net sales in 1996, compared to 88% in 1995. In 1996, non-system sales increased 13% when compared to non-system sales during same period in 1995. Gross margin for the year ended December 31, 1996 was 33%, compared to 39% in 1995. The decline in gross margin was primarily due to the shift in product sales mix from CVD system sales, which have higher gross margins, to MeV system sales, which have lower gross margins, lower absorption of manufacturing costs as a result of lower sales volumes and higher service costs associated primarily with the opening of Genus Page 12 Korea, Ltd. The Company's gross margins have historically been affected by variations in average selling prices, changes in the mix of product sales, unit shipment levels, the level of foreign sales and competitive pricing pressures. As a percentage of net sales, R&D expenses for the year ended December 31, 1996 were 18%, compared to 12% in 1995. On a dollar basis, R&D expenses during 1996 increased $2.4 million when compared to the same period in 1995. This increase was primarily due to investments in personnel, product development material costs and engineering tools for new product development. The increase in R&D expenses as a percentage of net sales was due to lower net sales in addition to the increased R&D spending. The Company's R&D expenses in 1996 and 1995 are net of software capitalization costs of $400,000 and $900,000, respectively. SG&A expenses were 22% of net sales for the year ended December 31, 1996, compared to 19% of net sales for 1995. The increase was primarily due to lower net sales. On an absolute dollar basis, SG&A expenses for the year ended December 31, 1996 decreased $1.1 million when compared to the same period in 1995. The decrease was due to lower payroll-related costs associated with the reduction in force during the third and fourth quarters of 1996 and lower commission and incentive expenses. During the year ended December 31, 1996, the Company incurred special charges of $5.9 million, relating primarily to capacity cost reductions in association with the Company's reduction in personnel in the third and fourth quarters of 1996, increased inventory reserves and the write-off of property and equipment. In 1996, the Company had $53,000 in other income, compared to $300,000 in other income for the comparable period in 1995. This decrease was principally due to lower interest income as a result of lower cash balances and higher interest expense associated with lease financing. The effective tax rate for the year ended December 31, 1996 was a 19% benefit compared to a 132% benefit for the same period in 1995. The significant change in the effective tax rate was due primarily to the recognition of lower amounts of deferred tax assets in accordance with SFAS 109. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1997, the Company's cash and cash equivalents decreased by $3.1 million. A total of $3.7 million was used in operating activities, primarily due to a growth in accounts receivable and inventories, partially offset by increased accounts payable. Fourth quarter sales grew over the similar period in 1996, resulting in increased accounts receivable. Inventory levels increased as several customer delivery dates were rescheduled from the fourth quarter of 1997 to early 1998. Capital expenditures during 1997, either by cash or capital lease obligations, were $4.4 million and related primarily to acquisition of machinery and equipment for the Company's R&D and Applications Laboratories and leasehold improvements and equipment for the Ion Technology facility in Newburyport, Massachusetts. The Company financed these expenditures through new or existing lease lines. Furthermore, the Company anticipates that additional capital expenditures, if any, during 1998 will be funded through existing working capital or lease financing. Proceeds from sale of common stock was $1.2 million and net short-term borrowings increased $4.7 million from 1996. The Company's primary source of funds at December 31, 1997 consisted of $8.7 million in cash and cash equivalents. The Company has a $10.0 million revolving line of credit which is secured by substantially all of the assets of the Company and expires in June 1998. At December 31, 1997, the Company had $2.8 million in unused letters of credit and borrowings of $7.2 million outstanding under the line of credit. Availability of borrowings is based on eligible accounts receivable and inventory. Based on eligible accounts receivable and inventory at December 31, 1997, the Company's borrowing capacity under the revolving credit facility was in excess of $10 million. A monthly borrowing base certificate is required by the bank. Page 13 The Company incurred operating losses during each of the two years in the period ended December 31, 1997 and, as of December 31, 1997, had an accumulated deficit of $48.9 million. Additionally, the Company's bank line of credit is scheduled to expire in June 1998. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. In February 1998, the Company issued equity securities through a private placement of convertible preferred stock ("Series A Stock") for gross proceeds of $5 million. Upon fulfillment of certain conditions, the same investors in the Company's Series A Stock have committed to providing additional equity financing. Assuming the Company fulfills these conditions and receives the proceeds from this additional preferred stock financing and assuming the Company is able to secure borrowings upon renewal of its existing bank line of credit or under a new line of credit, the Company believes that its existing cash resources together with funds from this additional preferred stock financing and line of credit will be sufficient to fund the Company's expected working capital requirements for at least the next 12 months. However, the exact amount and timing of these working capital requirements and the Company's ability to continue as a going concern will be determined by numerous factors, including the level of and gross margin on future sales, the payment terms extended to and by the Company and the timing of capital expenditures. Furthermore, there can be no assurance that funds will be received or become available from the additional preferred stock financing or line of credit or that these funds, together with the Company's existing cash resources, will be sufficient to implement the Company's operating strategy or meet the Company's other working capital requirements. Accordingly, the Company may be required to seek additional equity or debt financing. There can be no assurance that the Company would be able to obtain additional debt or equity financing, if and when needed, on terms that the Company finds acceptable. Any additional equity or debt financing may involve substantial dilution to the Company's shareholders, restrictive covenants or high interest costs. If the Company is unable to obtain sufficient funds to satisfy its cash requirements, it will be forced to curtail operations, dispose of assets or seek extended payment terms from its vendors. There can be no assurance that the Company would be able to reduce expenses or successfully complete other steps necessary to continue as a going concern. Such events would materially and adversely affect the value of the Company's equity securities. RISK FACTORS CERTAIN SECTIONS OF MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH ABOVE IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THIS RISK FACTORS SECTION. THE DISCUSSION OF THESE FACTORS IS INCORPORATED BY THIS REFERENCE AS IF SAID DISCUSSION WAS FULLY SET FORTH IN MANAGEMENT'S DISCUSSION AND ANALYSIS. HISTORICAL PERFORMANCE. Although the Company had net income of $19.3 million and $4.2 million in the years ended December 31, 1995 and 1994, the Company experienced losses of $19.3 million, $9.2 million, and $6.9 million for the years ended December 31, 1997, 1996 and 1993, respectively. As a result of the Company's inconsistent sales and operating results in recent years, there can be no assurance that the Company will be able to sustain consistent future revenue growth on a quarterly or annual basis, or that the Company will be able to maintain consistent profitability on a quarterly or annual basis. RELIANCE ON INTERNATIONAL SALES. International sales accounted for approximately 82%, 86% and 88% of total net sales in the years ended 1997, 1996 and 1995, respectively. In addition, net sales to South Korean customers accounted for approximately 50%, 59% and 63%, respectively, of total net sales during the same periods. The Company anticipates that international sales, including sales to South Korea, will continue to account for a significant portion of net sales. As a result, a significant portion of the Company's sales will be subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Although the Company's foreign system sales are primarily denominated in U.S. dollars and the Company does not engage in hedging transactions, the Company's foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could have the effect of making the Company's products more or less expensive. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company has a wholly owned South Korean subsidiary providing service and support to the installed base of customers and whose functional currency is the won. As a result of the devaluation of the won in the fourth quarter of 1997, the Company incurred a foreign exchange loss of $1.1 million. There can be no assurance that the Company will not incur currency losses or gains in future quarters as the currency fluctuates. A substantial portion of the Company's sales are in Asia. Recent turmoil in the Asian financial markets has resulted in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM prices have fallen dramatically and may continue to do so as some Asian IC manufacturers may be selling DRAMs at less than cost in order to raise cash. These developments may affect the Company in several ways. Currency devaluation may make dollar-denominated goods, such as the Company's, more expensive for Asian clients. Asian manufacturers may limit capital spending. Furthermore, the uncertainty of the DRAM market may cause manufacturers everywhere to delay capital spending plans. These circumstances may also affect the ability of Company customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. Some of the Company's South Korean customers have rescheduled their required delivery dates for orders Page 14 previously placed and have announced delays in the facilitization of their new manufacturing areas. In addition, some portion of IC fabrication plant construction has been subsidized by Asian governments. Financial turmoil may weaken these governments' willingness to continue such subsidies. Such developments could have a material adverse affect on the Company's business, financial condition and results of operations. RELIANCE ON A SMALL NUMBER OF CUSTOMERS. The Company continued its efforts to expand its customer base in 1997 and was successful, with new customers in Taiwan and North America. Historically, the Company has relied on a limited number of customers for a substantial portion of its net sales. In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%, respectively, of the Company's net sales. In 1996, these same two customers accounted for 53% and 18%, respectively, of the Company's net sales. Because the semiconductor manufacturing industry is concentrated in a limited number of generally larger companies, the Company expects that a significant portion of its future product sales will be concentrated within a limited number of customers. None of these customers has entered into a long-term agreement requiring it to purchase the Company's products. Furthermore, sales to certain of these customers may decrease in the future when those customers complete their current semiconductor equipment purchasing requirements for new or expanded fabrication facilities. The loss of a significant customer or any reduction in orders from a significant customer, including reductions due to customer departures from recent buying patterns, market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing ICs, could have a material adverse effect on the Company's business, financial condition and results of operations. CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY. The Company's business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for ICs and products utilizing ICs. The semiconductor industry is cyclical and experiences periodic downturns, which have an adverse effect on the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have adversely affected the Company's revenues, operating margins and results of operations. There can be no assurance that the Company's revenues and operating results will not continue to be materially and adversely affected by future downturns in the semiconductor industry. In addition, the need for continued investment in R&D, substantial capital equipment requirements and extensive ongoing worldwide customer service and support capability limits the Company's ability to reduce expenses. Accordingly, there is no assurance that the Company will be able to attain profitability in the future. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenue and operating results may fluctuate significantly from quarter to quarter. The Company derives its revenue primarily from the sale of a relatively small number of high-priced systems, many of which may be ordered and shipped during the same quarter. The Company's results of operations for a particular quarter could be adversely affected if anticipated orders, for even a small number of systems, were not received in time to enable shipment during the quarter, anticipated shipments were delayed or canceled by one or more customers or shipments were delayed due to manufacturing difficulties. The Company's revenue and operating results may also fluctuate due to the mix of products sold and the channel of distribution. COMPETITION. The semiconductor manufacturing capital equipment industry is highly competitive. Genus faces substantial competition throughout the world. The Company believes that to remain competitive, it will require significant financial resources in order to offer a broader range of products, to maintain customer service and support centers worldwide and invest in product and process R&D. Many of the Company's existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing and customer service and support capabilities, as well as greater name recognition than the Company. The Company expects its competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. If the Company's competitors enter into strategic relationships with leading semiconductor manufacturers covering MeV or CVD products similar to those sold by the Company, it would materially adversely affect the Company's ability to sell its products to these manufacturers. There can be no assurance that the Company will continue to compete successfully in the United States or worldwide. The Company faces direct competition in CVD WSix from Applied Materials, Inc. and Tokyo Electron, Ltd. In the MeV Page 15 marketplace, the Company's MeV ion implantation systems compete with MeV systems marketed by Eaton Corporation. There can be no assurance that these or other competitors will not succeed in developing new technologies, offering products at lower prices than those of the Company or obtaining market acceptance for products more rapidly than the Company. DEPENDENCE ON NEW PRODUCTS AND PROCESSES. The Company believes that its future performance will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to invest in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely affect sales of existing products. There can be no assurance that the market will accept the Company's new products or that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it has formed strategic alliances, its ability to sell its products to those manufacturers would be adversely affected. PRODUCT CONCENTRATION; RAPID TECHNOLOGICAL CHANGE. Semiconductor manufacturing equipment and processes are subject to rapid technological change. The Company derives its revenue primarily from the sale of its MeV ion implantation and WSix CVD systems. The Company estimates that the life cycle for these systems is generally three to five years. The Company believes that its future prospects will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities. As a result, the Company expects to continue to make significant investments in R&D. The Company also must manage product transitions successfully, as introductions of new products could adversely affect sales of existing products. There can be no assurance that future technologies, processes or product developments will not render the Company's product offerings obsolete or that the Company will be able to develop and introduce new products or enhancements to its existing and future processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so could adversely affect the Company's business, financial condition and results of operations. Furthermore, if the Company is not successful in the development of advanced processes or equipment for manufacturers with whom it currently does business, its ability to sell its products to those manufacturers would be adversely affected. DEPENDENCE ON KEY SUPPLIERS. Certain of the components and sub-assemblies included in the Company's products are obtained from a single supplier or a limited group of suppliers. Disruption or termination of these sources could have a temporary adverse effect on the Company's operations. The Company believes that alternative sources could be obtained and qualified to supply these products, if necessary. Nevertheless, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON INDEPENDENT DISTRIBUTORS. The Company currently sells and supports its MeV ion implantation and CVD products through direct sales and customer support organizations in the U.S., Western Europe and South Korea and through five exclusive sales representatives and distributors in the U.S., Japan, Taiwan and Singapore. Although the Company believes that alternative sources of distribution are available, the disruption or termination of its existing distributor relationships could have a temporary adverse effect on the Company's business, financial condition and results of operations. VOLATILITY OF STOCK PRICE; EFFECT OF CONVERSION OF SERIES A STOCK ON THE STOCK PRICE. The Company's Common Stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of, or announcements by, the Company, its competitors or its customers, announcements of technological innovations or new products by the Company or its competitors, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which the Company does business, may adversely affect the market price of the Company's Common Stock. Furthermore, trading in the stock is thin and because the Series A Stock is convertible at a discount to the market price, the holders of Series A Stock can convert the Series A Stock into Common Stock and sell such Common Stock at a profit at any time, which may have a depressive effect on the stock price. In addition, the occurrence of any of the events described in these "Risk Factors" could have a material adverse effect on such market price. READINESS FOR YEAR 2000. Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. These computer systems and applications could fail or create erroneous results unless corrected so that they can process data related to the year 2000. The Company relies on its systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll modules), customer service, infrastructure, embedded computer chips, networks Page 16 and telecommunications equipment and end products. The Company also relies on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governments both domestically and globally, directly for accurate exchange of data and indirectly. During 1997, the Company started the implementation of a new business system. One criteria for the selection of the enterprise software was compliance with Year 2000 issues. Accordingly, the Company's current estimate is that the costs associated with the Year 2000 issue, and the consequences of incomplete or untimely resolution of the Year 2000 issue, will not have a material adverse affect on the result of operations or financial position of the Company in any given year. However, despite the Company's efforts to address the Year 2000 impact on its internal systems, there can be no assurance that the Company has fully identified such impact or that it can resolve it without disruption of its business and without incurring significant expense. In addition, even if the internal systems of the Company are not materially affected by the Year 2000 issue, the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. Page 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 --------- --------- ASSETS Current Assets: Cash and cash equivalents........................... $ 8,700 $ 11,827 Accounts receivable (net of allowance for doubtful accounts of $1,097 in 1997 and $250 in 1996)....... 19,469 15,555 Inventories......................................... 28,986 26,464 Other current assets................................ 1,029 638 Current deferred taxes.............................. -- 4,427 --------- --------- Total current assets.............................. 58,184 58,911 Property and equipment, net......................... 15,276 15,345 Other assets, net................................... 3,278 4,459 Noncurrent deferred taxes........................... -- 10,417 --------- --------- $ 76,738 $ 89,132 --------- --------- --------- --------- LIABILITIES Current Liabilities: Short-term bank borrowings.......................... $ 7,200 $ 2,500 Accounts payable.................................... 8,723 5,304 Accrued expenses.................................... 10,613 10,808 Current portion of long-term debt and capital lease obligations.................................. 874 1,009 --------- --------- Total current liabilities......................... 27,410 19,621 Long-term debt and capital lease obligations, less current portion...................................... 971 1,260 --------- --------- Total liabilities................................. $ 28,381 $ 20,881 --------- --------- Commitments (Note 8) SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized, 2,000,000 shares; Issued and outstanding, none....................... -- -- Common stock, no par value: Authorized 50,000,000 shares; Issued and outstanding, 17,120,628 shares (1997) and 16,723,927 shares (1996)....................... 99,149 97,915 Accumulated deficit................................. (48,863) (29,527) Cumulative translation adjustment................... (1,929) (137) --------- --------- Total shareholders' equity........................ 48,357 68,251 --------- --------- $ 76,738 $ 89,132 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. Page 18 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 --------- ---------- --------- Net sales.................................. $ 84,286 $ 82,509 $ 100,350 Costs and expenses: Cost of goods sold....................... 54,762 55,537 61,111 Research and development................. 12,327 14,639 12,259 Selling, general and administrative...... 20,326 17,901 19,004 Special charge........................... -- 5,890 -- --------- ---------- --------- Income (loss) from operations.......... (3,129) (11,458) 7,976 Other income (expense), net................ (1,363) 53 327 --------- ---------- --------- Income (loss) before provision for (benefit from) income taxes............. (4,492) (11,405) 8,303 Provision for (benefit from) income taxes.. 14,844 (2,200) (10,979) --------- ---------- --------- Net income (loss)...................... $ (19,336) $ (9,205) $ 19,282 --------- ---------- --------- --------- ---------- --------- Net income (loss) per share-basic.......... $ (1.15) $ (0.56) $ 1.26 --------- ---------- --------- --------- ---------- --------- Net income (loss) per share-diluted........ $ (1.15) $ (0.56) $ 1.20 --------- ---------- --------- --------- ---------- ---------
The accompanying notes are an integral part of the consolidated financial statements. Page 19 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CUMULATIVE COMMON ACCUMULATED TRANSLATION STOCK DEFICIT ADJUSTMENT TOTAL ---------- ------------ ----------- --------- Balances, January 1, 1995................................. $ 76,590 $ (39,604) $ -- $ 36,986 Issuance of 2,539,018 shares of common stock under private placement offering............................. 16,222 -- -- 16,222 Issuance of 542,450 shares of common stock under stock option plan...................................... 1,161 -- -- 1,161 Tax benefit on exercise of stock options................ 750 -- -- 750 Issuance of 269,043 shares of common stock under employee stock purchase plan........................... 960 -- -- 960 Net income.............................................. -- 19,282 -- 19,282 ---------- ------------ ----------- --------- Balances, December 31, 1995............................... 95,683 (20,322) -- 75,361 Issuance of 310,471 shares of common stock under stock option plan...................................... 1,125 -- -- 1,125 Issuance of 249,917 shares of common stock under employee stock purchase plan........................... 1,107 -- -- 1,107 Net loss................................................ -- (9,205) -- (9,205) Translation adjustment.................................. -- -- (137) (137) ---------- ------------ ----------- --------- Balances, December 31, 1996............................... 97,915 (29,527) (137) 68,251 Issuance of 124,199 shares of common stock under stock option plan...................................... 364 -- -- 364 Issuance of 272,502 shares of common stock under employee stock purchase plan........................... 870 -- -- 870 Net loss................................................ -- (19,336) -- (19,336) Translation adjustment.................................. -- -- (1,792) (1,792) ---------- ------------ ----------- --------- Balances, December 31, 1997............................... $ 99,149 $ (48,863) $ (1,929) $ 48,357 ---------- ------------ ----------- --------- ---------- ------------ ----------- ---------
The accompanying notes are an integral part of the consolidated financial statements. Page 20 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss)........................................................ $ (19,336) $ (9,205) $ 19,282 Adjustments to reconcile to net cash from operating activities: Special charge......................................................... -- 5,890 -- Loss on disposal of leasehold improvements............................. -- -- 261 Depreciation and amortization.......................................... 5,073 6,945 4,244 Provision for doubtful accounts........................................ 2,930 -- -- Deferred taxes......................................................... 14,844 (2,534) (11,560) Changes in assets and liabilities: Accounts receivable.................................................. (7,181) 11,191 (11,627) Inventories.......................................................... (2,998) (4,509) (9,760) Other current assets................................................. (391) (865) 32 Accounts payable..................................................... 3,419 (1,825) 1,271 Accrued expenses..................................................... (543) (1,094) 4,417 Other, net........................................................... 527 (1,545) (701) ---------- ---------- ---------- Net cash provided by (used in) operating activities................ (3,656) 2,449 (4,141) ---------- ---------- ---------- Cash flows from investing activities: Acquisition of property and equipment.................................... (3,835) (6,611) (5,594) Capitalization of software development costs............................. -- (360) (937) ---------- ---------- ---------- Net cash used in investing activities.............................. (3,835) (6,971) (6,531) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock................................... 1,234 2,232 18,343 Proceeds from short-term bank borrowings................................. 50,290 4,000 -- Payment of short-term bank borrowings.................................... (45,590) (1,500) (3,800) Payments of long-term debt............................................... (939) (990) (1,429) ---------- ---------- ---------- Net cash provided by financing activities.......................... 4,995 3,742 13,114 ---------- ---------- ---------- Effect of exchange rate changes on cash.................................... (631) (23) -- Net increase (decrease) in cash and cash equivalents....................... (3,127) (803) 2,442 Cash and cash equivalents, beginning of year............................... 11,827 12,630 10,188 ---------- ---------- ---------- Cash and cash equivalents, end of year..................................... $ 8,700 $ 11,827 $ 12,630 ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest................................................................. $ 445 $ 210 $ 172 Income taxes............................................................. 94 105 209 Non-cash investing activities: Purchase of property and equipment under long-term debt obligations...... 515 1,544 1,416 Tax benefit on exercise of stock options................................. -- -- 750
The accompanying notes are an integral part of the consolidated financial statements. Page 21 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Genus, Inc. develops, manufactures, markets and services advanced thin film deposition and high energy MeV ion implantation equipment used in the fabrication of advanced semiconductor integrated circuits. The Company's products are marketed worldwide either directly to end-users or through exclusive sales representative arrangements. In January 1996, the Company opened a subsidiary in South Korea to provide sales and service support to Korean customers. In April 1997, the Company's Japanese subsidiary commenced significant operations, providing sales and service support to Japanese customers. The Company's customers include semiconductor manufacturers located throughout the United States, Europe and in the Pacific Rim including Japan, South Korea and Taiwan. Genus conducts its business within one industry segment. The following is a summary of Genus' significant accounting policies. BASIS OF PRESENTATION The Company incurred operating losses during each of the two years in the period ended December 31, 1997 and, as of December 31, 1997, had an accumulated deficit of $48,863. Additionally, the Company's bank line of credit is scheduled to expire in June 1998. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. In February 1998, the Company issued equity securities through a private placement of convertible preferred stock ("Series A Stock") for gross proceeds of $5,000. Upon fulfillment of certain conditions, the same investors in the Company's Series A Stock have committed to providing additional equity financing. Assuming the Company fulfills these conditions and receives the proceeds from this additional preferred stock financing and assuming the Company is able to secure borrowings upon renewal of its existing bank line of credit or under a new line of credit, the Company believes that its existing cash resources together with funds from this additional preferred stock financing and line of credit will be sufficient to fund the Company's expected working capital requirements for at least the next 12 months. However, the exact amount and timing of these working capital requirements and the Company's ability to continue as a going concern will be determined by numerous factors, including the level of and gross margin on future sales, the payment terms extended to and by the Company and the timing of capital expenditures. Furthermore, there can be no assurance that funds will be received or become available from the additional preferred stock financing or line of credit or that these funds, together with the Company's existing cash resources, will be sufficient to implement the Company's operating strategy or meet the Company's other working capital requirements. Accordingly, the Company may be required to seek additional equity or debt financing. There can be no assurance that the Company would be able to obtain additional debt or equity financing, if and when needed, on terms that the Company finds acceptable. Any additional equity or debt financing may involve substantial dilution to the Company's shareholders, restrictive covenants or high interest costs. If the Company is unable to obtain sufficient funds to satisfy its cash requirements, it will be forced to curtail operations, dispose of assets or seek extended payment terms from its vendors. There can be no assurance that the Company would be able to reduce expenses or successfully complete other steps necessary to continue as a going concern. Such events would materially and adversely affect the value of the Company's equity securities. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of significant intercompany accounts and transactions. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents approximate estimated fair value because of the short maturity of those financial instruments. Based on rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of debt approximate estimated fair values. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions located in the United States. The Company does not require collateral from its customers and maintains an allowance for credit losses. Three customers accounted for an aggregate of 75% and 71% of accounts receivable at December 31, 1997 and 1996, respectively. South Korean and Japanese customers accounted for an aggregate of 70% and 60% of accounts receivable at December 31, 1997 and 1996, respectively. INVENTORIES Inventories are stated at the lower of cost or market, using standard costs that approximate actual costs, under the first-in, first-out method. Page 22 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Other assets include goodwill and software development costs and are stated at cost. Goodwill represents the cost in excess of an acquired business and is amortized on a straight-line basis over 15 years. Software development costs represent costs incurred subsequent to establishing the technological feasibility of software products and are amortized over the expected life of the products, estimated to be three years. Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets and goodwill related to those assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual disposition. If the sum of the future cash flows is less than the carrying amounts of those assets, the Company recognizes an impairment loss based on the excess of the carrying amounts over the fair values of the assets. REVENUE RECOGNITION Revenue related to systems is recognized upon shipment or, prior to shipment, upon completion of customer source inspection and factory acceptance of the system where risk of loss and title to the system passes to the customer. A provision for the estimated future cost of system installation, warranty and commissions is recorded when revenue is recognized. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES The Company accounts for income taxes using a method that requires deferred tax assets to be computed annually on an asset and liability method and adjusted when new tax laws or rates are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense (benefit) is the tax payable (refundable) for the period plus or minus the change in deferred tax assets and liabilities during the period. FOREIGN CURRENCY The Company has foreign sales and service operations. With respect to all foreign subsidiaries excluding South Korea and Japan, the functional currency is the U.S. dollar, and transaction and translation gains and losses are included in net income (loss) and have not been material in any year presented. The functional currency of the Company's South Korean subsidiary is the won, and the functional currency of the Company's Page 23 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY (CONTINUED) Japanese subsidiary is the yen. The translation from the applicable foreign currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate during the period. Adjustments resulting from such translation are reflected as a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions, including intercompany transactions, are included in the results of operations. NET INCOME (LOSS) PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997 and, accordingly, has restated all prior-period net income (loss) per share data presented. Pursuant to the requirements of SFAS 128, the Company has computed and presented net income (loss) per share under two methods, basic and diluted. Basic net income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing income (loss) available to common shareholders, adjusted for convertible preferred dividends and after-tax interest expense on convertible debt, if any, by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). NOTE 2. INVENTORIES Inventories comprise the following:
DECEMBER 31, -------------------- 1997 1996 -------- -------- Raw materials and parts................................. $ 15,210 $ 14,776 Work in process......................................... 6,879 6,847 Finished goods.......................................... 6,897 4,841 -------- -------- $ 28,986 $ 26,464 -------- -------- -------- --------
Page 24 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and comprise the following:
DECEMBER 31, -------------------- 1997 1996 -------- -------- Equipment............................................... $ 19,510 $ 16,145 Demonstration equipment................................. 14,352 14,047 Furniture and fixtures.................................. 2,645 2,631 Leasehold improvements.................................. 6,631 6,900 -------- -------- 43,138 39,723 Less accumulated depreciation and amortization.......... (28,833) (24,669) -------- -------- 14,305 15,054 Construction in process................................. 971 291 -------- -------- $ 15,276 $ 15,345 -------- -------- -------- --------
Equipment includes $3,745 and $3,479 of assets under capital leases at December 31, 1997 and 1996, respectively. Accumulated amortization on these assets is $2,628 and $1,402 at December 31, 1997 and 1996, respectively. NOTE 4. OTHER ASSETS Other assets comprise the following:
DECEMBER 31, -------------------- 1997 1996 -------- -------- Goodwill $ 3,802 $ 3,802 Software development costs.............................. 1,347 1,347 -------- -------- 5,149 5,149 Accumulated amortization -- goodwill.................... (2,675) (2,421) Accumulated amortization -- software development costs.. (980) (579) -------- -------- 1,494 2,149 Other................................................... 1,784 2,310 -------- -------- $ 3,278 $ 4,459 -------- -------- -------- --------
Amortization expense for software development costs was $401, $507 and $376 in 1997, 1996 and 1995, respectively. Page 25 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5. LINE OF CREDIT The Company has a revolving line of credit agreement with a bank that provides for maximum borrowings of $10,000 and expires in June 1998. Borrowings under the line of credit, which are collateralized by substantially all of the assets of the Company, bear interest at the bank's prime rate minus .25% (8.25% at December 31, 1997) or LIBOR plus 2% (7.625% at December 31, 1997). The agreement requires the Company to comply with certain financial covenants and restricts the payment of dividends. At December 31, 1997, the Company had $2,800 in unused letters of credit and borrowings of $7,200 outstanding under the line of credit. Availability of borrowings is based on eligible accounts receivable and inventory. Based on eligible accounts receivable and inventory at December 31, 1997, the Company's borrowing capacity under the revolving credit facility was in excess of $10,000. A monthly borrowing base certificate is required by the bank. NOTE 6. ACCRUED EXPENSES Accrued expenses comprise the following:
DECEMBER 31, -------------------- 1997 1996 -------- -------- System installation and warranty........................ $ 3,741 $ 4,884 Accrued commissions and incentives...................... 2,062 1,344 Accrued payroll and related items....................... 1,264 1,003 Other................................................... 3,546 3,577 -------- -------- $ 10,613 $ 10,808 -------- -------- -------- --------
NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt comprises the following:
DECEMBER 31, -------------------- 1997 1996 -------- -------- Capital lease obligations with interest rates ranging from 4.9 - 15.6%....................................... $ 1,737 $ 2,153 Mortgage loan payable in monthly installments through October 2000 at 9 1/4% interest per annum and collateralized by a building........................... 108 116 -------- -------- 1,845 2,269 Less amounts due within one year........................ (874) (1,009) -------- -------- $ 971 $ 1,260 -------- -------- -------- --------
Page 26 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) The future aggregate payments of long-term debt and capital lease obligations are as follows: 1998............................................................. $ 954 1999............................................................. 543 2000............................................................. 358 2001............................................................. 110 -------- 1,965 Less amounts representing interest on long-term debt and capital lease obligations....................................... (120) -------- Principal payments and present value of minimum capital lease obligations............................................... $ 1,845 -------- --------
Certain of the capital lease agreements require the Company to comply with specific financial covenants and to pay stipulated amounts upon default or termination prior to the expiration of the basic lease terms. NOTE 8. LEASE COMMITMENTS The Company leases certain of its facilities and various office equipment under operating leases expiring through 2017. The Company is responsible for property taxes, insurance and maintenance under the facility leases. Certain of these leases contain renewal options. At December 31, 1997, minimum lease payments required under these operating leases are as follows: 1998............................................................. $ 1,854 1999............................................................. 1,585 2000............................................................. 1,600 2001............................................................. 1,681 2002............................................................. 1,584 Thereafter....................................................... 10,215 -------- $ 18,519 -------- --------
Rent expense for 1997, 1996 and 1995 was $2,215, $2,218 and $1,251, respectively. Page 27 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK NET INCOME (LOSS) PER SHARE A reconciliation of the numerator and denominator of basic and diluted income (loss) per share is as follows:
YEARS ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ---------- --------- -------- Numerator-Basic: Net income (loss)............................ $ (19,336) $ (9,205) $ 19,282 ---------- --------- -------- ---------- --------- -------- Denominator-Basic: Weighted average common stock outstanding.... 16,860 16,423 15,334 ---------- --------- -------- ---------- --------- -------- Basic net income (loss) per share.............. $ (1.15) $ (0.56) $ 1.26 ---------- --------- -------- ---------- --------- -------- Numerator-Diluted: Net income (loss)............................ $ (19,336) $ (9,205) $ 19,282 ---------- --------- -------- ---------- --------- -------- Denominator-Diluted: Weighted average common stock outstanding.... 16,860 16,423 15,334 Effect of dilutive securities: Stock options............................. -- -- 729 ---------- --------- -------- 16,860 16,423 16,063 ---------- --------- -------- ---------- --------- -------- Diluted net income (loss) per share............ $ (1.15) $ (0.56) $ 1.20 ---------- --------- -------- ---------- --------- --------
Stock options to purchase 1,979,000 shares of common stock were outstanding in 1997 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1997. Stock options to purchase 1,838,000 shares of common stock were outstanding in 1996 on a weighted average basis, but were not included in the computation of diluted loss per share because the Company has a net loss for 1996. Stock options to purchase 152,000 shares of common stock were outstanding in 1995 on a weighted average basis, but were not included in the computation of diluted income per share because the exercise price was greater than the average market value of the common shares. PRIVATE PLACEMENT OFFERING On February 17, 1995, the Company sold 2,539,018 shares of common stock for $16,200 through a private placement offering. STOCK OPTION PLAN The Company has a 1991 Incentive Stock Option Plan (the "Plan") under which the Board of Directors may issue incentive and nonstatutory stock options. The Plan expires ten years after adoption and the Board of Page 28 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) Directors has the authority to determine to whom options will be granted, the number of shares, the term and exercise price. The options are exercisable at times and increments as specified by the Board of Directors, and expire five years from date of grant. These options generally vest over a three-year period. At December 31, 1997, the Company had reserved 3,503,006 shares of common stock for issuance under the Plan. A total of 785,340 shares remained available for future grants at December 31, 1997. At December 31, 1995, 351,866 options were exercisable at a weighted average exercise price of $3.28. At December 31, 1996, 492,729 options were exercisable at a weighted average exercise price of $5.56. At December 31, 1997, 789,670 options were exercisable at a weighted average exercise price of $6.50. Activity under the Plan is set forth in the table below:
WEIGHTED OUTSTANDING AVERAGE SHARES OPTIONS PRICE EXERCISE (in 000's) PER SHARE TOTAL PRICE ---------- --------------- -------- --------- Balance, January 1, 1995............ 1,279 $1.25 to $ 6.88 $ 3,682 $ 2.88 Granted........................... 1,277 7.75 to 15.63 12,084 9.46 Exercised......................... (542) 1.25 to 6.88 (1,161) 2.14 Terminated........................ (428) 1.25 to 15.63 (4,658) 10.88 ---------- --------------- -------- --------- Balance, December 31, 1995.......... 1,586 1.75 to 15.63 9,947 6.27 Granted........................... 1,027 5.94 to 8.38 6,705 6.53 Exercised......................... (310) 1.75 to 8.63 (1,125) 3.63 Terminated........................ (213) 2.75 to 15.63 (1,776) 8.34 ---------- --------------- -------- --------- Balance, December 31, 1996.......... 2,090 1.75 to 8.63 13,751 6.58 Granted........................... 537 3.88 to 6.94 2,707 5.04 Exercised......................... (124) 1.75 to 6.13 (364) 2.94 Terminated........................ (652) 2.25 to 8.63 (4,473) 6.86 ---------- --------------- -------- --------- Balance, December 31, 1997.......... 1,851 $2.25 to $ 8.63 $ 11,621 6.28 ---------- --------------- -------- --------- ---------- --------------- -------- ---------
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income (loss) and net income (loss) per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1995 under the fair value method prescribed by SFAS 123. Page 29 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) The fair value of these options was estimated at the date of grant using a Black-Scholes single option pricing model with the following weighted average assumptions for 1997, 1996 and 1995:
1997 1996 1995 --------- --------- --------- Risk free interest rates.......................... 6.220% 6.070% 6.320% Expected life..................................... 3.5 years 3.5 years 3.5 years Expected volatility............................... 77.7% 77.7% 77.7% Expected dividend yield........................... --% --% --%
The weighted average fair value of options granted in 1997, 1996 and 1995 was $2.92, $3.81 and $4.58, respectively. Under the 1989 Employee Stock Purchase Plan, the Company does not recognize compensation cost related to employee purchase rights under the Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 1997, 1996 and 1995.
1997 1996 1995 --------- --------- --------- Risk free interest rates.......................... 5.630% 5.340% 6.250% Expected life..................................... 0.5 years 0.5 years 0.5 years Expected volatility............................... 77.7% 77.7% 77.7% Expected dividend yield........................... --% --% --%
The weighted average fair value of those purchase rights granted in 1997, 1996 and 1995 was $1.80, $3.26 and $3.88, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income (loss) and basic and diluted net income (loss) per share would have been the pro forma amounts indicated below:
1997 1996 1995 --------- --------- --------- Pro forma net income (loss)....................... $(21,537) $(12,053) $17,858 Pro forma net income (loss) per share -- basic.... $ (1.28) $ (0.73) $ 1.16 Pro forma net income (loss) per share -- diluted.. $ (1.28) $ (0.73) $ 1.13
The above pro forma effects on net income (loss) may not be representative of the effects on future results as options granted typically vest over several years and additional option grants are expected to be made in future years. Page 30 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) The options outstanding and currently exercisable by exercise price under the option plan at December 31, 1997 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- ------------------------------- NUMBER WEIGHTED AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE OUTSTANDING WEIGHTED AVERAGE EXERCISE PRICES (IN 000'S) CONTRACTUAL LIFE EXERCISE PRICE (IN 000'S) EXERCISE PRICE - --------------- ----------- ---------------- ---------------- ----------- ---------------- $2.25-$5.25 538 3.12 $ 4.24 192 $ 3.66 $5.56-$6.13 580 3.67 6.01 202 5.99 $6.38-$8.38 486 2.93 7.70 229 7.77 $8.63-$8.63 247 2.95 8.55 167 8.63 ----------- ----------- $2.25-$8.63 1,851 3.22 $ 6.28 790 $ 6.50 ----------- ----------- ----------- -----------
EMPLOYEE STOCK PURCHASE PLAN The Company has reserved a total of 1,750,000 shares of common stock for issuance under a qualified stock purchase plan, which provides substantially all Company employees with the right to acquire shares of the Company's common stock through payroll deductions. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85% of fair market value at either the beginning of each two-year offering period or the end of each six-month purchase period within the two-year offering period. At December 31, 1997, 1,625,086 shares have been issued under the plan. COMMON STOCK PURCHASE RIGHTS In July 1990, the Company distributed a dividend to shareholders comprised of a right to purchase one share of common stock (a "Right") for each outstanding share of common stock of the Company they hold. These rights do not become exercisable or transferable apart from the common stock until the Distribution Date which is either the tenth day after a person or group (a) acquires beneficial ownership of 20% or more of the Company's common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 30% or more of the Company's common stock. After the Distribution Date, each Right will entitle the holder to purchase from the Company one share of common stock at a price of $28.00 per share. If the Company is acquired in a merger or other business combination transaction, or if 50% or more of its consolidated assets or earnings power is sold, each Right will entitle the holder to purchase at the exercise price that number of shares of the acquiring company having a then current market value of two times the exercise price of the Right. In the event that the Company is the surviving corporation in a merger and the Company's common stock remains outstanding, or in the event that an acquiring party engages in certain self-dealing transactions, each Right not owned by the acquiring party will entitle the holder to purchase at the exercise price that number of shares of the Company's common stock having a then current market value of two times the exercise price of the Right. Page 31 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9. CAPITAL STOCK (CONTINUED) The Rights are redeemable at the Company's option for $.01 per Right prior to becoming exercisable, may be amended at the Company's option on or prior to the Distribution Date and expire on July 3, 2000. NOTE 10. EMPLOYEE BENEFIT PLAN During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit Plan") to provide retirement and incidental benefits for eligible employees. The Benefit Plan provides for Company contributions as determined by the Board of Directors which may not exceed 6% of the annual aggregate salaries of those employees eligible for participation. In 1997, 1996 and 1995, the Company made $92, $87 and $61, respectively, in contributions to the Benefit Plan. NOTE 11. SPECIAL CHARGE During 1996, the Company incurred special charges of $5,890 relating primarily to payroll costs associated with the reduction in workforce and inventory and demonstration equipment write-downs. NOTE 12. OTHER INCOME (EXPENSE), NET Other income (expense), net, comprises the following:
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- ------ ------ Interest income.............................. $ 156 $ 334 $ 790 Interest expense............................. (445) (210) (172) Loss on disposal of leasehold improvements... -- -- (261) Foreign exchange............................. (1,107) -- -- Other, net................................... 33 (71) (30) -------- ------ ------ $ (1,363) $ 53 $ 327 -------- ------ ------ -------- ------ ------
Page 32 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 13. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 -------- --------- --------- Federal: Current................................... $ -- $ -- $ 431 Deferred.................................. 14,004 (2,343) $ (11,036) -------- --------- --------- 14,004 (2,343) (10,605) -------- --------- --------- State: Current................................... -- -- 150 Deferred.................................. 840 (191) (524) -------- --------- --------- 840 (191) (374) -------- --------- --------- Foreign: Current................................... -- 334 -- -------- --------- --------- $ 14,844 $ (2,200) $ (10,979) -------- --------- --------- -------- --------- ---------
The Company's effective tax rate for the years ended December 31, 1997, 1996 and 1995 differs from the U.S. federal statutory income tax rate as follows:
1997 1996 1995 -------- --------- --------- Federal income tax at statutory rate....... (34)% (35)% 34% Change in valuation allowance.............. 372 13 (173) Alternative minimum tax.................... -- -- 5 State income taxes......................... -- -- 2 Foreign income taxes....................... -- 3 -- Other...................................... (8) -- -- -------- --------- --------- 330% (19)% (132)% -------- --------- --------- -------- --------- ---------
The components of the net deferred tax asset comprise the following:
1997 1996 --------- --------- Deferred tax assets (liabilities): Net operating loss carryforwards.................. $ 13,097 $ 9,447 Tax credit carryforward........................... 1,867 1,288 Inventory, accounts receivable and other reserves......................................... 401 1,835 Non-deductible accrued expenses................... 1,152 1,264 Other reserves.................................... -- 1,245 Depreciation and amortization..................... 215 (235) Valuation allowance............................... (16,732) -- --------- --------- Net deferred tax assets............................. $ -- $ 14,844 --------- --------- --------- ---------
Page 33 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 13. INCOME TAXES (CONTINUED) Temporary differences represent the cumulative taxable or deductible amounts recorded in the financial statements in different years than recognized in the tax returns. At December 31, 1997, the Company had the following income tax carryforwards available:
TAX EXPIRATION REPORTING DATES --------- ----------- U.S. regular tax operating losses.......... $ 36,700 2005-2012 U.S. business tax credits.................. $ 1,867 2002-2009 State net operating losses................. $ 11,800 1998-2003
Based on the weight of available evidence as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), management has determined that it is more likely than not that the net deferred tax asset at December 31, 1997 will not be realized and has, therefore, provided a full valuation allowance against the net deferred tax asset. The amount of the net deferred tax asset that is realizable could be increased in the near term if actual operating results differ significantly from current estimates. The utilization of the Company's net operating losses may be limited upon certain changes in ownership. NOTE 14. SEGMENT INFORMATION The Company is engaged in the design, manufacture, marketing and servicing of advanced thin film deposition systems and MeV ion implantation systems used primarily in the semiconductor manufacturing industry. The Company's sales are primarily generated from two products, CVD WSix and MeV ion implantation systems. The Company's CVD system is designed for the deposition of WSix to create multiple interconnect layers on ICs. The MeV ion implantation system drives electrically charged ions into the surface of a silicon wafer to convert the electrical characteristics of the wafer. Both products are primarily used in the manufacturing of DRAMs. Its business serves the semiconductor manufacturing industry only. Net sales, identifiable assets and the results of operations of subsidiaries in foreign countries are not material. INTERNATIONAL SALES International sales (principally from sales to customers in the Far East and Europe) for 1997, 1996 and 1995 represented 82%, 86% and 88% of net sales, respectively. MAJOR CUSTOMERS In 1997, two customers, Samsung Electronics Company, Ltd. and Innotech Corporation, accounted for 47% and 17%, respectively, of net sales, and in 1996, these same two customers accounted for 53% and 18%, respectively, of net sales. In 1995, one customer accounted for 63% of net sales. Page 34 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
1997 QUARTERS ENDED ------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 *DECEMBER 31 -------- -------- ------------ ------------ Net sales.................... $ 19,681 $ 19,351 $ 24,375 $ 20,879 Gross profit................. 7,368 7,811 8,351 5,994 Net income (loss)............ 181 296 512 (20,325) Net income (loss) per share- basic and diluted........... 0.01 0.02 0.03 (1.20)
1996 QUARTERS ENDED ------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ------------ Net sales.................... $ 26,360 $ 25,095 $ 13,892 $ 17,162 Gross profit................. 9,438 9,176 3,399 4,959 Net income (loss)............ 593 645 **(8,105) **(2,338) Net income (loss) per share- basic and diluted........... 0.04 0.04 (0.49) (0.14)
* During the fourth quarter of 1997, delays in shipments to Asian customers resulted in lower sales. In addition, the Company incurred a net charge of $2,930 for bad debt expense. The lower sales, coupled with this write-off, resulted in an operating loss of $4,930 for the fourth quarter. Other income (loss) for the quarter included $1,107 in foreign exchange losses as a result of the effect of the devaluation of the Korean won on intercompany transactions. In addition, based on the weight of available evidence as prescribed by SFAS 109, management determined that it is more likely than not that the net deferred tax asset at December 31, 1997 will not be realized and, therefore, provided a full valuation allowance against the net deferred tax asset during the fourth quarter of 1997. ** During the third and fourth quarters of 1996, the Company recognized special charges aggregating $5,890 relating primarily to payroll costs associated with a reduction in workforce and inventory and demonstration equipment write-downs. NOTE 16. SUBSEQUENT EVENTS On January 28, 1998 the Board of Directors offered employees the opportunity to reprice outstanding stock options as of February 5, 1998. The repriced options, both vested and unvested, are precluded from exercise for a period of one year from the repricing date. Approximately 1,544,750 options with original exercise prices ranging from $3.88 to $8.63 were repriced at $3.03, the fair market value as of February 5, 1998. On February 12, 1998 the Company completed a private equity placement of $5,000 of convertible preferred stock to a group of institutional investors. Upon fulfillment of certain specified conditions, these same investors have also committed to provide additional financing of up to $5,000. Page 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Genus, Inc. We have audited the accompanying consolidated balance sheets of Genus, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genus, Inc. and subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations during each of the past two years and has an accumulated deficit, that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. San Jose, California January 26, 1998, except for Notes 1, 5 and 16, as to which the date is March 2, 1998 Page 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A relating to the Registrant's 1998 Annual Meeting of Shareholders (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors and nominees for directors of the Company is incorporated by reference to the Company's Proxy Statement. The executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, and their ages at March 10, 1998, are as follows:
NAME AGE POSITION - ---------------------------- ---- ------------------------------------------------------- William W.R. Elder.......... 59 Chairman of the Board James T. Healy.............. 57 President, Chief Executive Officer John E. Aldeborgh........... 41 Executive Vice President, Customer Satisfaction Officer Mary F. Bobel............... 48 Executive Vice President, Chief Financial Officer Frederick E. Heslet, Ed.D... 58 Executive Vice President, Chief Quality Officer Thomas E. Seidel, Ph.D...... 62 Executive Vice President, Chief Technical Officer Mario M. Rosati............. 51 Secretary
Except as set forth below, all of the executive officers have been associated with the Company in their present or other capacities for more than the past five years. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships among executive officers of the Company. Mr. Elder, a founder of the Company, is the Chairman of the Board. From April 1990 to September 1996, he was Chairman of the Board, President and Chief Executive Officer of the Company. From November 1981 to April 1990, he was President and a director of the Company. Mr. Healy joined the Company in September 1996 as President and Chief Executive Officer of the Company. From December 1990 to September 1996, Mr. Healy was associated with Credence Systems Corporation, a manufacturer of semiconductor test equipment, in various senior executive management positions, most recently as President and a director of the Company. Mr. Aldeborgh joined the Company in June 1989 and serves as the Executive Vice President and Customer Satisfaction Officer. From January 1993 to January 1996, he was Vice President and General Manager, Ion Technology Products of the Company. From June 1989 to January 1993, he was the Director of Operations of the Ion Technology Products. From May 1983 to May 1989, Mr. Aldeborgh was with LTX Corporation, a manufacturer of semiconductor test equipment, in various management positions, most recently as Director of Manufacturing for the Linear Manufacturing Division. Page 37 Ms. Bobel joined the Company in March 1997 as Executive Vice President and Chief Financial Officer. From October 1994 to September 1996, Ms. Bobel served as Vice President and Chief Financial Officer at Educational Publishing Corporation, a publisher of supplementary educational materials. From March 1990 to September 1994, she was employed at Adobe Systems, a publicly held software company, most recently as Vice President and Corporate Controller. Dr. Heslet joined the Company in November 1996 as Chief Quality Officer and Executive Vice President, Human Resources. In addition, he also is employed by California State University, Hayward, where he has been a professor of educational psychology since 1968. From November 1990 to December 1996, he served as Vice President of Quality and Development at Credence Systems Corporation, a manufacturer of semiconductor test equipment. Dr. Seidel joined the Company in January 1996 and is the Executive Vice President and Chief Technical Officer of the Company. From July 1988 to January 1996, Dr. Seidel was associated with SEMATECH, a semiconductor-industry consortium, in various senior management positions, most recently as Chief Technologist and Director of Strategic Technology. Mr. Rosati has been a director of the Company since its inception in November 1981, and has served as Secretary since June 1995. From July 1995 to April 1996, Mr. Rosati was the Company's Assistant Secretary. He is a member of Wilson Sonsini Goodrich & Rosati, P.C., general counsel to the Company. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement. Page 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS. Consolidated Balance Sheets -- December 31, 1997 and 1996 Consolidated Statements of Operations -- Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity -- Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows -- Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Accountants 2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule of Genus, Inc. for the years ended December 31, 1997, 1996 and 1995 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Genus, Inc. PAGE ---- Report of Independent Accountants......... 40 II-- Valuation and Qualifying Accounts......... 41 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Report. 4. REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company during the fiscal quarter ended December 31, 1997. Page 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Genus, Inc. Our report on the consolidated financial statements of Genus, Inc. is included on page 36 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Jose, California January 26, 1998 Page 40 SCHEDULE II GENUS, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD - -------------------------------------------- ---------- ---------- ----------- ------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------------- ---------- ---------- ----------- ------------- 1995 Allowance for doubtful accounts............. $ 250 $ -- $ -- $ 250 Inventory reserves.......................... 2,665 995 389 3,271 Product warranty and installation accruals.. 2,394 3,640 1,716 4,318 1996 Allowance for doubtful accounts............. 250 -- -- 250 Inventory reserves.......................... 3,271 4,603 1,338 6,536 Product warranty and installation accruals.. 4,318 4,022 3,456 4,884 1997 Allowance for doubtful accounts............. 250 4,589 3,742 1,097 Inventory reserves.......................... 6,536 910 2,040 5,406 Product warranty and installation accruals.. 4,884 3,620 4,754 3,750
Page 41 GENUS, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1997 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - --------- ----------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of Registrant as filed June 6, 1997 (11) 3.2 By-laws of Registrant, as amended (2) 4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between Registrant and Bank of America, N.T. and S.A., as Rights Agent (4) 4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.3 Registration Rights Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.4 Certificate of Determination (14) 10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4 Mulliken Way, Newburyport, Massachusetts, and amendment and extension of lease, dated March 17, 1987 (1) 10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1) 10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5) 10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10) 10.5 International Distributor Agreement, dated November 23, 1987, between General Ionex Corporation and Innotech Corporation (1) 10.6 Distributor/Representative Agreement, dated August 1, 1984, between Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.) (1) 10.7 Exclusive Sales and Service Representative Agreement, dated October 1, 1989, between Registrant and AVBA Engineering Ltd. (3) 10.8 Exclusive Sales and Service Representative Agreement, dated as of April 1, 1990, between Registrant and Indosale PVT Ltd. (3) 10.9 License Agreement, dated November 23, 1987, between Registrant and Eaton Corporation (1) 10.10 Exclusive Sales and Service Representative Agreement, dated May 1, 1989, between Registrant and Spirox Taiwan, Ltd. (2) 10.11 Lease, dated April 7, 1992, between Registrant and The John A. and Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive, Sunnyvale, California (6) 10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the Registrant and Advantage Production Technology, Inc. (7) 10.13 License and Distribution Agreement, dated September 8, 1992, between the Registrant and Sumitomo Mutual Industries, Ltd. (8) 10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9) 10.15 International Distributor Agreement, dated July 18, 1997, between Registrant and Macrotron Systems GmbH (12) 10.16 Credit Agreement, dated August 18, 1997, between Registrant and Sumitomo Bank of California (12) 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Accountants 24.1 Power of Attorney (included on page 44) 27.1 Financial Data Schedule 27.2 Financial Data Schedule (Restated Fiscal Year Ends 1995, 1996 and Quarters 1, 2, 3 of 1996) 27.3 Financial Data Schedule (Restated Quarters 1, 2, 3 of 1997)
Page 42 (1) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10, 1988, and December 15, 1988, which Registration Statement became effective November 10, 1988. (2) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and amended May 24, 1989, which Registration Statement became effective May 24, 1989. (3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (4) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. (7) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K dated June 12, 1992. (8) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 21, 1992. (9) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (11) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (12) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (13) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (14) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated February 12, 1998. Page 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 13th day of March 1998. GENUS, INC. By: /s/ Mary F. Bobel -------------------------- Mary F. Bobel EXECUTIVE VICE PRESIDENT CHIEF FINANCIAL OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James T. Healy and Mary F. Bobel, jointly and severally, as his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------ ------------------------ ----------------- /s/ WILLIAM W.R. ELDER Chairman of the Board March 13, 1998 - ------------------------- William W.R. Elder /s/ JAMES T. HEALY President, Chief Executive March 13, 1998 - ------------------------- Officer (Principal James T. Healy Executive Officer) /s/ MARY F. BOBEL Executive Vice President, March 13, 1998 - ------------------------- Chief Financial Officer Mary F. Bobel (Principal Financial Officer and Principal Accounting Officer) /s/ STEPHEN F. FISHER Director March 13, 1998 - ------------------------- Stephen F. Fisher /s/ G. FREDERICK FORSYTH Director March 13, 1998 - ------------------------- G. Frederick Forsyth /s/ TODD S. MYHRE Director March 13, 1998 - ------------------------- Todd S. Myhre /s/ MARIO M. ROSATI Director March 13, 1998 - ------------------------- Mario M. Rosati Page 44 EX-21.1 2 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT Genus Subsidiary Corporation, a California corporation. Genus 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. Page 45 EX-23.1 3 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 12 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. COOPERS & LYBRAND L.L.P. San Jose, California March 13, 1998 Page 46 EX-27.1 4 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 5 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 6 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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