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As filed with the Securities and Exchange Commission on August 6, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A2
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
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OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-17139
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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/A2 or any amendment to
this Form 10-K/A2. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on March 22,
2001 in the over-the-counter market as reported by the Nasdaq National Market,
was approximately $49.5 million. Shares of common stock held by each officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of July 31, 2001, Registrant had 22,269,117 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-K/A2 Report: Proxy Statement for Registrant's 2001 Annual Meeting
of Shareholders - Items 10, 11, 12 and 13
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PART I
ITEM 1.
OVERVIEW
Since 1982, we have been supplying advanced manufacturing systems to the
semiconductor industry worldwide. Major semiconductor manufacturers use our
leading-edge thin film deposition equipment and process technology to produce
integrated circuits, commonly called chips, that are incorporated into a variety
of products, including personal computers, communications equipment and consumer
electronics. We pioneered the development of chemical vapor deposition tungsten
silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, today we are leading the commercialization of
atomic layer deposition, also known as ALD technology. This technology is
designed to enable a wide spectrum of thin film applications such as aluminum
oxide, tungsten nitride and other advanced dielectric insulating and conducting
metal barrier materials for advanced integrated circuit manufacturing.
In 2000, we announced our marketing strategy of targeting non-semiconductor
markets, as we are confident that our developed films can serve multiple
applications in both semiconductors and non-semiconductor segments. In addition
to expanding our total available market, this strategy of diversifying our
customer base is intended to gain us some protection against cyclical downturns
in the semiconductor industry. We think our emerging ALD technology will prove
effective in expanding and diversifying our customer base.
We continue to develop enabling thin film technology that addresses the
scaling challenges facing the semiconductor industry relating to gate and
capacitor materials. These challenges have been labeled as "red zones" by the
International Technology Roadmap for Semiconductors (ITRS) because there are no
known solutions that allow for further reduction in feature sizes and improved
performance. Our innovative thin film technology solutions are designed to
enable chip manufacturers to simplify and advance their integrated circuit
production processes and lower their total cost of manufacturing per chip, known
as cost of ownership.
As it is in the semiconductor industry, non-semiconductor business segments
have scaling initiatives as well. For example, the making of thin film magnetic
heads in the data storage industry has scaling requirements analogous to the
scaling trends in semiconductors. A key part of our business strategy includes
providing enabling thin film solutions for non-semiconductor applications.
We provide a production-proven platform that is used for both the
development and volume production of new thin films in integrated circuit
manufacturing. This platform is based on a common architecture and a high
percentage of common parts that are designed to provide manufacturers with high
reliability and low cost of ownership across a wide range of thin film
deposition applications. The modular design of our system permits manufacturers
to add capacity and to service their manufacturing systems easily. In addition
to the modular platform architecture, our systems operate on a standardized
software that is designed to support a wide range of thin film deposition
processes. Furthermore, our patented process chamber design incorporated into
our flagship LYNX product family can be configured for chemical vapor deposition
(CVD), plasma enhanced CVD, metal organic CVD and ALD with minimal changes to
the chamber design.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Our current customers include semiconductor
manufacturers such as Infineon Technologies, Micron Technology, Inc. and Samsung
Electronics Company, Ltd. Recently, we gained a new, non-semiconductor customer
in the United States, Read-Rite Corporation, which is an independent
manufacturer of magnetic recording heads for hard disk drives and a recognized
technology leader in the data storage industry.
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INDUSTRY BACKGROUND
The manufacture of a chip requires a number of complex steps and processes.
Most integrated circuits are built on a base of silicon, called a wafer, and
consist of two main structures. The lower structure is made up of components,
typically transistors or capacitors, and the upper structure consists of the
circuitry that connects the components. Building an integrated circuit requires
the deposition of a series of film layers, which may be conductors, dielectrics
(insulators), or semiconductors. The overall growth of the semiconductor
industry and the increasing complexity of integrated circuits have led to
increasing demand for advanced semiconductor equipment. Although the
semiconductor industry has grown over 30 years with an average compound annual
growth rate (CAGR) of 17%, it is prone to cyclic variations. Typically there are
periods of high demand followed by periods of low demand. Each cycle is one to
three years of high growth and one to three years of low growth. Currently we
are entering a period of a down cycle after two years of overheated high demand.
In spite of a forecasted flat year of growth in the semiconductor industry for
2001, Genus is planning the execution of 30% growth (down from 66% in the year
2000). This is rationalized by the diversity and demand of Genus' new product
base and our entry into new markets.
INDUSTRY DRIVERS: LOWERING THE COST PER FUNCTION AND INCREASING PERFORMANCE
The growth of computer markets and the emergence and growth of new markets
such as wireless communications and digital consumer electronics have
contributed to recent growth in the semiconductor industry. This increase also
has been fueled by the semiconductor industry's ability to supply increasingly
complex, higher performance integrated circuits, while continuing to reduce
cost. The increasing complexity of integrated circuits and the accompanying
reductions in feature size require more advanced and expensive wafer fabrication
equipment which can increase the average cost of advanced wafer fabrication
facilities. Technological advances in semiconductor manufacturing equipment have
historically enabled integrated circuit manufacturers to lower cost per function
and improve performance dramatically by:
- - reducing feature size of integrated circuits and the introduction of new
materials with scaled dimensions;
- - increasing the wafer size;
- - increasing manufacturing yields; and
- - improving the utilization of wafer fabrication equipment.
REDUCING FEATURE SIZES AND ADDING NEW ENABLING THIN FILMS. Smaller feature
sizes allow more circuits to fit on one wafer. These reductions have contributed
significantly to reducing the manufacturing cost per chip. The semiconductor
industry is driven by performance (mainly the increased speed for logic and
memory signals) and increased chip density (mainly the increased density of
memory and logic capacity). In addition to the continued reduction in feature
sizes, there is a paradigm shift for the use of new materials to improve
performance of integrated circuits. New materials are required for gate,
capacitor and interconnect application segments within the semiconductor
manufacturing process. The adoption of new types of thin film conducting and
insulating materials will accelerate the trend toward higher levels of
semiconductor performance and integration while maintaining the historic trend
of reduction of cost per function.
LARGER WAFER SIZES. By increasing the wafer size, integrated circuit
manufacturers can produce more circuits per wafer, thus reducing the overall
manufacturing costs per chip. Leading-edge wafer fabrication lines are currently
using 200 millimeter (mm) wafers, up from the 100mm wafers used ten to fifteen
years ago. Currently, many integrated circuit makers are commencing pilot
production lines using 300mm wafers. We believe that most major manufacturers
will add 300mm production capabilities within the next one to four years.
HIGHER MANUFACTURING YIELDS. In the last fifteen years, manufacturing
yields, or the percentage of good integrated circuits per wafer, have increased
substantially, while the time to reach maximum yield levels
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during a production lifecycle has decreased significantly. As the complexity of
chips increases, manufacturers must continually reduce defect density to obtain
higher yields.
IMPROVED EQUIPMENT UTILIZATION AND INTRODUCING NEW EQUIPMENT ARCHITECTURES.
The utilization of semiconductor manufacturing lines has improved in the last
ten years. Manufacturing lines now operate continuously. In addition, new
architectures of production equipment are being explored that allow for higher
throughputs, better reliability, high quality, and low overall cost-of-ownership
as measured by the total cost to process each wafer through the equipment.
While these production techniques are important for reducing the cost per
function of chips, we believe that the most beneficial production solution is
likely to combine feature size reduction and the use of new thin film materials.
RED ZONE CHALLENGES FACING THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is driven by the need for higher performance and
greater chip density as measured by an increasing number of functions on the
chip. The semiconductor industry has historically been able to double the number
of transistors on a given space of silicon every 18 to 24 months by reducing
feature sizes. However, as the industry approaches feature size dimensions of
0.15 micron and below, the industry will face significant challenges and
roadblocks pertaining to improving device performance and feature size
reduction. These challenges have been labeled "red zones" by the International
Technology Roadmap for Semiconductors because there are no known solutions to
allow for further reduction in feature sizes and improved performance. It is
estimated that semiconductor manufacturers need approximately two to four years
to research, develop and commercially produce a new type of chip. Accordingly,
we expect semiconductor manufacturers to begin their research and development
activities as well as capital purchases to support those activities at least two
years before producing a new chip.
As part of its strategy to solve the challenges posed by the red zones, the
semiconductor industry is moving towards the use of ultra-thin dielectrics with
high insulating capabilities for gate dielectrics and capacitors as well as
ultra-thin metal barriers for copper-based interconnect processes. Emerging thin
films with high dielectric capabilities for gate and capacitor applications
include metal oxides such as aluminum oxide. In these ultra-thin dielectric film
applications, the thickness and quality must be highly controlled while the
films need to be deposited in a high-volume, cost-effective manner. Ultra-thin
metal nitride barrier films, such as those made of tungsten nitride, must be
developed to support copper-based interconnect schemes. Reduction of feature
size requires innovations in new types of thin film deposition technologies and
equipment to deposit new films.
THE GENUS SOLUTION
We are an innovative supplier of thin film deposition equipment to
semiconductor and non-semiconductor manufacturers and are focused on developing
enabling thin film technology to solve the challenges posed by the red zones.
Our patented multi-purpose process chamber serves as the foundation for all of
our current products. Our products are designed to deliver high throughput, low
cost of ownership and quick time to market, enhancing the ability of
manufacturers to achieve productivity gains. We support our innovative thin film
deposition systems with a focused level of customer service.
INNOVATIVE THIN FILM SOLUTIONS
Our systems and processes are designed to provide innovative thin film
solutions that address technical and manufacturing problems of the semiconductor
industry. We provide our customers with advanced systems and processes for
depositing thin films such as CVD tungsten silicide, tungsten nitride, and
blanket tungsten, and ALD films such as aluminum oxide, tantalum oxide, titanium
oxide, zirconium oxide, hafnium oxide, titanium nitride and tungsten nitride.
These innovative thin films solve certain key device and
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interconnect problems faced by semiconductor manufacturers as they scale their
device geometries below 0.13 micron.
VERSATILE PRODUCTION PLATFORM
Our Lynx series of systems is based on a common outsourced, reliable
wafer-handling robotic platform. The Lynx systems are designed to be flexible
and can be configured for multiple deposition processes, such as CVD, plasma
enhanced CVD, metal organic CVD and ALD. Our Lynx systems offer the following
advantages:
- - a production-proven platform which allows for easier and faster migration
from research and development to production;
- - a platform based upon a large number of standardized parts used across our
systems to enhance reliability; and
- - a modular design that allows for simplified service.
In addition, all of our systems are designed with a graphical user
interface that automates tasks and allows for comprehensive viewing of the
real-time status of the systems. Our software supports our customers' process
development needs with the ability to run a different set of processes for each
wafer.
LOW COST OF OWNERSHIP
Our Lynx series equipment offers low cost of ownership by featuring
multiple deposition processes capabilities, production-proven process chamber
design, advanced software architecture and reliable wafer handling. Based on
feedback from our installed customer base, we estimate that our production
systems consistently achieve greater than 90% availability, and that the mean
time between failure of our system is greater than 300 hours. In addition, our
customers have confirmed that we offer among the lowest costs of operation. We
are committed to improving these results, achieving these same levels of
performance or better with our new thin film products.
CUSTOMER SUPPORT
We believe we deliver superior customer support and service to enhance our
long-term customer relationships. We maintain an international customer support
infrastructure with fully staffed customer support facilities in Japan, Korea
and the United States. We provide training for two customer engineers with all
of our equipment installations as well as 24 hours a day, seven days a week
product support. We offer warranties consisting of a two-year parts warranty and
a one-year labor warranty that provides a dedicated technician on site.
MARKETS AND APPLICATIONS
In 2000, we continued expanding our product line with new films and
applications that allow us to serve broader markets. In 1999, Genus had tungsten
silicide and tungsten nitride for gate and barrier applications and we were just
introducing ALD technology. As we turn into 2001, we have tungsten silicide,
tungsten nitride and blanket tungsten by conventional CVD, and aluminum oxide,
tantalum oxide, titanium oxide, hafnium oxide and zirconium oxide as well as
titanium nitride and tungsten nitride by ALD. In addition, Genus has the
demonstrated capability to integrate these ALD films as alloys and nanolaminates
(layered structures) for the engineering of specialized capabilities on its Lynx
series platforms. These 10 films serve the Company for applications in
semiconductors for gate, capacitor and interconnect, as well as
non-semiconductor applications (e.g., in particular, aluminum oxide for thin
film magnetic heads of hard disk drives). In the near term, our key target
applications are gate and capacitor for semiconductors, while ALD
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interconnect barriers may be marketed in the years 2002-2003. We are also now
marketing certain of our dielectrics for gap applications in thin film heads.
The 2001 estimated market for silicide is $400 million; for gate and
capacitor dielectric film tools the estimated market is $700 million; the
estimated market for metal barriers is $1.4 billion. Genus has increased its
potential market from approximately $400 million in 1998 to more than $2.5
billion today. If we assume that these segments have a historic CAGR (+17%), we
estimate a total available market (TAM) of $3.4 billion for 2003 and $4 billion
by 2005. It is also reasonable to assume, as many key dielectrics and metal
barrier films migrate from CVD toward ALD technology, that an increasing
fraction of this TAM can be applicable to the Genus product suite. Genus has
already shipped its ALD dielectric and metal system for capacitor application,
and its dielectric system (with enabling engineering specializations) for logic
gate application. As far as the non-semiconductor segments are concerned, we now
have business in the thin film magnetic head specialty market, for which gap
dieletrics has an estimated TAM level of approximately $30-50 million per year.
By focusing on a broader set of film markets, we believe we can reduce our
dependence on the volatile dynamic-random-access memory (DRAM) market, as well
as benefit from participation in the logic segment and non-semiconductor market
opportunities. In summary, we are now participating in semiconductor memory
with gate and capacitor films, in semiconductor logic with advanced gate films,
and in non-semiconductor gap dielectrics for thin film magnetic heads. We moved
from solely memory applications to this level of diversification in the last two
years.
We focus on the following thin film market segments:
CVD SILICIDE AND METAL, AND ALD DIELECTRICS AND METAL BARRIERS FOR GATE
STACK FILMS
CVD tungsten silicide is used to reduce the electrical resistance of the
gate material in a transistor device structure. Our tungsten silicide gate thin
films are used in DRAM integrated circuit production. In the future, we expect
the tungsten gate material to migrate from tungsten silicide to the low
resistance tungsten gate films, such as RInG that we have developed and beyond
that to use various metal barrier films in combination with high-k dielectrics.
CAPACITOR FILMS
Genus is commercializing its ALD technology with the application to
advanced capacitors. These include: cylinder ("stacked"), trench, embedded, rf
and decoupling capacitor applications. Genus is in beta phase with several
applications and customers using both ALD dielectric and metal electrode
barriers. The state of the art has been advanced due to high conformality and
high quality Genus ALD films. The opportunity to increase the number of beta
sites and move to pilot production exists.
BARRIER METAL INTERCONNECT THIN FILMS
We are currently commercializing new thin film CVD barrier metal films such
as tungsten nitride. CVD tungsten nitride has better film characteristics and
can more uniformly cover device structures than conventional physical vapor
deposition barrier thin films such as titanium nitride. We expect our CVD
tungsten nitride barrier thin films to have applications in multi-layer copper
interconnect processes.
NON-SEMICONDUCTOR FILMS
Genus has developed a market for its ALD films in the thin film magnetic
head (reader) market. This market developed because of a production ready-made
solution that the Genus ALD dielectrics provide for the scaling of the gap
dielectrics. The market is scaling to thinner films, ideally suited to the ALD
approach. Other non-semiconductor markets are targeted, these include: MRAM.
Optical interconnects / filters, Organic LED's MEMS, and photomasks, in fact
anywhere that film uniformity and conformality are
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enabling. However, it is too early to predict timing of the penetration in many
of these markets.
PRODUCTS AND TECHNOLOGY
We have developed our product strategy around the Lynx system concept. The
Lynx system integrates platform and process modules with our standardized
operating software. The Lynx system refers specifically to the vacuum robotic
wafer handler and its wafer controlling software. The Lynx process modules are
generically appropriate for CVD, plasma enhanced CVD, metal organic CVD and ALD
technologies.
All of our current thin film systems are built on a common platform and
marketed in the context of the Lynx series. Each Lynx product includes wafer
handling robotics, dual loadlocks, control electronics and system software. The
Lynx system can be used for the deposition of advanced dielectrics and copper
ultra-thin barrier seed. The Lynx product line addresses both 200 and 300mm
wafer sizes and is designed for the deposition of the following thin film
applications:
CVD --
- - tungsten silicide-monosilane
- - tungsten silicide-dichlorosilane
- - tungsten nitride
- - tungsten
ALD --
- - aluminum oxide
- - advanced metal oxides (e.g., tantalum oxide, titanium oxide, zirconium
oxide, hafnium oxide)
- - nanolaminates and alloys
- - metal barrier films (e.g., titanium nitride and tungsten nitride)
LYNX SERIES
LYNX2. The LYNX2 system is currently used in production by manufacturers of
advanced DRAM devices of 0.35 to 0.18 micron. LYNX2 systems support over 120
process modules in high volume production. Production availability for the LYNX2
system runs from 90-95%. LYNX2 platforms are also used for customer development
and pilot manufacturing for more advanced semiconductor applications below 0.18
micron. The LYNX2 features a wafer handling platform that is compatible with the
Modular Equipment Standards Committee (MESC). This platform uses a centrally
located, dual-end effector robot for high throughput operation. The system is
controlled by a graphical user interface that provides the operator with
real-time information such as recipe, set points, hardware status and service
features. The modular design of the LYNX2 allows the addition of up to four
process modules, which can be run serially or in parallel. The LYNX2 process
module design also offers a multi-zone resistive heater for more uniform wafer
heating, two-zone showerheads for improved film composition uniformity and a
state-of-the-art gas delivery system that minimizes chamber-to-chamber variance.
In the case of ALD, fast gas switching has been developed for high productivity
ALD.
LYNX3. We introduced the LYNX3 in January 1999 as our first 300mm low
pressure CVD process module in a beta system. The LYNX3 process module is based
on a newly developed and patented process chamber concept that results in
exceptional uniformity. The LYNX3 is designed to run all films currently
supported by the LYNX2, as well as all films currently in development. The
LYNX3 system will support up to five process modules, which can be run serially
or in parallel. We are currently developing an advanced version of the LYNX3,
which is designed to be a "bridge tool", capable of running either 200 or 300mm
wafers.
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The range of thin films that can be deposited using the LYNX product family
include:
- - ALD DIELECTRICS. In July 1999, we announced the availability of ALD
aluminum oxide. ALD has many possible applications in the semiconductor market
including as a high dielectric constant oxide for either capacitors or for gate
dielectrics, as an etch stop for advanced structures, or for hard mask
applications. We made other advanced ALD dielectrics available during 2000. We
believe that our ALD aluminum oxide-based technology will find near-term
opportunities in the DRAM capacitor application. Other ALD dielectrics will find
longer-term applications in both capacitor and gate dielectric structures.
- - ALD METAL BARRIERS. Metal barrier films have been developed and offer
application for metal gate (work function control as well as barrier), capacitor
electrodes, contact and interconnect barriers. The applications are current in
the case of capacitor electrodes and contact barrier. For interconnects they
will likely come to be needed below the 90nm feature size, where barrier film
thicknesses decrease below 100 angstroms. Somewhat beyond 2005, there will be an
interest in these barriers for metal gate electrodes.
- - TUNGSTEN SILICIDE. In addition to our mainstream production silane-based
tungsten silicide film, we offer dichlorosilane LRS silicide, a low resistivity,
low stress CVD tungsten silicide. DRAM manufacturers can use LRS tungsten
silicide for increased yields and faster device speeds.
- - RING. We introduced the industry's first plasma enhanced CVD tungsten
nitride barrier film in 1997, Rapid Integrated Gate or RInG. The application is
for tungsten gates with a built-in tungsten nitride barrier that can be rapidly
integrated for gates using rapid thermal annealing processes. This film is a
low-cost candidate for production using tungsten gate technology.
- - METAL OXIDE ALLOYS AND NANOLAMINATES. With the development of Genus ALD,
the Company has been able to demonstrate a film flexibility otherwise not known.
For example, Genus LYNX ALD system can provide the flexibility to deposit up to
3 compound films in alloy and / or nanolaminate form. The capability has become
enabling for the "engineering" of composite films for optimal performance in
next generation semiconductor devices. Composites of both dielectrics and metals
can be achieved.
GENUS 8700 SERIES AND 6000 SERIES. While we no longer actively sell these
thin film products, we continue to sell spare parts and provide service for the
installed base worldwide.
CUSTOMER SUPPORT
We believe that our customer support organization is critical to
establishing and maintaining the long-term customer relationships that often are
the basis upon which semiconductor manufacturers select their equipment vendor.
Our customer support organization is headquartered in Sunnyvale, California with
additional employees located in Japan, South Korea and Europe. Our support
personnel are available on a 24-hour a day, seven days a week basis with a
maximum one-hour response time. All support personnel have technical
backgrounds, with process, mechanical and electronics training, and are
supported by our engineering and applications personnel. Support personnel
install systems, perform warranty and out-of-warranty service and provide sales
support.
We offer a 12-month labor warranty and a 24-month parts warranty. Our labor
warranty includes having on-site dedicated support technician during the labor
warranty period. We also offer training to our customers at our headquarters.
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SALES AND MARKETING
We maintain direct sales and service offices in the United States, Japan,
South Korea and Europe. From these offices and other locations, we provide
customer support directly and maintain "spares depots" for our products. We
also have sales representatives in the northwestern U.S., Taiwan, Singapore,
Malaysia and China.
CUSTOMERS
We rely on a limited number of customers for a substantial portion of our
net sales. Our major customers in 2000 included Samsung, Micron Technology and
Infineon. Samsung and Micron accounted for 91% and 5% of our net sales in 2000.
In early 2001, we gained a new customer, a leading US-based supplier of
components for the data storage industry, with a multiple system order for our
ALD technology.
BACKLOG
We schedule production of our systems based on both backlog and regular
sales forecasts. We include in backlog only those systems for which we have
accepted purchase orders and assigned shipment dates within the next 12 months.
All orders are subject to cancellation or delay by the customer with limited or
no penalty. Our backlog was approximately $9.6 million as of December 31, 2000.
The year-to-year fluctuation is due primarily to the cyclical nature of the
semiconductor industry. Our backlog at any particular date is not necessarily
representative of actual sales to be expected for any succeeding period, and our
actual sales for the year may not meet or exceed the backlog represented.
Because of possible changes in delivery schedules and cancellations of orders,
our backlog at any particular date is not necessarily representative of actual
sales for any succeeding period. In particular, during periods of industry
downturns we have experienced significant delays relating to orders that were
previously booked and included in backlog.
RESEARCH AND DEVELOPMENT
We focus our research and development efforts on developing innovative thin
film products. During recent periods, we have devoted a significant amount of
resources to the Lynx2 and Lynx3 systems and ALD films. We expect to focus our
future efforts on our Lynx ALD system for 200 and 300mm applications for
advanced film technologies. We maintain a Class 1 applications laboratory and a
separate thin films development area in California. By basing our products on
the Lynx system, we believe that we can focus our development activities on the
process chamber and develop new products quickly and at relatively low cost.
Our research and development expenses were $8.7 million for 2000, $5.4
million for 1999 and $8.9 million for 1998, representing 21.3%, 18.9% and 27.5%
of net sales, respectively. Our research and development expenses were higher in
2000 primarily due to investments made in productizing ALD and 300mm,
development of ALD films. Research and development expenses associated with our
current thin film product line were $8.7 million for 2000, $5.4 million for 1999
and $5.4 million for 1998, representing 21.3% of thin film net sales in 2000,
18.9% in 1999 and 47.7% in 1998.
The worldwide semiconductor industry is characterized by rapidly changing
technology, evolving industry standards and continuous improvements in products
and services. Because of continual changes in these markets, we believe that our
future success will depend upon our ability to continue to improve our existing
systems and process technologies, and to develop systems and new technologies
that compete effectively. We must adapt our systems and processes to
technological changes and to support emerging industry standards for target
markets. We cannot be sure that we will complete our existing and future
development efforts within our anticipated schedule or that our new or enhanced
products will have the features to make them successful.
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We may experience difficulties that could delay or prevent the successful
development, introduction or marketing of new or improved systems or process
technologies. These new and improved systems and process technologies may not
meet the requirements of the marketplace and achieve market acceptance.
Furthermore, despite testing by us, difficulties could be encountered with our
products after shipment, resulting in loss of revenue or delay in market
acceptance and sales, diversion of development resources, injury to our
reputation or increased service and warranty costs. The success of new system
introductions is dependent on a number of factors, including timely completion
of new system designs and market acceptance. If we are unable to improve our
existing systems and process technologies or to develop new technologies or
systems, we may lose sales and customers.
COMPETITION
The global semiconductor fabrication equipment industry is intensely
competitive and is characterized by rapid technological change and demanding
customer service requirements. Our ability to compete depends upon our ability
to continually improve our products, processes and services and our ability to
develop new products that meet constantly evolving customer requirements.
A substantial capital investment is required by semiconductor manufacturers
to install and integrate new fabrication equipment into a semiconductor
production line. As a result, once a semiconductor manufacturer has selected a
particular supplier's products, the manufacturer often relies for a significant
period of time upon that equipment for the specific production line application
and frequently will attempt to consolidate its other capital equipment
requirements with the same supplier. It is difficult for us to sell to a
particular customer for a significant period of time after that customer has
selected a competitor's product, and it may be difficult for us to unseat an
existing relationship that a potential customer has with one of our competitors
in order to increase sales of our products to that customer.
Each of our product lines competes in markets defined by the particular
wafer fabrication process it performs. In each of these markets we have multiple
competitors. At present, however, no single competitor competes with us in all
of the same market segments in which we compete. Competitors in a given
technology tend to have different degrees of market presence in the various
regional geographic markets. Competition is based on many factors, primarily
technological innovation, productivity, total cost of ownership of the systems,
including yield, price, product performance and throughput capability, quality,
contamination control, reliability and customer support. We believe that our
competitive position in each of our markets is based on the ability of our
products and services to address customer requirements related to these
competitive factors.
We compete principally with other methods of thin film deposition, such as
CVD and physical vapor deposition, in the overall thin film systems market. Our
direct competitors in the tungsten silicide market includes Applied Materials,
Inc. and Tokyo Electron, Ltd. Competition from these competitors increased in
1999 and in 2000, and we expect that such competition will continue to
intensify. We believe that we compete favorably on each of the competitive
elements in this market.
We may not be able to maintain our competitive position against current and
potential competition. New products, pricing pressures, rapid changes in
technology and other competitive actions from both new and existing competitors
could materially affect our market position. Some of our competitors have
substantially greater installed customer bases and greater financial, marketing,
technical and other resources than we do and may be able to respond more quickly
to new or changing opportunities, technologies and customer requirements. Our
competitors may introduce or acquire competitive products that offer enhanced
technologies and improvements. In addition, some of our competitors or potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged to gain market share to our detriment. We believe that the
semiconductor equipment industry will continue to be subject to increased
consolidation, which will increase the number of larger, more powerful companies
and increase competition.
10
MANUFACTURING AND SUPPLIERS
Our manufacturing operations are based in our Sunnyvale, California
facility and consist of procurement, subassembly, final assembly, test and
reliability engineering. Our manufacturing facility maintains and operates a
Class-1 cleanroom to demonstrate integrated applications with its customers. The
LYNX family systems are based on an outsourced wafer handling platform, enabling
us to use a large number of common subassemblies and components. Many of the
major assemblies are procured completely from outside sources. We focus our
internal manufacturing efforts on those precision mechanical and
electro-mechanical assemblies that differentiate our systems from those of our
competitors.
Most of the components for our thin film systems are produced in
subassemblies by independent domestic suppliers according to our design and
procurement specifications. We anticipate that the use of such subassemblies
will continue to increase in order to achieve additional manufacturing
efficiencies. Many of these components are obtained from a limited group of
suppliers. We generally acquire these components on a purchase order basis and
not under long-term supply contracts. Our reliance on outside vendors generally,
and a limited group of suppliers in particular, involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing and timely delivery of components.
Because the manufacture of certain of these components and subassemblies is
an extremely complex process and can require long lead times, we could
experience delays or shortages caused by suppliers. Historically, we have not
experienced any significant delays in manufacturing due to an inability to
obtain components, and we are not currently aware of any specific problems
regarding the availability of components that might significantly delay the
manufacturing of our systems in the future. However, the inability to develop
alternate sources or to obtain sufficient source components as required in the
future, could result in delays of product shipments that would have a material
adverse effect on our business, results of operations and financial condition.
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during our sales demonstrations and research and development.
Failure to comply with present or future regulations could result in substantial
liability to us, suspension or cessation of our operations, restrictions on our
ability to expand at our present locations or requirements for the acquisition
of significant equipment or other significant expense. To date, we have
adequately complied with environmental rules and regulations. Such compliance
has not materially affected our operations.
INTELLECTUAL PROPERTY
We believe that because of the rapid technological change in the
semiconductor industry, our future prospects will depend primarily upon the
expertise and creative skills of our personnel in process technology, new
product development, marketing, application engineering and product engineering,
rather than on patent protection. Nevertheless, we have a policy to actively
pursue domestic and foreign patent protection to cover technology developed by
us. We hold 23 United States patents with thirteen patent applications pending
in the United States as well as several foreign patents and patent applications
covering various aspects of our products and processes. Where appropriate, we
intend to file additional patent applications to strengthen our intellectual
property rights.
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we cannot be sure that we
will be able to protect our technology adequately, and our competitors could
independently develop similar technology, duplicate our products or design
around our patents. To the extent we wish to assert our patent rights, we cannot
be sure that any claims of our patents will be sufficiently broad to protect our
technology or that our pending patent applications will be approved. In
addition, there can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented, that any rights granted under these
patents will provide adequate protection to us, or that we will have sufficient
resources to protect and enforce our rights. In addition, the laws of some
foreign countries may not protect our proprietary rights to as great an extent
as do the laws of the United States.
11
As is customary in our industry, from time to time we receive or make
inquiries regarding possible infringement of patents or other intellectual
property rights. Although there are no pending claims against us regarding
infringement of any existing patents or other intellectual property rights or
any unresolved notices that we are infringing intellectual property rights of
others, such infringement claims could be asserted against us or our suppliers
by third parties in the future. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays,
subject us to significant liabilities to third parties, require us to enter into
royalty or licensing agreements, or prevent us from manufacturing and selling
our products. If our products were found to infringe a third party's proprietary
rights, we could be required to enter into royalty or licensing agreements in
order to continue to be able to sell our products. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business. Our involvement in any patent
dispute or other intellectual property dispute or action to protect trade
secrets and know-how could have a material adverse effect on our business.
EMPLOYEES
As of March 15, 2001, we employed approximately 139 full-time employees
worldwide. The success of our future operations depends in large part on our
ability to recruit and retain qualified employees, particularly those highly
skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense, particularly in the San Francisco bay
area, where our headquarters are located. At times we have experienced
difficulty in attracting new personnel, and we may not be successful in
retaining or recruiting sufficient key personnel in the future. None of our
employees is represented by a labor union, and we have never experienced a work
stoppage, slowdown or strike. We consider our relationships with our employees
to be good.
SALE OF ASSETS
In July 1998, we sold selected assets and transferred selected liabilities
related to the MeV ion implant equipment product line to Varian Associates, Inc.
MeV Ion Implant Market
Ion implantation is the process by which a beam of electrically charged
dopant atoms (ions) are accelerated and driven into the surface of a silicon
wafer. This process alters the electrical characteristics of the silicon by
making it more or less conductive.
The market for ion implanters consisted of three primary segments: high
current, medium current and high energy. High and medium current ion implanters
made up approximately 67% of the total ion implant market in 1998.
Ion implant sales accounted for 65% of total revenues for 1998.
Information regarding our foreign and domestic operations and export sales
is included in Note 12 of Notes to Consolidated Financial Statements.
RECENT DEVELOPMENTS
On March 28, 2001, we converted our existing $10 million Venture Bank line
of credit to an asset-based line of credit. Amounts available under the line are
based on 80% of eligible accounts receivable, and borrowings under the line are
secured by all corporate assets and bear interest at 9.6% per annum and an
administrative fee of a quarter of one percent on all advances. This line will
not have accounts receivable customer concentration limitations, will allow
borrowing against foreign receivables, and will have no financial covenants. It
will expire in March, 2002.
12
In March 2001, we received an order from a major Japanese semiconductor
manufacturer for a 300mm ALD system to be used for gate stack applications. This
is our first order for 300mm ALD technology, and the first order from a Japanese
customer since we reopened our Genus Japan office. The system is scheduled to
ship during the fourth quarter of 2001.
In March 2001, we received a multiple system purchase order from a major
thin film head (disk drive) manufacturer for multiple ALD systems. This is the
first order for our ALD technology for a non-semiconductor application. The
first system is scheduled for delivery early in the second quarter and the
second system is scheduled for shipment no later than December 31, 2001.
ITEM 2. PROPERTIES
We maintain our headquarters, manufacturing and research and development
operations in Sunnyvale, California. We have a lease for a facility totaling
approximately 100,500 square feet. Our lease expires in October 2002, with a
current annual rental expense of approximately $772,000. In 2000 we subleased
approximately 38,000 square feet to a third parties. In December, 2000, one of
the parties terminated their sublease, and we reclaimed 11,000 square feet of
office space. We currently sublease approximately 27,000 square feet to a third
party. We also lease sales and support offices in Seoul, South Korea, Tokyo and
Japan. We believe that our existing facilities are adequate to meet our current
requirements and that suitable additional or substitute space will be available
as needed. However, our future growth may require that we secure additional
facilities or expand our current facilities further before the term of our
headquarters lease expires. Any move to new facilities or expansion could be
disruptive and cause us to incur significant unexpected expense. Our present
lease expires in October of 2002 and we have an option to renew the lease for
five years at 95% of fair market value.
ITEM 3. LEGAL PROCEEDINGS
In May of 1999, Varian Semiconductor Equipment Associates, Inc. ("Varian")
filed a Statement of Claims with the American Arbitration Society of Santa Clara
County, California seeking to enforce certain provisions of the April 15, 1998
Asset Purchase Agreement by and between Varian and Genus (the "Asset Sale"). The
dispute specifically involved ownership rights of certain high energy ion
implanter assets. Varian and Genus entered into a Settlement and Mutual Rlease
(the "Release") in January of 2000. As partial consideration under the Release,
Genus agreed to relinquish its ownership interest in certain funds provided to
Varian in conjunction with the Asset Sale. These funds were held in an escrow
account maintained by Varian, the amount of which was $543,000.
In July 1999, we were named as a co-defendant in a claim filed at the
Superior Court of the state of California for the county of Santa Clara,
involving an automobile accident by one of our former employees which resulted
in the death of an individual. Significant general, punitive and exemplary
damages are being sought by the plaintiffs. Recently, a demand was placed by the
plaintiff that is within our insurance policy limits. While we believe we are
not at fault in this matter, we have instructed our insurance carrier to pay the
demand in an effort to avoid the costs associated with going to trial. Although
the outcome of this matter is not presently determinable, we do not believe that
resolution of this matter will have a material adverse effect on our financial
position or results of operations.
We may in the future be party to litigation arising in the course of our
business, including claims that we allegedly infringe third party trademarks and
other intellectual property rights. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Information
Our common stock is traded in the over-the-counter market under the NASDAQ
symbol GGNS. The only class of Genus securities that is traded is Genus common
stock. The high and low closing sales prices for 2000 and 1999 set forth below
are as reported by the NASDAQ National Market System. At March 22, 2001, we had
372 registered shareholders as reported by Mellon Investor Services. The
closing sales price of Genus common stock on December 29, 2000, the last trading
day in 2000, was $ 1-19/32.
2000 1999
---- ----
HIGH LOW HIGH LOW
------- -------- ------- --------
First Quarter. $16-3/4 $ 4-1/4 $2-7/16 $ 1-5/32
Second Quarter 12-5/16 5-5/8 3-3/8 1-1/4
Third Quarter. 10 3-13/16 3-3/4 2-9/32
Fourth Quarter 4-3/4 1-19/32 5-7/16 1-31/32
We have not paid cash dividends on our common stock since inception, and our
Board of Directors presently intends to reinvest our earnings, if any, in our
business. Accordingly, it is anticipated that no cash dividends will be paid to
holders of common stock in the foreseeable future. Additionally, our $10 million
accounts receivable based line of credit does not allow for the distribution of
dividends.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998(1) 1997 1996
-------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . . . . . . . . . $40,638 $28,360 $ 32,431 $ 84,286 $ 82,509
Costs and expenses:
Costs of goods sold. . . . . . . . . . . . . . . . . 24,385 16,628 29,600 54,762 55,537
Research and development . . . . . . . . . . . . . . 8,659 5,368 8,921 12,327 14,639
Selling, general and administrative. . . . . . . . . 10,093 7,930 14,115 20,326 17,901
Restructuring and other(2)(3). . . . . . . . . . . . 0 543 7,308 0 5,890
-------- -------- --------- --------- ---------
Loss from operations . . . . . . . . . . . . . . . . . (2,499) (2,109) (27,513) (3,129) (11,458)
Other income (expense), net. . . . . . . . . . . . . . 108 669 (86) (1,363) 53
-------- -------- --------- --------- ---------
Loss before provision for income taxes and
cumulative effect of change in accounting principle (2,391) (1,440) (27,599) (4,492) (11,405)
Provision for (benefit from) income taxes. . . . . . . 490 177 1 14,844 (2,200)
-------- -------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . (2,881) (1,617) (27,600) (19,336) (9,205)
Cumulative effect of change in accounting principle (6,770) 0 0 0 0
-------- -------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . (9,651) (1,617) (27,600) (19,336) (9,205)
Deemed dividends on preferred stock. . . . . . . . . . 0 0 (1,903) 0 0
-------- -------- --------- --------- ---------
Net loss attributable to common shareholders . . . . . $(9,651) $(1,617) $(29,503) $(19,336) $ (9,205)
======== ======== ========= ========= =========
Net income (loss) per share before cumulative effect
of change in accounting principle
Basic. . . . . . . . . . . . . . . . . . . . . . . . (0.15) (0.09) (1.71) (1.15) (0.56)
Diluted. . . . . . . . . . . . . . . . . . . . . . . (0.15) (0.09) (1.71) (1.15) (0.56)
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . (0.51) (0.09) (1.71) (1.15) (0.56)
Diluted. . . . . . . . . . . . . . . . . . . . . . . (0.51) (0.09) (1.71) (1.15) (0.56)
Cumulative effect of change in accounting principle (4)
Basic. . . . . . . . . . . . . . . . . . . . . . . . (0.36)
Diluted. . . . . . . . . . . . . . . . . . . . . . . (0.36)
Shares used in computing net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . 18,937 18,134 17,248 16,860 16,423
Diluted. . . . . . . . . . . . . . . . . . . . . . . 18,937 18,134 17,248 16,860 16,423
The following are pro forma amounts with the change in accounting principle
related to revenue recognition applied retroactively to years prior to 2000.
Sales . . . . . . . . . . . . $ 40,638 $ 27,992 $ 33,599 * *
Net income (loss) . . . . . . (2,881) (3,232) (25,963) * *
Net income (loss) per share:
Basic . . . . . . . . . . . $ (0.15) $ (0.18) $ (1.51) * *
Diluted . . . . . . . . . . $ (0.15) $ (0.18) $ (1.51) * *
15
DECEMBER 31,
------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . $ 3,136 $ 6,739 $ 8,125 $ 8,700 $11,827
Working capital. . . . . . . . . . . . . . . . . 896 14,151 15,799 30,774 39,290
Total assets . . . . . . . . . . . . . . . . . . 44,535 27,744 31,827 76,738 89,132
Long-term debt and capital lease obligations . . 0 0 50 971 1,260
Redeemable Series B convertible preferred stock. 0 0 773 0 0
Total shareholders' equity . . . . . . . . . . . $11,292 $19,378 $19,953 $48,357 $68,251
(1) In 1998, we sold the ion implant equipment product line.
(2) In 1996, we incurred a charge of $5.9 million relating primarily to
payroll costs associated with the reduction in workforce and inventory
and demonstration equipment write-downs.
(3) In 1998, we recorded a restructuring charge related to the sale of the
ion implant equipment product line and the restructuring of the thin
film operation.
(4) In 2000, the Company changed its accounting method for recognizing
revenue to comply with Staff Accounting Bulletin number 101.
* Data is not available to provide pro forma information for these years.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations is being provided using both the historical method and the
new SAB 101 method. This data should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K/A2. In
addition to historical information, the discussion in this Annual Report on Form
10-K/A2 contains certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
by these forward-looking statements due to factors, including but not limited
to, those set forth under "Risk Factors" and elsewhere in this Annual Report on
Form 10-K/A2.
OVERVIEW
Genus, Inc. supplies advanced manufacturing systems for the worldwide
semiconductor industry. Semiconductor manufacturers use our leading-edge thin
film deposition equipment and process technology to produce integrated circuits,
commonly called chips, that are incorporated into a variety of products,
including personal computers, communications equipment and consumer electronics.
We pioneered the development of chemical vapor deposition tungsten silicide,
which is used in certain critical steps in the manufacture of integrated
circuits. In addition, we are leading the commercialization of atomic layer
deposition, also known as ALD technology. This technology is designed to enable
a wide spectrum of thin film applications such as aluminum oxide, tungsten
nitride and other advanced dielectric and conducting metal barrier materials for
advanced integrated circuit manufacturing.
We also continue to develop enabling thin film technology that addresses
the scaling challenges facing the semiconductor industry relating to gate,
capacitor and interconnect materials. These challenges have been labeled as "red
zones" by the International Technology Roadmap for Semiconductors because there
are no known solutions that allow for further reduction in feature sizes and
improved performance. Our innovative thin film technology solutions are designed
to enable chip manufacturers to simplify and advance their integrated circuit
production processes and lower their total cost of manufacturing per chip, known
as cost of ownership.
We provide a production proven platform that is used for both the
development and production of new thin films in integrated circuit
manufacturing. This platform is based on common architecture and a high
percentage of common parts that is designed to provide manufacturers with high
reliability and low cost of ownership across a wide range of thin film
deposition applications. The modular design of our system permits manufacturers
to add capacity and service their manufacturing systems easily. In addition to
the modular platform architecture, our systems operate on a standardized
software that is designed to support a wide range of thin film deposition
processes. Furthermore, our patented process chamber design incorporated into
our flagship LYNX product family can be configured for chemical vapor
deposition, or CVD, plasma enhanced CVD, metal organic CVD and ALD with minimal
changes to the chamber design.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Our current customers include semiconductor
manufacturers such as Infineon Technologies, Micron Technology, Inc. and Samsung
Electronics Company, Ltd.
In July 1998, we sold certain assets and transferred certain liabilities
related to the MeV ion implant equipment product line to Varian Associates, Inc.
for approximately $24.1 million. The net assets and liabilities we transferred
to Varian included inventory of $20.9 million, capital equipment and other
assets of $9.7 million, and warranty, installation and other liabilities of $4.5
million. In addition, we incurred transaction fees of $0.6 million resulting in
a loss on sale of $2.6 million. We no longer engage in the ion implant business
and have refocused our efforts on thin film deposition. In connection with the
Varian transaction and the refocusing of our business on thin film products, we
significantly reduced our workforce at our Sunnyvale, California location.
17
In 1998, we recorded restructuring and other charges of approximately
$7,308,000. The $7,308,000 is comprised of $2,575,000 loss on sale of assets to
Varian, $472,000 legal costs for the dispute with Varian and $4,261,000 of
restructuring charges. Restructuring charges included personnel charges of
$1,746,000 associated with our workforce reduction, $1,113,000 in leasehold
improvement write-offs and $1,402,000 for expenses associated with the closing
of several sales offices and branches.
The restructuring strategy was to downsize the thin film operation so that
profitability could be achieved at lower revenue levels, and included
maintaining our market share in our core tungsten silicide product business to
sustain us during the 1998-1999 recession. Additionally, we would focus our
resources towards designing and manufacturing thin film products that would meet
the future requirements of the semiconductor industry and provide growth
opportunities going forward. The restructuring included a worldwide workforce
reduction to bring the headcount in line with projected revenue levels, closing
foreign sales and service offices where short term business opportunities were
unlikely, and writing off inventory related to discontinued product lines. The
anticipated benefits of the restructuring activities are in the process of being
achieved through increased levels of revenue growth and, by applying our limited
resources towards the development and marketing of our core products, and our
next-generation ALD product.
Over the past few years, we were dependent on one customer, Samsung, for a
majority of our thin film product revenue. Samsung accounted for 91% of our net
sales in 2000 and 83.9% in 1999. There is no long-term agreement between us and
Samsung. In 1999, we shipped our Lynx2 system to a new customer, Micron
Technology, and in the first quarter of 2000, we shipped an ALD system to
Infineon Technologies, also a new customer.
The Company's selling arrangements generally involve contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title. As a result, effective January 1, 2000, to comply with the
provisions of Securities and Exchange Commission Staff Accounting Bulletin No.
101, the Company deferred the recognition of revenue from such equipment sales
until installation is complete and the product is accepted by the customer.
Prior to January 1, 2000, revenue related to systems had been generally
recognized upon shipment. A provision for the estimated future cost of system
installation, warranty and commissions was recorded when revenue was recognized.
Under SAB 101, warranty obligations are accrued upon final customer acceptance,
which coincides with recognition of revenue. The cost of inventory shipped to
customers for which we are awaiting customer acceptance is recorded as
"Inventory at customers' locations."
Our business depends upon capital expenditures by semiconductor
manufacturers. The level of capital expenditures by these manufacturers depends
upon the current and anticipated market demand for devices which use integrated
circuits. The semiconductor industry suffered a significant downturn beginning
in late 1997. This was a result of several factors, including the economic
crisis in Asia, semiconductor industry over-capacity and reduced profitability
for semiconductor manufacturers resulting from the decreasing prices of personal
computers. Accordingly, many semiconductor manufacturers delayed planned new
equipment purchases until 1999, which significantly impacted our 1998 sales. The
overall market improved throughout 1999 and 2000, and accordingly we experienced
progressively higher thin film sales in 1999 and 2000 compared with 1998. The
cyclical nature of the semiconductor equipment market continues to present
challenges to us in terms of our ability to forecast both near and long-term
sales. As such, we cannot assure you that this increase in sales represents a
trend that will continue into the future. The sharp downturn that has affected
the U.S. economy in early 2001 has meant a decrease in overall financial
performance expectations. We expect this large-scale economic downturn to
continue through the first half of 2001, if not longer.
International net sales, predominantly to customers based in South Korea,
accounted for 92.4% of total net sales in 2000, 86.5% of total net sales in 1999
and 56.7% of total net sales in 1998. To date, all sales have been denominated
in U.S. dollars. We anticipate that international sales, and in particular from
South Korea, will continue to account for a significant portion of our total net
sales.
18
The local currency is the functional currency for our foreign operations in
South Korea and Japan. All other currency is dollar denominated. Gains or losses
from translation of foreign operations where the local currencies are the
functional currency are included as a component of shareholders' equity and
comprehensive income/loss. Foreign currency transaction gains and losses are
recognized in the statement of operations.
In order to support our business strategy, we will be required to make
significant investments in research and development. In addition, we believe
selling, general and administrative costs will increase as sales volumes
increase. We depend on increases in sales in order to attain profitability. If
our sales do not increase, our current operating expenses could prevent us from
attaining profitability and harm our financial results.
RESULTS OF OPERATIONS
The following table sets forth, expressed as a percentage of total net
sales, certain consolidated statements of operations data for the periods
indicated:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------- ------ -------
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . 60.0 58.6 91.2
Research and development. . . . . . . . . . . . . . . . . . . 21.3 18.9 27.5
Selling, general and administrative . . . . . . . . . . . . . 24.8 28.0 43.5
Restructuring and Other . . . . . . . . . . . . . . . . . . . 0 1.9 22.5
------- ------ -------
Loss from operations (6.1) (7.4) (84.8)
Other income (expense), net . . . . . . . . . . . . . . . . . . 0.2 2.3 (0.3)
------- ------ -------
Loss before provision for income taxes and cumulative effect of
change in accounting principle. . . . . . . . . . . . . . . . (5.9) (5.1) (85.1)
Provision for income taxes. . . . . . . . . . . . . . . . . . . 1.2 0.6 0
------- ------ -------
Loss before cumulative effect of change in accounting principle (7.1) (5.7) (85.1)
Cumulative effect of change in accounting principle . . . . . . (16.6) 0 0
------- ------ -------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . (23.7)% (5.7)% (85.1)%
======= ====== =======
YEARS ENDED DECEMBER 31, 2000 AND 1999
NET SALES. Net sales in 2000 were $40.6 million compared with net sales of
$28.4 million in 1999, representing an increase of 43%. A total of 12 systems
were accepted by the customer in 2000, and qualified for revenue recognition. A
total of 5 systems that shipped in 2000 were not signed off and accepted by
customers, and this revenue was deferred at December 31, 2000. Export sales
accounted for 92% of revenue in 2000 compared with 86% in 1999. Net sales for
2000 of $40.6 million, compared to $28.0 million which reflect the 1999 net
sales applying the change in accounting principle related to revenue
recognition, represents an increase of 45.2%.
COST OF GOODS SOLD. Costs of goods sold in 2000 was $24.4 million compared
with $16.6 million in 1999. Gross profit in 2000 was $16.3 million,
representing 40% of net sales, compared with $11.7 million or 41.4% of net sales
in 1999. Costs of goods sold for 1999 reflecting the change in accounting
principle were $17.9 million and the gross profit was $10.1 million or 36%. The
gross margin % was lower on higher sales volumes, and was attributed to lower
margins due to competitive pricing pressures on our standard tungsten
19
silicide products, and increased worldwide customer service and manufacturing
expenses to support our sales growth in 2000, including a new office in Japan.
Our gross profits have historically been affected by variations in average
selling prices, configuration differences, changes in the mix of product sales,
unit shipment levels, the level of foreign sales and competitive pricing
pressures.
RESEARCH AND DEVELOPMENT. Research and development expenses in 2000 were
$8.7 million compared with $5.4 million in 1999, representing an increase of
61%. As a percentage of net sales, research and development expenses were 21.3%
in 2000 and 18.9% in 1999. The increase in research and development expenses is
attributable to investments in development programs for ALD productization and
films, our 3 300mm system, new tungsten products, and continuous improvement
programs for existing products. These programs are essential in our efforts to
broaden our customer base and penetrate new markets in both semiconductor and
non-semiconductor applications. We expect research and development expenses to
increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $10.1 million in 2000 compared with $7.9 million in 1999,
representing an increase of 27%. As a percentage of net sales, selling, general
and administrative expenses were 24.8% in 2000 and 28.0% in 1999. The $2.2
million increase in 2000 was due primarily to increased investment in sales and
marketing to support the 43% percent revenue growth and 66% shipment growth we
experienced in 2000, and focused efforts toward new customers and market
segments.
OTHER INCOME (EXPENSE), NET. We had other income (net) of $108,000 in 2000
compared with other income of $669,000 in 1999. Other income in 2000 consisted
of interest income and foreign currency exchange gains due to the strengthening
of the Korean won against the U.S. dollar during the first half of 2000, offset
by foreign currency exchange losses incurred in the fourth quarter. In 1999,
other income included interest income and foreign currency exchange gains.
PROVISION FOR INCOME TAXES. We had income taxes of $490,000 in 2000
compared with $177,000 of income taxes in 1999. In both years, income taxes
were related to income generated from our South Korean subsidiary. At December
31, 2000, we had federal net operating loss carry-forwards of $80.5 million and
state net operating loss carry-forwards of $6.7 million.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. We recorded a
non-recurring charge of $6.77 million for the cumulative effect of a change in
accounting principle due to the adoption of SAB 101. This amount represents the
gross profit on systems that shipped during 1999, but did not receive final
customer acceptance during 1999. Included in this number were 5 systems and
some upgrades which had a total sales value of $13.5 million.
ACCOUNTING CHANGE
In December 2000, the Company changed its accounting method for recognizing
revenue on sales with an effective date of January 1, 2000. The Company's
selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. As a result, effective January 1, 2000, to comply with the provisions of
Securities and Exchange Commission Staff Accounting Bulletin No. 101, the
Company deferred recognition of revenue from such equipment sales until
installation is complete and the product is accepted by the customer. The
Company previously recognized revenue related to systems upon shipment. A
provision for the estimated future cost of system installation, warranty and
commissions was recorded when revenue was recognized. Service revenue is
recognized when service has been completed.
The cumulative effect in prior years of the change in accounting method was
a charge of $6.77 million or $0.36 per diluted share.
20
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET SALES. Net sales in 1999 were $28.4 million compared with net sales of
$32.4 million in 1998, representing a decrease of 12.6%. The decline in our net
sales was primarily due to the divestiture of the ion implant product line to
Varian, which contributed $21.1 million of net sales in 1998 and none in 1999,
offset by increased demand for our thin film products as the semiconductor
equipment industry emerged from the 1998 and 1997 recession. Our 1999 thin film
product net sales of $28.4 million was an increase of over 150% from 1998 levels
of thin film product sales. Export sales accounted for 86% of our net sales in
1999 compared with 56% in 1998.
COST OF GOODS SOLD. Costs of goods sold in 1999 was $16.6 million compared
with $29.6 million in 1998, representing a decrease of 43.9%. This decrease was
primarily due to lower sales volumes due to the divestiture of the ion implant
product line to Varian, and $5.4 million of inventory charges recorded in 1998
associated with the restructuring of the Company and the divestiture of the ion
implant product line in 1998. The Company reviewed the carrying value of ion
implant inventory during 1998 with a view to disposal of that product line and
associated inventory at values based on expectations of proceeds upon the sale
of the ion implant product line. Accordingly, inventory reserves were increased
prior to, but in connection with, the sale of the inventory to Varian. In
addition, thin film inventory reserves were increased in light of revised sales
forecasts. The Company subsequently disposed of the affected inventory by
scrapping the inventory during 1998 and 1999 and through the sale of an old
system in 1998 for which the cost of approximately $400,000 had previously been
reversed. Gross profit in 1999 was $11.7 million, representing 41.4% of net
sales, compared with $2.8 million or 8.7% of net sales in 1998. Our gross
profits have historically been affected by variations in average selling prices,
configuration differences, changes in the mix of product sales, unit shipment
levels, the level of foreign sales and competitive pricing pressures.
RESEARCH AND DEVELOPMENT. Research and development expenses in 1999 were
$5.4 million compared with $8.9 million in 1998, representing a decrease of
39.8%. As a percentage of net sales, research and development expenses were
18.9% in 1999 and 27.5% in 1998. Substantially all of the decrease in research
and development expenses is attributable to expenditures in 1998 associated with
the ion implant product line. Thin film research and development spending in
1999 remained relatively constant with 1998 levels. Included in research and
development expense in 1999 is a credit of $360,000 from a government Small
Business Innovative Research grant for ALD development. We expect research and
development expenses to increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $7.9 million in 1999 compared with $14.1 million in 1998,
representing a decrease of 43.8%. As a percentage of net sales, selling, general
and administrative expenses were 28.0% in 1999 and 43.5% in 1998. The $6.2
million decrease in 1999 was due primarily to the reduction in our workforce
related to the divestiture of the ion implant product line to Varian in July
1998 as well as a $1.4 million write-off in 1998 relating to an ion implant
receivable.
RESTRUCTURING AND OTHER. In 1999, we recorded a charge of $543,000 against
a receivable from Varian held in escrow for the final settlement of a dispute
with Varian that arose in connection with the sale of the ion implant product
line to Varian. This charge related to funds that were held in escrow for
possible claims made under our change of control agreements with key ion implant
employees who transferred to Varian as part of the Varian transaction. No funds
were distributed from this escrow account, and the final change of control
agreement expired in July 1999.
OTHER INCOME (EXPENSE), NET. We had other income of $669,000 in 1999
compared with other expense of $86,000 in 1998. Other income in 1999 consisted
of interest income and foreign currency exchange gains due to the strengthening
of the Korean won against the U.S. dollar. In 1998, other expense included
interest expense and foreign currency exchange losses during the first half of
the year, partially offset by interest income during the second half of the
year.
21
PROVISION FOR INCOME TAXES. We had income taxes of $177,000 in 1999
compared with immaterial income taxes in 1998. Taxes in 1999 related to income
from our South Korean subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, our cash and cash equivalents were $3.1 million, a
decrease of $3.6 million from cash and cash equivalents of $6.7 million held as
of December 31, 1999. At December 31, 2000, our accounts receivable were $8.5
million, an increase of $850,000 from accounts receivable of $7.6 million at
December 31, 1999.
Cash used in operating activities totaled $2.3 million in 2000. Cash was
primarily used by the net loss of $9.7 million and increased inventories of
$10.4 million and accounts receivable of $850,000, offset by non-cash charges
and increases in deferred revenue and accounts payable. Accounts payable
increased primarily due to increased sales volumes, and managing the non-linear
nature of our shipments and timing of collections from our customers. Inventory
increased due to material on hand for four systems, two that we had expected to
ship during the fourth quarter, and for two other systems which were scheduled
to ship early in the first quarter of 2001, and an increase in inventory at
customer locations representing the cost of systems shipped for which we are
awaiting customer acceptance. Accounts receivable increased due to two systems
that we shipped late in the fourth quarter of 2000 and were not collected until
the first quarter of 2001. In 1999, cash provided by operating activities
totaled $4.5 million, and consisted of a decrease in accounts receivable of $5.1
million, an increase in accounts payable of $2.0 million, and depreciation and
amortization of $1.8 million. Net cash provided by operating activities was also
affected by the reported net loss in 1999 of $1.6 million and an increase in
inventories of $1.9 million.
Financing activities provided $4 million of cash in 2000. Net short term
borrowings were $2.7 million, and proceeds from the issuance of common stock
from our Employee Stock Purchase and Incentive Stock Option Plans totaled $1.3
million. In 1999, $3.7 million was used in financing activities, primarily for
the payment of the short-term borrowings of $4.0 million, offset by $322,000
received from the issuance of common stock from our Employee Stock Purchase and
Incentive Stock Option Plans.
We had capital expenditures of $5.1 million during 2000. These expenditures
principally related to the acquisition of machinery and equipment for our
research and development and applications laboratories, expansion and upgrading
of our Sunnyvale, California facility, and improvements to our enterprise
resource planning business system. We currently anticipate that additional
capital expenditures will be funded through lease financing or from our working
capital.
Our primary source of funds at December 31, 2000 consisted of $3.1 million
in cash and cash equivalents, and $8.5 million of accounts receivable, most of
which we expect to collect or to have been collected during 2001.
In November 1999, we entered into a $10 million revolving line of credit
with Venture Bank. Amounts available under the line are based on 80% of eligible
accounts receivable, and borrowings under the line are secured by all corporate
assets and bear interest at prime plus 0.25%. The line of credit expires in
November 2001. The line of credit contains covenants that require us to maintain
a minimum quick ratio and a maximum debt to tangible net equity ratio. In
addition, the line of credit requires us to have annual profitability beginning
in 2000 and a maximum quarterly loss of $1 million with no two consecutive
quarterly losses. Additionally, we are prohibited from distributing dividends.
At December 31, 2000, the Company was in default of certain of the covenants and
Venture Bank has granted the Company a waiver of the default. The amount
available to borrow at December 31, 2000 was $4.4 million at a rate of 9.75%.
There was $2.7 million outstanding at the end of December, 2000.
On March 28, 2001, through an arrangement with Cupertino National Bank, we
converted our existing $10 million Venture Bank line of credit to an asset-based
line of credit. Amounts available under the line are
22
based on 80% of eligible accounts receivable, and borrowings under the line are
secured by all corporate assets and bear interest at 9.6% per annum and an
administrative fee of a quarter of one percent on all advances. This line will
not have accounts receivable customer concentration limitations, will allow
borrowing against foreign receivables, and will have no financial covenants. It
will expire in March, 2002.
We believe that our existing working capital, as well as the $10 million
Cupertino National Bank line of credit, will be sufficient to fund our working
capital and capital expenditures requirements for at least the next twelve
months. Thereafter, if cash generated from operations is insufficient to satisfy
liquidity needs, we might need to raise additional funds through a public or
private financing, strategic relationship, or other arrangements. We cannot
assure you that additional funding, if needed, will be available to us or will
be available on terms that we believe are attractive. If we fail to raise
capital when needed, it could harm our business. If we raise additional funds
through the issuance of equity securities, the percentage ownership of our
shareholders would be reduced.
During the year ended December 31, 2000, the Company was in the process of
executing its business strategy and has plans to eventually achieve profitable
operations. Management believes that existing cash and available financing will
be sufficient to meet projected working capital, capital expenditures and other
cash requirements for the next twelve months. Accordingly, these financial
statements have been prepared on a going concern basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments
be recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains
or losses) of a derivative instrument depends on whether is has been designated
and qualifies as part of a hedging relationship and further, on the type of
hedging relationship. We adopted SFAS No. 133, as amended, on January 1, 2001.
The adoption of SFAS No. 133 did not have a material impact on our financial
statements.
RISK FACTORS
The risks described below are not the only ones that we face. Additional
risks and uncertainties not presently known to us or that are currently deemed
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by, and
the trading price of our common stock could decline due to any of these risks.
You should also refer to the other information included in this Annual Report on
Form 10-K/A2 and the other information, our financial statements and the related
notes incorporated by reference into this Annual Report on Form 10-K/A2.
This Annual Report on Form 10-K/A2 contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the factors described below and elsewhere in this Annual Report on Form 10-K/A2.
You should not place undue reliance on these forward-looking statements.
23
WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO
ACHIEVE OR SUSTAIN PROFITABILITY
We have experienced losses of $9.6 million, $1.6 million and $29.5 million
for 2000, 1999 and 1998, respectively.
We may not be able to attain or sustain consistent future revenue growth on
a quarterly or annual basis, or achieve and maintain consistent profitability on
a quarterly or annual basis.
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
Historically, we have relied on a small number of customers for a
substantial portion of our net sales. For example, Samsung Electronics Company,
Ltd. and Micron Technology, Inc. accounted for 91% and 5% of our net sales in
2000. Samsung Electronics Company, Ltd. and Infineon Technologies accounted for
90% and 6% of total shipments made in 2000, which would have been recorded as
revenue under the historical accounting method. In addition, Samsung
Electronics Company, Ltd., and Infineon Technologies represented 92% of accounts
receivable at December 31, 2000. The semiconductor manufacturing industry
generally consists of a limited number of larger companies. We consequently
expect that a significant portion of our future product sales will be
concentrated within a limited number of customers.
None of our customers has entered into a long-term agreement with us
requiring them to purchase our products. In addition, sales to these customers
may decrease in the future when they complete their current semiconductor
equipment purchasing requirements. If any of our customers were to encounter
financial difficulties or become unable to continue to do business with us at or
near current levels, our business, results of operations and financial condition
would be materially harmed. Customers may delay or cancel orders or may stop
doing business with us for a number of reasons including:
- customer departures from historical buying patterns;
- general market conditions;
- economic conditions; or
- competitive conditions in the semiconductor industry or in the
industries that manufacture products utilizing integrated circuits.
OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE SIGNIFICANTLY AND MAY FALL SHORT OF
ANTICIPATED LEVELS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
Our net sales and operating results may fluctuate significantly from
quarter to quarter. For example, in the year 2000, our quarterly revenues
ranged from $3.8 million to $15.7 million with the bottom line ranging from a
loss of $10 million to a profit of $1.6 million.
We derive our 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. Our results of operations for a particular quarter could be materially
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. At our current revenue level, each
sale, or failure to make a sale, could have a material effect on us.
Our lengthy sales cycle, coupled with our customers' competing capital
budget considerations, make the timing of customer orders uneven and difficult
to predict. Our backlog at the beginning of a quarter typically does not include
all orders required to achieve our sales objectives for that quarter. As a
result, our net sales and operating results for a quarter depend on us shipping
orders as scheduled during that quarter as
24
well as obtaining new orders for systems to be shipped in that same quarter. Any
delay in scheduled shipments or in shipments from new orders would materially
harm our operating results for that quarter, which could cause our stock price
to decline.
WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT
ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES
Export sales accounted for approximately 98%, 86% and 56% of our total net
sales in 2000, 1999 and 1998, respectively. Net sales to our South Korean-based
customers accounted for approximately 92%, 84% and 30% of total net sales,
respectively. We anticipate that international sales, including sales to South
Korea, will continue to account for a significant portion of our net sales. As
a result, a significant portion of our net sales will be subject to risks,
including:
- unexpected changes in law or regulatory requirements;
- exchange rate volatility;
- tariffs and other barriers;
- political and economic instability;
- difficulties in accounts receivable collection;
- extended payment terms;
- difficulties in managing distributors or representatives;
- difficulties in staffing our subsidiaries;
- difficulties in managing foreign subsidiary operations; and
- potentially adverse tax consequences.
Our foreign sales are primarily denominated in U.S. dollars and we do not
engage in hedging transactions. As a result, our foreign sales are subject to
the risks associated with unexpected changes in exchange rates, which could
affect the price of our products.
In the past, turmoil in the Asian financial markets resulted in dramatic
currency devaluations, stock market declines, restriction of available credit
and general financial weakness. For example, prices fell dramatically in 1998
because some integrated circuit manufacturers sold dynamic random access memory
chips, called DRAMs, at less than cost in order to generate cash. The cash
shortfall caused Asian semiconductor companies to defer or cancel investments in
new production facilities, thereby reducing our anticipated sales of our
semiconductor manufacturing equipment in Asia in 1998.
Also during this time, the value of the won, the currency of South Korea,
declined significantly against the U.S. dollar. As a result, purchases of U.S.
manufactured products became very costly. Since most of our sales were made to
South Korean customers, these circumstances adversely impacted our customers'
ability to invest in new facilities and equipment that reduced our shipments and
profitability in 1998.
Wherever currency devaluations occur abroad, our goods become more
expensive for our customers in that region. Difficult economic conditions may
limit capital spending by our customers. These circumstances may also affect the
ability of our customers to meet their payment obligations, resulting in the
cancellations or deferrals of existing orders and the limitation of additional
orders.
25
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. Although we
are marketing our atomic layer deposition technology to non-semiconductor
markets such as markets in magnetic thin film heads, flat panel displays,
microelectromechanical systems and inkjet printers, we are still very dependent
on the semiconductor market. The semiconductor industry is cyclical and
experiences periodic downturns both of which reduce the semiconductor industry's
demand for semiconductor manufacturing capital equipment.
Semiconductor industry downturns have significantly decreased our revenues,
operating margins and results of operations in the past. During the industry
downturn in 1998, several of our customers delayed or cancelled investments in
new manufacturing facilities and equipment due to declining DRAM prices, the
Asian economic downturn, and general softening of the semiconductor market. This
caused our sales in 1998 to be significantly lower than in the prior three
years.
After the dramatic industry boom for semiconductor equipment that peaked
early in the year 2000, another cyclical downturn is presently occurring.
Industry reports anticipate a fall of 35% in 2001 compared to 2000. This sharp
and severe industry downturn is the largest in the industry's history and it is
occurring with a slowdown of the U.S. economy overall. Almost all previous
downturns have been solely due to pricing declines. The current downturn in the
industry marks a corresponding decline in unit production. Genus recently
reported a loss for our second quarter 2001 financial results. There is a risk
that our revenues and operating results will continue to be further impacted by
the continued downturn in the semiconductor industry and global economy.
OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW THIN FILMS AND MARKET
ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE THIN FILMS
We believe that our future growth will depend in large part upon the
acceptance of our new thin films and processes, especially atomic layer
deposition. As a result, we expect to continue to invest in research and
development in these new thin films and the systems that use these films. There
can be no assurance that the market will accept our new products or that we will
be able to develop and introduce new products or enhancements to our existing
products and processes in a timely manner to satisfy customer needs or achieve
market acceptance. The failure to do so could harm our business, financial
condition and results of operations.
We must manage product transitions successfully, as introductions of new
products could harm sales of existing products. We derive our revenue primarily
from the sale of equipment used to chemically deposit tungsten silicide in the
manufacture of memory chips. We estimate that the life cycle for these tungsten
silicide CVD systems is three-to-five years. There is a risk that future
technologies, processes or product developments may render our product offerings
obsolete and we may not be able to develop and introduce new products or
enhancements to our existing products in a timely manner.
WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES
The semiconductor manufacturing capital equipment industry is highly
competitive. We face substantial competition throughout the world. We believe
that to remain competitive, we will require significant financial resources in
order to develop new products, offer a broader range of products, establish and
maintain customer service centers and invest in research and development.
Many of our existing and potential competitors have substantially greater
financial resources, more extensive engineering, manufacturing, marketing,
customer service capabilities and greater name
26
recognition. We expect our competitors to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics.
If our competitors enter into strategic relationships with leading
semiconductor manufacturers covering thin film products similar to those sold by
us, it would materially adversely affect our ability to sell our products to
such manufacturers. In addition, to expand our sales we must often replace the
systems of our competitors or sell new systems to customers of our competitors.
Our competitors may develop new or enhanced competitive products that will offer
price or performance features that are superior to our systems. Our competitors
may also be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their product lines. We may not be able to
maintain or expand our sales if our resources do not allow us to respond
effectively to such competitive forces.
WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR
OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND
PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility and
proven financial performance.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. To do otherwise creates risk for the manufacturer because the
manufacture of a semiconductor requires many process steps and a fabrication
facility will contain many different types of machines that must work cohesively
to produce products that meet the customers' specifications. If any piece of
equipment fails to perform as expected, the customer could incur significant
costs related to defective products, production line downtime, or low production
yields.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we have
observed that once a particular piece of equipment is selected from a vendor,
the customer is likely to continue purchasing that same piece of equipment from
the vendor for similar applications in the future. Our customer list, though
limited, has expanded in recent months. Yet our broadening market share remains
at risk to choices made by customers that continue to be influenced by
pre-existing installed bases by competing vendors.
A semiconductor manufacturer frequently will attempt to consolidate its
other capital equipment requirements with the same vendor. Accordingly, we may
face narrow windows of opportunity to be selected as the "vendor of choice" by
potential new customers. It may be difficult for us to sell to a particular
customer for a significant period of time once that customer selects a
competitor's product, and we may not be successful in obtaining broader
acceptance of our systems and technology. If we are not able to achieve broader
market acceptance of our systems and technology, we may be unable to grow our
business and our operating results and financial condition will be harmed.
OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF
OUR REVENUE
Sales of our systems depend upon the decision of a prospective customer to
increase manufacturing capacity. That decision typically involves a significant
capital commitment by our customers. Accordingly, the purchase of our systems
typically involves time-consuming internal procedures associated with the
evaluation, testing, implementation and introduction of new technologies into
our customers' manufacturing facilities. For many potential customers, an
evaluation as to whether new semiconductor manufacturing
27
equipment is needed typically occurs infrequently. Following an evaluation by
the customer as to whether our systems meet its qualification criteria, we have
experienced in the past and expect to experience in the future delays in
finalizing system sales while the customer evaluates and receives approval for
the purchase of our systems and constructs a new facility or expands an existing
facility.
Due to these factors, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort. The time
between our first contact with a customer and the customer placing its first
order typically lasts from nine to twelve months and is often even longer. This
lengthy sales cycle makes it difficult to accurately forecast future sales and
may cause our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected for that period.
OUR INTELLECTUAL PROPERTY IS IMPORTANT TO US AND WE RISK LOSS OF A VALUABLE
ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSES IF WE CANNOT ADEQUATELY
PROTECT IT.
Our success depends in part on our proprietary technology. There can be no
assurance that we will be able to protect our technology or that competitors
will not be able to develop similar technology independently. We currently have
a number of United States and foreign patents and patent applications. On
August 1, 2001, we filed a counterclaim against ASM International N.V., charging
ASM with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective
Etching Native Oxide," and with committing antitrust violations designed to harm
the atomic layer deposition market.
There can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide us with competitive advantages.
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
appropriate. However, no assurance can be given that we will be able to
negotiate necessary licenses on commercially reasonable terms, or at all, or
that any litigation resulting from such claims would not have a material adverse
effect on our business and financial results.
On August 1, 2001, we filed our response in the patent infringement case
initiated by ASM denying ASM's allegation that Genus infringes patents that ASM
claims to have acquired. In our response, we deny ASM's and maintain that ASM's
claims based on these patents are improper.
On June 6, 2001, ASM America, Inc. filed suit against us in the U.S.
District Court for the Northern District of California asserting that our atomic
layer deposition products infringe claims of U.S. Patent Nos. 6,015,590 and
5,916,365. The complaint sought unspecified monetary damages and equitable
relief.
We intend to defend our position vigorously. The outcome of any litigation
is uncertain, however, and we may not prevail. Should we be found to infringe
any of the patents asserted, in addition to potential monetary damages and any
injunctive relief granted, we would need either to obtain a license from ASM to
commercialize our products or redesign our products so they do not infringe any
of these patents. If we were unable to obtain a license or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale our atomic layer products. In this case our business may
not develop as planned, and our results could materially suffer.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees who would be difficult to replace. The loss of Dr. Elder or Dr.
Seidel or other key employees could limit or delay our ability to develop new
products and adapt existing products to our customers' evolving requirements and
would also result in lost sales and diversion of management resources. None of
our executive officers are bound by a written employment agreement, and the
relationships with our officers are at will.
28
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
and process engineers. Competition for such personnel is intense, particularly
in the San Francisco Bay Area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop and
market our products and perform services for our customers. As a result, our
growth could be limited due to our lack of capacity to develop and market our
products to customers, or fail to meet delivery commitments or experience
deterioration in service levels or decreased customer satisfaction.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations. If we fail to
comply with present or future regulations, we could be subject to substantial
liability for clean up efforts, property damage, personal injury and fines or
suspension or cessation of our operations.
We use the following regulated gases at our manufacturing facility in
Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen.
We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The
city of Sunnyvale, California, imposes high environmental standards to
businesses operating within the city. Genus has met the city's stringent
requirements and has received an operating license from Sunnyvale. Presently,
our compliance record indicates that our methods and practices successfully meet
standards. Moving forward, if we fail to continuously maintain high standards to
prevent the leakage of any toxins from our facilities into the environment,
restrictions on our ability to expand or continue to operate our present
locations could be imposed upon us or we could be required to acquire costly
remediation equipment or incur other significant expenses.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS
Components and sub-assemblies included in our products are obtained from a
single supplier or a limited group of suppliers. Disruption or termination of
these sources could have an adverse effect on our operations. We believe that
alternative sources could be obtained and qualified to supply these products, if
necessary. Nevertheless, a prolonged inability to obtain components could have a
material adverse effect on our operating results.
WE DEPEND UPON SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR
PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US
We currently sell and support our thin film products through direct sales
and customer support organizations in the U.S., Europe, South Korea and Japan
and through six independent sales representatives and distributors in the U.S.,
Europe, South Korea, Taiwan, China and Malaysia. We do not have any long-term
contracts with our sales representatives and distributors. Any disruption or
termination of our existing distributor relationships could negatively impact
sales and revenue.
WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN
EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE
We terminated our relationship with our distributor, Innotech Corp. in
Japan in 1998. In 2000, we invested significant resources in Japan by
establishing a direct sales organization, Genus-Japan, Inc. Although we
continue to invest significant resources in our Japan office and have received
orders from two new Japanese customers in 2001, we may not be able to attract
new customers in the Japanese semiconductor industry, and as a result, we may
fail to yield a profit or return on our investment in Japan.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR
TO SECURITIES LITIGATION
Our common stock has experienced substantial price volatility, particularly
as a result of quarter-to-quarter variations in our, our competitors or our
customers' actual or anticipated financial results, our competitors or our
customers' announcements of technological innovations, revenue recognition
policies, changes in earnings estimates by securities analysts and other events
or factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general
economic and political conditions in the United States and the countries in
which we do business, may adversely effect the market price of our common stock.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation, if filed against us, could result in substantial costs
and divert our management's attention and resources.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A disaster
could severely damage our ability to deliver our products to our customers. Our
products depend on our ability to maintain and protect our operating equipment
and computer systems, which is primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. Further, our facilities in the
State of California are currently subject to electrical blackouts as a
consequence of a shortage of available electrical power. In the event these
blackouts continue or increase in severity, they could disrupt the operations of
our affected facilities. Although we maintain general business insurance against
interuptions such as fires and floods, there can be no assurance that the amount
of coverage will be adequate in any particular case.
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR
CAUSE OUR STOCK PRICE TO DROP.
As of July 31, 2001, we have a total of 4,494,555 shares of common stock
underlying warrants and outstanding employee stock options. Of the stock
options, 1,558,729 shares are currently exercisable. All of the shares
underlying the warrants are currently exercisable.
There are 1,461,525 shares of our common stock underlying the warrants
issued to the shareholders listed in the table below under the section entitled
"Selling Securities Holders." Of these shares, 1,270,891 have an exercise price
of $3.50; 69,375 have an exercise price of $3.00; and 121,259 have an exercise
price of $5.24. In addition, Venture Banking Group, a division of Cupertino
National Bank, holds a warrant, issued October 14, 1999, to purchase 25,000
shares of our common stock at an exercise price of $1.00. The warrants have
terms providing for an adjustment of the number of shares underlying the
warrants in the event that we issue new shares at a price lower than the
exercise price of the warrants, where we make a distribution of common stock to
our shareholders or effect a reclassification.
30
If all of the shares underlying the exercisable options and warrants were
exercised and sold in the public market, the value of your current holdings in
Genus may decline as a result of dilution to your percentage ownership in Genus
or as a result of a reduction in the per share value of our stock resulting from
the increase in the number of Genus shares available on the market, if such
availability were to exceed the demand for our stock.
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
Please read the section below entitled "Description of Equity Securities"
where we more completely summarize our preferred stock rights agreement, which
is our primary anti-takeover device. Pursuant to the agreement, our board of
directors has declared a dividend of one right for each share of our common
stock that was outstanding as of October 13, 2000. The rights trade with the
certificates for the common stock until a person or group acquires beneficial
ownership of 15% or more of our common stock. After such an event, we will mail
rights certificates to our shareholders and the rights will become transferable
apart from the common stock. At that time, each right, other than rights owned
by an acquiror or its affiliates, will entitle the holder to acquire, for the
exercise price, a number of shares of common stock having a then-current market
value of twice the exercise price.
In the event that circumstances trigger the transferablility and
exercisability of rights granted in our preferred stock rights agreement, your
current holdings in Genus may decline as a result of dilution to your percentage
ownership in Genus or as a result of a reduction in the per share value of our
stock resulting from the increase in the number of outstanding shares available.
FORWARD-LOOKING STATEMENTS
Some of the information in this Annual Report on Form 10-K/A2 and in the
documents that are incorporated by reference, including the risk factors,
contains forward-looking statements that involve risks and uncertainties. These
statements relate to future events or our future financial performance. In many
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of these terms and other
comparable terminology. These statements are only predictions. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including the risks faced by us
described above and elsewhere in this Annual Report on Form 10-K/A2.
We believe it is important to communicate our expectations to our
shareholders. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this Annual Report on Form 10-K/A2,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We face exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as our business practices evolve and could
seriously harm our financial results. All of our international sales, except
upgrades, spare parts and service sales made by our subsidiary in South Korea,
are currently denominated in U.S. dollars. Sales made by the South Korean
subsidiary for the year ended December 31, 2000 amounted to won 10.405 million,
or $9.126 million and sales for the year ended December 31, 1999 amounted to won
6.130 million, or $5.245. An increase in the value of the U.S. dollar relative
to foreign currencies could make our products more expensive and, therefore,
reduce the demand for our products. Reduced demand for our products could
materially adversely affect our business, results of operations and financial
condition.
31
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
32
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, independent accountants, dated February 12, 2001,
except as to the second paragraph of Note 6, which is as of March 28, 2001, are
included in a separate section of this Report.
SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA
The following table presents our consolidated statements of operations data
for each of the eight quarters in the period ended December 31, 2000. In our
opinion, this information has been presented on the same basis as the audited
consolidated financial statements included in a separate section of this report,
and all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts below to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements and related notes. The operating results for any quarter
should not be relied upon as necessarily indicated of results for any future
period. We expect our quarterly operating results to fluctuate in future
periods due to a variety of reasons, including those discussed in "Business
Risks."
FIRST QTR SECOND QTR THIRD QTR FOURTH QTR
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
2000
Sales
As originally reported . . . . . . . . . . . . . . $ 12,277 $ 12,356 $ 14,165 $ 8,388
Effect of revenue recognition change . . . . . . . (8,451) (5,770) 378 7,295
---------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . . . . 3,826 6,586 14,543 15,683
---------- ------------ ----------- ------------
Gross profit
As originally reported . . . . . . . . . . . . . . 5,465 5,450 6,043 2,515
Effect of revenue recognition change . . . . . . . (4,483) (3,039) 456 3,846
--------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . . . 982 2,411 6,499 6,361
--------- ------------ ----------- ------------
Cumulative effect of change in
accounting principle . . . . . . . . . . . . (6,770) -- -- --
------- ------------ ----------- ------------
Net income (loss)
As originally reported . . . . . . . . . . . . . . 971 955 1,190 (2,830)
Effect of revenue recognition change . . . . . . . (11,308) (3,014) 456 3,929
-------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . . . $ (10,337) $ (2,059) $ 1,646 $ 1,099
======== ============ =========== ============
Basic income per share: Income before
cumulative effect of accounting change
As originally reported . . . . . . . . . . . . . . $ 0.05 $ 0.05 $ 0.06 $ (0.15)
Effect of revenue recognition change . . . . . . . (0.24) (0.16) 0.03 0.21
----------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . (0.19) (0.11) 0.09 0.06
--------- ------------ ----------- ------------
Cumulative effect of change
in accounting principle. . . . . . . . . . . . . . . (0.36) -- -- --
------- ------------ ----------- ------------
Net income
As originally reported . . . . . . . . . . . . . . 0.05 0.05 0.06 (0.15)
Effect of revenue recognition change . . . . . . . (0.60) (0.16) 0.03 0.21
-------- ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . $ (0.55) $ (0.11) $ 0.09 $ 0.06
======= ============ =========== ============
Diluted income per share: Income before
cumulative effect of accounting change
As originally reported . . . . . . . . . . . . . . $ 0.05 $ 0.05 $ 0.06 $ (0.15)
Effect of revenue recognition change (0.24) (0.16) 0.02 0.20
------ ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . (0.19) (0.11) 0.08 0.05
------ ------------ ----------- ------------
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . . (0.36) -- -- --
------- ------------ ----------- ------------
Net income (loss)
As originally reported . . . . . . . . . . . . . . 0.05 0.05 0.06 (0.15)
Effect of revenue recognition change (0.60) (0.16) 0.02 0.20
------ ------------ ----------- ------------
As restated for first three quarters and
as reported for fourth quarter . . . . . . . . $ (0.55) $ (0.11) $ 0.08 $ 0.05
======== ============ =========== ============
1999
Sales. . . . . . . . . . . . . . . . . . . . . . . . $ 5,953 $ 7,966 $ 8,818 $ 5,623
Gross profit . . . . . . . . . . . . . . . . . . . . 2,349 3,471 3,797 2,115
Net income (loss). . . . . . . . . . . . . . . . . . (611) 179 313 (1,498)
Basic net income (loss) per share. . . . . . . . . . (0.03) 0.01 0.02 (0.08)
Diluted net income (loss) per share. . . . . . . . . $ (0.03) $ 0.01 $ 0.02 $ (0.08)
Pro forma amounts for 1999 assuming the change in
accounting principle related to revenue recognition
was applied retroactively:
Sales. . . . . . . . . . . . . . . . . . . . . . . $ 6,240 $ 6,346 $ 8,706 $ 6,700
Gross profit . . . . . . . . . . . . . . . . . . . 2,646 2,214 2,938 2,320
Net income (loss). . . . . . . . . . . . . . . . . (314) (1,078) (546) (1,294)
Basic net income (loss) per share. . . . . . . . . (0.02) (0.06) (0.03) (0.07)
Diluted net income (loss) per share. . . . . . . . $ (0.02) $ (0.06) $ (0.03) $ (0.07)
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 2000, the directors and executive officers of the
Company, who are elected by and serve at the discretion of the Board of
Directors, are as follows:
NAME AGE POSITION
- --------------------------------------------------------------------
William W.R. Elder. . . 62 Chairman of the Board, President and Chief Executive Officer
Thomas E. Seidel, Ph.D. 65 Executive Vice President, Chief Technical Officer
Kenneth Schwanda. . . . 42 Vice President, Finance, Chief Financial Officer
Robert A. Wilson. . . . 38 Executive Vice President, Worldwide Sales
Mario M. Rosati . . . . 54 Secretary and Director
Todd S. Myhre . . . . . 56 Director
G. Frederick Forsyth. . 56 Director
George D. Wells . . . . 65 Director
Robert J. Richardson. . 54 Director
Except as set forth below, all of the executive officers have been
associated with us in their present or other capacities for more than the past
five years. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. There are no family relationships among our
executive officers.
WILLIAM W.R. ELDER was a founder of Genus and is our Chairman of the Board,
President and our Chief Executive Officer. From October 1996 to April 1998, Dr.
Elder served only as Chairman of the Board. From April 1990 to September 1996,
Dr. Elder was Chairman of the Board, President and Chief Executive Officer of
the Company. From November 1981 to April 1990, Dr. Elder was President and a
director of the Company.
THOMAS E. SEIDEL has served as our Executive Vice President and Chief
Technical Officer since January 1996. From July 1988 to January 1996, Dr. Seidel
was associated with SEMATECH, a semiconductor-industry consortium, in various
senior management positions, most recently as Chief Technologist and Director of
Strategic Technology.
KENNETH SCHWANDA has served as our Vice President of Finance and Chief
Financial Officer since February 1999. Mr. Schwanda joined the Company in
December 1992 and has held various financial management positions, most
currently as Vice President of Finance. Mr. Schwanda began his professional
career in 1979 at Harris Corporation, a global communications company, where he
held accounting and finance positions.
ROBERT A. WILSON has served as our Vice President of Worldwide Sales since
January 1999. Mr. Wilson is also a director of Genus Japan. Mr. Wilson joined
the Company in January 1987 and has held several product and technical marketing
positions with the Company until his transition to sales in 1992.
MARIO M. ROSATI has served as our Secretary since May 1996 and as a director
since our inception in November 1981. He has been a member, since 1971, of the
law firm Wilson Sonsini Goodrich & Rosati, Professional Corporation, general
counsel to the Company. Mr. Rosati is also a director of Aehr Test Systems, a
manufacturer of computer hardware testing systems, MyPoints.com, Inc., a web and
email-based direct marketing company, Sanmina Corporation, an electronics
contract manufacturer, Symyx Technologies, Inc., a combinatorial materials
science company, The Management Network Group, Inc., a management consulting
firm focused on the telecommunications industry, and Vivus, a specialty
pharmaceutical company, all publicly-held companies. He is also a director of a
number of privately-held companies.
35
TODD S. MYHRE has served as a director since January 1994. Since September
1999, he served as Interim Chief Executive Officer and a Board member for
Ybrain.com, an e-commerce company focused on the college student market. From
April 1998 to August 1999 and from September 1995 to January 1996, he served as
President, Chief Executive Officer, and a Board member of GameTech
International, an electronic gaming manufacturer. From February 1996 to February
1998, Mr. Myhre was an international business consultant. From January 1993 to
August 1993, from August 1993 to December 1993 and from January 1994 to August
1995, Mr. Myhre served as Vice President and Chief Financial Officer of the
Company, as Executive Vice President and Chief Operating Officer and as
President and a Director of the Company.
G. FREDERICK FORSYTH has served as a director since February 1996. Since
May 2000, Mr. Forsyth has served as President and CEO of NewRoads, Inc. From
March 1999 to May 2000, Mr. Forsyth served as President, Systems Engineering and
Services of Solectron Corp. From August 1997 to March 1999, Mr. Forsyth served
as President, Professional Products Division of Iomega, Inc. From June 1989 to
February 1997, Mr. Forsyth was associated with Apple Computer, Inc., a personal
computer manufacturer, in various senior management positions, most recently as
Senior Vice President and General Manager, Macintosh Product Group.
GEORGE D. WELLS has served as a director since March 2000. From July 1992
to October 1996, Mr. Wells served as President and Chief Executive Officer of
Exar Corporation. From April 1985 to July 1992, he served as President and Chief
Operating Officer of L.S.I. Logic Corporation and became Vice Chairman in March
1992. From May 1983 to April 1985, Mr. Wells was President and Chief Executive
Officer of Intersil, Inc., a subsidiary of General Electric Company.
ROBERT J. RICHARDSON has served as a director since March 2000. Since
January 2000, Mr. Richardson has been a semiconductor industry consultant. From
November 1997 to January 2000, Mr. Richardson served as Chairman, Chief
Executive Officer and President of Unitrode Corporation. From June 1992 to
November 1997, he served in various positions at Silicon Valley Group, Inc.
including President Lithography Systems, President Track Systems Division, and
Corporate Vice-President New Business Development and Marketing. From October
1988 to June 1992, Mr. Richardson was President and General Manager, Santa Cruz
Division at Plantronics, Inc.
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.
36
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.
Report of Independent Accountants
Consolidated Balance Sheets-December 31, 2000 and 1999
Consolidated Statements of Operations-Years Ended December 31, 2000, 1999
and 1998
Consolidated Statements of Shareholders' Equity and comprehensive income
(loss)-Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows-Years Ended December 31, 2000, 1999
and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedule.
Schedule II "Valuation and Qualifying Accounts"
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Report.
Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter ended December 31, 2000.
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Genus, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and
comprehensive income (loss) and of cash flows present fairly, in all material
respects, the financial position of Genus, Inc. and its subsidiaries at December
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of recognizing revenue to comply
with Securities and Exchange Commission Staff Accounting Bulletin No. 101.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 12, 2001, except as to the second paragraph of Note 6, which is as of
March 28, 2001
F-1
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------
2000 1999
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,136 $ 6,739
Accounts receivable (net of allowance for doubtful accounts
of $363 in 2000 and $551 in 1999). . . . . . . . . . . . . . . . . . . . . . . . . 8,479 7,629
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,849 7,266
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675 883
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,139 22,517
Equipment, furniture and fixtures, net . . . . . . . . . . . . . . . . . . . . . . . 10,207 4,894
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 333
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,535 $ 27,744
========= =========
LIABILITIES
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,719 $ 0
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,647 4,146
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,315 3,748
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . 18,562 420
Current portion of capital lease obligations . . . . . . . . . . . . . . . . . . . . 0 52
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,243 8,366
--------- ---------
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized 2,032,000 shares;
Issued and outstanding, none . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding, 19,319,000 shares in 2000 and
18,469,000 shares in 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,837 101,042
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (89,523) (79,872)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . (2,022) (1,792)
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,292 19,378
--------- ---------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . $ 44,535 $ 27,744
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
F-2
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
-------- -------- ---------
Net sales . . . . . . . . . . . . . . . . . . . . . $40,638 $28,360 $ 32,431
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . 24,385 16,628 29,600
Research and development. . . . . . . . . . . . . 8,659 5,368 8,921
Selling, general and administrative . . . . . . . 10,093 7,930 14,115
Restructuring and other . . . . . . . . . . . . . 0 543 7,308
-------- -------- ---------
Loss from operations. . . . . . . . . . . . . . (2,499) (2,109) (27,513)
Other income (expense), net . . . . . . . . . . . . 108 669 (86)
-------- -------- ---------
Loss before provision for income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . (2,391) (1,440) (27,599)
Provision for income taxes. . . . . . . . . . . . . 490 177 1
-------- -------- ---------
Loss before cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . (2,881) (1,617) (27,600)
Cumulative effect of change in accounting principle (6,770) 0 0
-------- -------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . (9,651) (1,617) (27,600)
Deemed dividends on preferred stock . . . . . . . . 0 0 (1,903)
-------- -------- ---------
Net loss attributable to common shareholders. . . . $(9,651) $(1,617) $(29,503)
======== ======== =========
Per share data:
Basic and diluted loss per share
before cumulative effect. . . . . . . . . . . . . $ (0.15) $ (0.09) $ (1.71)
Cumulative effect of change in accounting principle (0.36) -- --
-------- -------- ---------
Basic and diluted net loss per share. . . . . . . . $ (0.51) $ (0.09) $ (1.71)
======== ======== =========
Shares used to compute basic and diluted
net loss per share. . . . . . . . . . . . . . . . 18,937 18,134 17,248
======== ======== =========
Unaudited Pro forma amounts of the retroactive application of the change in
accounting principle under SAB 101:
Net sales . . . . . $ 40,638 $27,992 $ 33,599
Net loss. . . . . . (2,881) (3,232) (25,963)
Net loss per share:
Basic . . . . . . $ (0.15) $ (0.18) $ (1.51)
Diluted . . . . $ (0.15) $ (0.18) $ (1.51)
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
ACCUM.
OTHER
PREFERRED COMMON STOCK ACCUMULATED COMPREH.
STOCK SHARES AMOUNT DEFICIT LOSS TOTAL
-------- ------ -------- --------- -------- ---------
Balances, January 1, 1998. . . . . $ 0 17,123 $ 99,149 $(48,863) $(1,929) $ 48,357
Issuance of 100 shares of
Series A convertible
preferred stock and
warrants to purchase
shares of common stock . . . . 6,222 0 385 (1,792) 0 4,815
Conversion of 2 shares of
Series A convertible
preferred stock to
common stock . . . . . . . . . (124) 107 124 0 0 0
Redemption of 70 shares of
Series A convertible
preferred stock. . . . . . . . (4,725) 0 0 0 0 (4,725)
Exchange of 28 shares of
Series A convertible
preferred stock for 28
shares of Series B
manditorily redeemable
convertible preferred stock. . (1,373) 0 0 0 0 (1,373)
Issuance of shares of common
stock under stock option
plan . . . . . . . . . . . . . 0 5 14 0 0 14
Issuance of shares of common
stock under employee stock
purchase plan. . . . . . . . . 0 238 177 0 0 177
Net loss . . . . . . . . . . . . 0 0 0 (27,600) 0
Translation adjustments. . . . . 0 0 0 0 288
Comprehensive loss . . . . . . . 0 0 0 0 0 (27,312)
-------- ------ -------- --------- -------- ---------
Balances, December 31, 1998. . . . 0 17,473 99,849 (78,255) (1,641) 19,953
Conversion of 16 shares of
Series B convertible preferred
stock to 640 shares of
common stock . . . . . . . . . 0 640 773 0 0 773
Issuance of shares of common
stock under stock option
plan . . . . . . . . . . . . . 0 50 102 0 0 102
Issuance of shares of common
stock under employee stock
purchase plan. . . . . . . . . 0 306 220 0 0 220
Issuance of warrants to Venture
Bank to purchase 25 shares of
common stock . . . . . . . . . 0 0 53 0 0 53
Amortization of deferred stock
compensation . . . . . . . . . 0 0 45 0 0 45
Net loss . . . . . . . . . . . . 0 0 0 (1,617) 0
Translation adjustments. . . . . 0 0 0 0 (151)
Comprehensive loss . . . . . . . 0 0 0 0 0 (1,768)
-------- ------ -------- --------- -------- ---------
Balances, December 31, 1999. . . . 0 18,469 101,042 (79,872) (1,792) 19,378
Issuance of shares of common
Stock under stock option
plan . . . . . . . . . . . . . 0 490 1,023 0 0 1,023
Issuance of shares of common
stock from warrants and
options. . . . . . . . . . . . 0 72 0 0 0 0
Issuance of shares of common
stock under employee stock
purchase plan. . . . . . . . . 0 288 282 0 0 282
Stock-based compensation . . . . 0 0 490 0 0 490
Net loss . . . . . . . . . . . . 0 0 0 (9,651) 0
Translation adjustments. . . . . 0 0 0 0 (230)
Comprehensive loss . . . . . . . 0 0 0 0 0 (9,881)
-------- ------ -------- --------- -------- ---------
Balances, December 31, 2000. . . . $ 0 19,319 $102,837 $(89,523) $(2,022) $ 11,292
======== ====== ======== ========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
--------- -------- ---------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,651) $(1,617) $(27,600)
Adjustments to reconcile net loss to net cash from operating activities:
Cumulative effect of change in accounting principle. . . . . . . . . . 6,770 0 0
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,740 1,805 2,480
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . (188) 51 1,670
Restructuring and other. . . . . . . . . . . . . . . . . . . . . . . . 0 543 7,308
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . 490 98 0
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (662) 4,785 4,781
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,414) (1,928) (2,938)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 (519) 650
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 4,501 1,953 (6,530)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 111 (626) (5,153)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 4,659 0 0
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 626
--------- -------- ---------
Net cash provided by (used in) operating activities. . . . . . . . . (2,292) 4,545 (18,830)
--------- -------- ---------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures . . . . . . . . . . . . (5,053) (2,040) (919)
Sale of MeV ion implant products . . . . . . . . . . . . . . . . . . . . 0 0 23,151
--------- -------- ---------
Net cash provided by (used in) investing activities. . . . . . . . . (5,053) (2,040) 22,232
--------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . 1,305 322 191
Proceeds from issuance of preferred stock and warrants . . . . . . . . . 0 0 4,815
Redemption of preferred stock. . . . . . . . . . . . . . . . . . . . . . 0 0 (5,325)
Proceeds from short-term bank borrowings . . . . . . . . . . . . . . . . 6,719 0 4,000
Payments of short-term bank borrowings . . . . . . . . . . . . . . . . . (4,000) (4,000) (7,200)
Payments of long-term debt and capital leases. . . . . . . . . . . . . . (52) (62) (761)
--------- -------- ---------
Net cash provided by (used in) financing activities. . . . . . . . . 3,972 (3,740) (4,280)
--------- -------- ---------
Effect of exchange rate changes on cash (230) (151) 303
--------- -------- ---------
Net decrease in cash and cash equivalents (3,603) (1,386) (575)
Cash and cash equivalents, beginning of year 6,739 8,125 8,700
--------- -------- ---------
Cash and cash equivalents, end of year $ 3,136 $ 6,739 $ 8,125
========= ======== =========
Supplemental Cash Flow Information
Cash paid for interest $ 76 $ 4 $ 186
Cash paid for income taxes 177 0 6
Non-cash investing and financing activities:
Deemed dividends on preferred stock. . . . . . . . . . . . . . . . . . . 0 0 1,903
Conversion of Series A preferred stock to common stock . . . . . . . . . 0 0 124
Conversion of Series B preferred stock to common stock . . . . . . . . . 0 773 0
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
GENUS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Genus, Inc. (the "Company") was incorporated in
California in 1982. The Company designs, manufactures and markets capital
equipment and deposition processes for advanced semiconductor manufacturing. The
Company's products are marketed worldwide either directly to end-users or
through exclusive sales representative arrangements. In January 1996, the
Company opened a subsidiary in South Korea to provide sales and service support
to Korean customers. The Company's customers include semiconductor manufacturers
located throughout the United States, Europe and in the Pacific Rim including
Japan, South Korea and Taiwan. The following is a summary of the Company's
significant accounting policies.
Basis of Presentation. The consolidated financial statements include the
accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of
significant intercompany accounts and transactions. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Liquidity. During the year ended December 31, 2000, the Company was in the
process of executing its business strategy and has plans to eventually achieve
profitable operations. Management believes that existing cash and available
financing will be sufficient to meet projected working capital, capital
expenditures and other cash requirements for the next twelve months.
Accordingly, these financial statements have been prepared on a going concern
basis.
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. Cash equivalents consist primarily of money market funds.
Fair Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, short term bank borrowings and accounts
payable approximate estimated fair value because of the short maturity of those
financial instruments.
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentrations of credit risk, consist principally of
cash and cash equivalents and trade receivables. The Company places cash not
required for current disbursement in money market funds in the United States.
The Company does not require collateral from its customers and maintains an
allowance for credit losses.
Two customers accounted for an aggregate of 91% of accounts receivable at
December 31, 2000. Two customers accounted for an aggregate of 92% of accounts
receivable at December 31, 1999. Three customers accounted for an aggregate of
78% of accounts receivable at December 31, 1998. South Korean headquartered
customers accounted for an aggregate of 85% and 71% of accounts receivable at
December 31, 2000 and 1999, respectively. The Company has written off bad debts
of none, none, and $2,267,000 in 2000, 1999, and 1998, respectively.
Inventories. Inventories are stated at the lower of cost or market, using
standard costs that approximate actual costs, under the first-in, first-out
method.
Long-Lived Assets. Equipment, furniture and fixtures 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.
F-6
Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets 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. The Company's selling arrangements generally involve
contractual customer acceptance provisions and installation of the product
occurs after shipment and transfer of title. As a result, effective January 1,
2000, to comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101, the Company defers recognition of revenue from such
equipment sales until installation is complete and the product is accepted by
the customer. Under SAB 101, warranty obligations are accrued upon final
customer acceptance which coincides with recognition of revenue. Prior to
January 1, 2000, revenue related to systems was generally recognized upon
shipment. A provision for the estimated future cost of system installation,
warranty and commissions was recorded when revenue was recognized. Service
revenue is recognized when service has been completed.
Income Taxes. The Company accounts for income taxes using a method that
requires deferred tax assets to be computed annually on an asset and liability
method and adjusted when new tax laws or rates are enacted. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts more
likely than not to be realized. Income tax expense (benefit) is the tax payable
(refundable) for the period plus or minus the change in deferred tax assets and
liabilities during the period.
Foreign Currency. The Company has foreign sales and service operations.
With respect to all foreign subsidiaries excluding South Korea and Japan, the
functional currency is the U.S. dollar, and transaction and translation gains
and losses are included in results of operations. The functional currency of the
Company's South Korean subsidiary is the won, and the functional currency of the
Company's Japanese subsidiary is the yen. The translation from the applicable
foreign currency to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using the weighted average exchange rate during the period.
Adjustments resulting from such translation are reflected as other comprehensive
income/loss.
Net Loss Per Share. Basic net loss per share is computed by dividing loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
loss available to common shareholders, adjusted for convertible preferred
dividends and after-tax interest expense on convertible debt, if any, by the sum
of the weighted average number of common shares outstanding and potential common
shares (when dilutive).
Stock Compensation. The Company accounts for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation." Generally, the Company's policy is
to grant options with an exercise price equal to the quoted market price of the
Company's stock on the date of the grant. Accordingly, no compensation cost has
been recognized in the Company's statements of operations. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
Comprehensive Income/loss. In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
disclosure and financial statement display for reporting total comprehensive
income and its individual components. Comprehensive income, as defined, includes
all changes in equity during a period from non-owner sources. The Company's
comprehensive income/loss includes net income/loss and foreign currency
translation adjustments and is displayed in the statement of shareholders'
equity and comprehensive income/loss.
F-7
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
year financial statements to conform to current year's presentation. Such
reclassifications had no effect on previously reported results of operations or
retained earnings.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Boards ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133"
which deferred the effective date until the first fiscal year beginning after
June 15, 2000. In June 2000, the FASB issued SFAS Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of SFAS 133." SFAS No. 138 amends certain terms and conditions of
SFAS 133. SFAS 133 requires that all derivative instruments be recognized at
fair value as either assets or liabilities in the statement of the financial
position. The accounting for changes in the fair value (i.e., gains or losses)
of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. We adopted SFAS No. 133, as amended, on January 1, 2001. The
adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial statements.
NOTE 2. ACCOUNTING CHANGE - REVENUE RECOGNITION
In December 2000, the Company changed its accounting method for recognizing
revenue on sales with an effective date of January 1, 2000. The Company's
selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. As a result, effective January 1, 2000, to comply with the provisions of
Securities and Exchange Commission Staff Accounting Bulletin No. 101, the
Company defers recognition of revenue from such equipment sales until
installation is complete and the product is accepted by the customer. The
Company previously recognized revenue related to systems upon shipment. A
provision for the estimated future cost of system installation, warranty and
commissions was recorded when revenue was recognized.
The cumulative effect on prior years of the change in accounting method was a
charge of $6.77 million or $0.36 per basic and diluted share.
NOTE 3. INVENTORIES
Inventories comprise the following (in thousands):
DECEMBER 31,
---------------
2000 1999
------- ------
Raw materials and purchased parts $ 6,081 $5,439
Work in process . . . . . . . . . 5,624 1,055
Finished goods. . . . . . . . . . 647 772
Inventory at customers' locations 9,497 0
------- ------
$21,849 $7,266
======= ======
Inventory at customers' locations represent the cost of systems shipped to
customers for which we are awaiting customer acceptance.
F-8
NOTE 4. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost and comprise the
following (in thousands):
DECEMBER 31,
------------------
2000 1999
--------- ---------
Equipment (useful life of 3 years). . . . . . . . . . . . . $ 8,698 $ 8,048
Demonstration equipment (useful life ranges from 3-5 years) 18,089 14,658
Furniture and fixtures (useful life of 3 years) . . . . . . 1,029 1,021
Leasehold improvements (useful life ranges from 4-10 years) 3,694 3,056
--------- ---------
31,510 26,783
Less accumulated depreciation and amortization. . . . . . . (24,740) (23,048)
--------- ---------
6,770 3,735
Construction in process . . . . . . . . . . . . . . . . . . 3,437 1,159
--------- ---------
$ 10,207 $ 4,894
========= =========
NOTE 5. ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
DECEMBER 31,
-------------
2000 1999
------ ------
System installation and warranty. . . . $ 757 $ 817
Accrued commissions and incentives. . . 242 364
Accrued compensation and related items. 615 872
Federal, state and foreign income taxes 828 622
Other . . . . . . . . . . . . . . . . . 873 1,073
------ ------
$3,315 $3,748
====== ======
NOTE 6. SHORT-TERM BANK BORROWING
In November 1999, the Company entered into a $10 million revolving line of
credit with Venture Bank. Amounts available under the line are based on 80% of
eligible accounts receivable, and borrowings under the line of credit are
secured by all corporate assets and bear interest at prime plus 0.25%. The line
of credit expires in November 2001. The line of credit contains covenants that
require the Company to maintain a minimum quick ratio and a maximum debt to
tangible net equity ratio. In addition, the line requires the Company to have
annual profitability beginning in 2000 and a maximum quarterly loss of $1
million with no two consecutive quarterly losses. Additionally, the Company is
prohibited from distributing dividends. At December 31, 2000, the Company was in
default of certain of the covenants and Venture Bank has granted the Company a
waiver of the default. The amount available to borrow at December 31, 2000 was
$4.4 million at a rate of 9.75%. There was $2.7 million outstanding at December
31, 2000.
On March 28, 2001, the Company converted its existing $10 million Venture
Bank line of credit to an asset-based line of credit. Amounts available under
the line are based on 80% of eligible accounts receivable, and borrowings under
the line are secured by all corporate assets and bear interest at 9.6% per annum
and an administrative fee of a quarter of one percent on all advances. This line
will not have accounts receivable customer concentration limitations, will allow
borrowing against foreign receivables, and will have no financial covenants. It
will expire in March, 2002.
NOTE 7. COMMITMENTS AND CONTINGENCIES
F-9
The Company leases certain of its facilities and various office equipment
under operating leases expiring through 2002. The Sunnyvale facility lease
expires in October, 2002, but we have an option to renew the lease for five more
years at 95% of current market prices. The Company is responsible for property
taxes, insurance and maintenance under the facility leases. Certain of these
leases contain renewal options. In 2000 we subleased approximately 38,000 square
feet to a third parties. In December, 2000, one of the parties terminated their
sublease, and we reclaimed 11,000 square feet of office space. We currently
sublease approximately 27,000 square feet to a third party. We also lease sales
and support offices in Seoul, South Korea, Tokyo, Japan.
At December 31, 2000, minimum lease payments required and sublease income
under these operating leases are as follows (in thousands):
LEASE PAYMENTS SUBLEASE INCOME
--------------- ----------------
2001 . $ 815 $ 625
2002 . 643 468
--------------- --------
$ 1,458 $ 1,093
====== ========
Rent expense was $806,000, $713,000 and $1,315,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. Sublease rental income was
$1,104,000, $820,000 and $146,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
Legal Proceedings
In July 1999, the Company was named as a co-defendant in a claim filed at
the Superior Court of the state of California for the county of Santa Clara,
involving an automobile accident by a former employee which resulted in the
death of an individual. Significant general, punitive and exemplary damages are
being sought by the plaintiffs. Recently, a demand was placed by the plaintiff
that is within the Company's insurance policy limits. While the Company believes
it is not at fault in this matter, the Company has instructed its insurance
carrier to pay the demand in an effort to avoid the costs associated with going
to trial. Although the outcome of this matter is not presently determinable,
management does not believe that resolution of this matter will have a material
adverse effect on its financial position or results of operations.
NOTE 8. SHAREHOLDERS' EQUITY
Private Placement of Convertible Preferred Stock
In February 1998, the Company issued an aggregate of 100,000 shares of 6%
Series A Convertible Preferred Stock (the "Series A Stock") and warrants to
purchase an aggregate of up to 400,000 shares of its common stock, all for an
aggregate purchase price of $5,000,000 in cash. In 1998, the Company recorded
deemed dividends on preferred stock of approximately $1,903,000 reflecting the
beneficial conversion feature, which is the difference between the proceeds
allocated to the Series A Stock and the fair value of the Series A Stock
(assuming immediate conversion) upon issuance, and the accrual of the 6%
dividends thereon.
In June 1998, 2,000 shares of the Series A Stock were converted into common
stock of the Company. In July 1998, the Company redeemed 70,000 shares of the
outstanding Series A Stock for $4,725,000 in cash (the "Redemption"), and the
remaining 28,000 shares of Series A Stock were exchanged for 28,000 shares of
Redeemable Series B Convertible Preferred Stock (the "Series B Stock") by the
existing holders of the Series A Stock (the "Exchange"). The Redemption and
Exchange were accounted for by comparing the fair value of the Series B Stock
and the $4,725,000 in cash with the carrying amount of the Series A Stock
F-10
redeemed and with the fair value of the Series A Stock converted (pursuant to
the original conversion terms of the Series A Stock); there was no material
difference between these amounts. In November 1998, the Company redeemed 12,000
shares of the Series B Stock for approximately $600,000 in cash. As of December
31, 1998, there were 16,000 shares of Series B Stock outstanding, all of which
were converted into 640,000 shares of common stock of the Company in February
1999.
Warrants and Options
In connection with the issuance of the Series A Stock, the Company issued
warrants for 400,000 shares of the Company's common stock to the holders of the
Series A Stock. The warrants were exercisable at any time until February 11,
2001 for 300,000 shares of common stock at a price of $3.67 per share and for
100,000 shares at a price of $4.50 per share. The warrants for 300,000 shares
at $3.67 per share expired unexercised on February 11, 2001. During May 2000, a
grantee elected to exercise its warrants to purchase 100,000 shares. As
provided in the warrant agreement, the grantee received a reduced number of
shares in exchange for the aggregate exercise price due, resulting in the
issuance by the Company of 55,000 shares.
In connection with a private placement in April 1995, the Company granted
options for 118,000 shares of the Company's common stock to the investors. On
April 25, 2000, the grantees elected to exercise their options to purchase all
118,000 shares. As provided in the option agreements, the grantees received a
reduced number of shares in exchange for the aggregate exercise price due,
resulting in the issuance by the Company of 17,000 shares.
In connection with the $10 million revolving line of credit, the Company
issued to Venture Bank warrants to purchase 25,000 shares of the Company's
common stock at a price of $2.39 per share. Based on the Black-Scholes option
pricing model, the fair market value of the warrants at the date of the grant
was $53,000, which is being amortized to interest expense over the two-year life
of the line.
Net Loss Per Share
A reconciliation of the numerator and denominator of basic and diluted loss
per share is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
-------- -------- ---------
Income available to common shareholders
before cumulative effect of change in
accounting principle:
Numerator-Basic and diluted:
Net loss. . . . . . . . . . . . . . . . . . $(2,881) $(1,617) $(27,600)
Deemed dividends on preferred stock . . . . . 0 0 (1,903)
-------- -------- ---------
Net loss available to common shareholders $(2,881) $(1,617) $(29,503)
======== ======== =========
Denominator-Basic and diluted:
Weighted average common stock outstanding . 18,937 18,134 17,248
======== ======== =========
Basic net loss per share. . . . . . . . . . . $ (0.15) $ (0.09) $ (1.71)
======== ======== =========
Net income available to common shareholders:
Numerator-Basic and diluted:
Net loss. . . . . . . . . . . . . . . . . . $(9,651) $(1,617) $(27,600)
Deemed dividends on preferred stock . . . . . 0 0 (1,903)
-------- -------- ---------
Net loss available to common shareholders $(9,651) $(1,617) $(29,503)
======== ======== =========
Denominator-Basic and diluted:
Weighted average common stock outstanding . 18,937 18,134 17,248
======== ======== =========
Basic net loss per share. . . . . . . . . . . $ (0.51) $ (0.09) $ (1.71)
======== ======== =========
F-11
Stock options to purchase 2,972,386 shares of common stock were outstanding
in 2000, but were not included in the computation of diluted loss per share
because the Company has a net loss for 2000. Warrants for the purchase of
325,000 shares of common stock were outstanding at December 31, 2000, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 2000.
Stock options to purchase 2,639,219 shares of common stock were outstanding
in 1999, but were not included in the computation of diluted loss per share
because the Company has a net loss for 1999. Warrants for the purchase of
425,000 shares of common stock were outstanding at December 31, 1999, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 1999.
Stock options to purchase 2,301,190 shares of common stock were outstanding
in 1998, but were not included in the computation of diluted loss per share
because the Company has a net loss for 1998. A total of 16,000 shares of Series
B Convertible Preferred Stock and warrants for the purchase of 400,000 shares of
common stock were outstanding at December 31, 1998, but were not included in the
computation of diluted loss per share because the Company has a net loss for
1998.
Stock Option Plan
In March of 2000, the Company adopted the 2000 Incentive Stock Option Plan
to replace the 1991 Incentive Stock Option Plan. The 1991 Incentive Stock Option
Plan was scheduled to expire ten years after its adoption in 1991. Under the
2000 Incentive Stock Option Plan, the Board of Directors can grant incentive and
nonstatutory stock options. The Board of Directors has the authority to
determine to whom options will be granted, the number of shares, the term and
exercise price. The options are exercisable at times and increments as specified
by the Board of Directors, and generally vest over a three-year period and
expire five years from the date of grant. At December 31, 2000, the Company had
reserved 4,803,006 shares of common stock for issuance under the 2000 Incentive
Stock Option Plan, which included 800,000 shares added to the plan in 2000. A
total of 418,049 shares remained available for future grants at December 31,
2000. At December 31, 1998, 573,484 options were exercisable at a weighted
average exercise price of $3.094. At December 31, 1999, 1,128,992 options were
exercisable at a weighted average exercise price of $2.34. At December 31, 2000,
1,285,017 options were exercisable at a weighted average exercise price of
$2.31.
Employee Stock Purchase Plan
The Company has reserved a total of 2,650,000 shares of common stock for
issuance under a qualified stock purchase plan, which provides substantially all
Company employees with the right to acquire shares of the Company's common stock
through payroll deductions. This total includes an additional 300,000 shares
added to the plan in 2000. 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, 2000, 2,456,765 shares have been issued under the plan. At
December 31, 2000, shares available for purchase under this plan were 193,235.
Share Purchase Rights Plan
On September 7, 2000, the Company's Board of Directors declared a dividend
pursuant to a newly adopted Share Purchase Rights Plan which replaced a similar
earlier plan that had expired on July 3, 2000. The intended
F-12
purpose of the Rights Plan is to protect shareholders' rights and to maximize
share value in the event of an unfriendly takeover attempt. As of the record
date of October 13, 2000, each share of common stock of Genus, Inc. outstanding
was granted one right under the new plan. Each right is exercisable only under
certain circumstances and upon the occurrence of certain events and permits the
holder to purchase from the Company one one-thousandth (0.001) of a share of
Series C Participating Preferred Stock at an initial exercise price of forty
dollars ($40.00) per one one-thousandth share. The 50,000 shares of Series C
preferred stock authorized in connection with the Rights Plan will be used for
the exercise of any preferred share purchase rights in the event that any person
or group (the Acquiring Person) acquires beneficial ownership of 15% or more of
the outstanding common stock. In such event, the shareholders (other than the
Acquiring Person) would receive common stock of the Company having a market
value of twice the exercise price. Subject to certain restrictions, the Company
may redeem the rights issued under the Rights Plan for $0.001 per right and may
amend the Rights Plan without the consent of rights holders. The rights will
expire on October 13, 2010, unless redeemed by the Company.
Option Repricing
On January 28, 1998 the Board of Directors offered employees the
opportunity to reprice outstanding stock options as of February 9, 1998. The
repriced options, both vested and unvested, were precluded from exercise for a
period of one year from the repricing date. Approximately 1,544,750 options with
original exercise prices ranging from $3.88 to $8.63 were repriced at $3.03, the
fair market value as of February 9, 1998.
Activity under the 1991 and 2000 Incentive Stock Option Plans is set forth
in the table below:
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING TOTAL EXERCISE
(IN 000'S) PRICE PER SHARE (IN 000'S) PRICE
---------- ------------------ ----------- ------
Balance, January 1, 1998 . 1,851 $ 2.25 to $ 8.63 $ 11,621 $ 6.28
Granted. . . . . . . . . 3,764 0.88 to 3.21 8,500 2.26
Exercised. . . . . . . . (5) 2.87 to 2.87 (14) 2.87
Terminated . . . . . . . (3,309) 1.63 to 8.63 (15,600) 4.71
---------- ------------------ ----------- ------
Balance, December 31, 1998 2,301 0.88 to 8.00 4,507 1.96
Granted. . . . . . . . . 532 1.87 to 4.34 1,384 2.88
Exercised. . . . . . . . (50) 0.88 to 3.03 (102) 2.05
Terminated . . . . . . . (144) 0.88 to 4.00 (226) 1.57
---------- ------------------ ----------- ------
Balance, December 31, 1999 2,639 0.88 to 8.00 5,563 2.11
Granted. . . . . . . . . 1,052 2.25 to 15.75 8,795 8.36
Exercised. . . . . . . . (490) 0.88 to 3.22 (1,023) 2.09
Terminated . . . . . . . (229) 0.88 to 15.75 (602) 2.63
---------- ------------------ ----------- ------
Balance, December 31, 2000 2,972 $ 0.88 to $ 15.75 $ 12,733 $ 4.28
========== ================== =========== ======
Options outstanding and currently exercisable by exercise price under the
option plan at December 31, 2000 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ----------------------
WEIGHTED AVG.
RANGE OF NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
------------------- ------------------- ----------------- -------------- ------------ --------------
0.8750 - $0.8750. 555,366 2.72 $ 0.8750 368,703 $ 0.8750
1.2500 - 1.3130. . 95,462 2.65 1.2588 54,802 1.2569
1.6250 - 1.6250. . 308,823 2.37 1.6250 172,512 1.6250
1.8750 - 2.6250. . 169,833 3.28 2.3035 63,171 2.3114
3.0310 - 3.0310. . 454,402 1.21 3.0310 454,402 3.0310
3.0940 - 3.0940. . 320,000 3.56 3.0940 106,675 3.0940
3.2190 - 5.2812. . 83,500 3.77 3.8300 29,001 3.6004
5.3440 - 5.3440. . 340,000 4.61 5.3440 0 0.0000
5.6250 - 8.8750. . 395,000 4.11 7.9019 28,251 7.6493
10.0000 - 15.7500. 250,000 4.21 14.4330 7,500 15.7500
- ------------------ ------------------- ------------------- ----------------- -------------- ------------
0.8750 - $15.7500 2,972,386 3.13 $ 4.2837 1,285,017 $ 2.31
================== =================== =================== ================= ============== ============
F-13
Pro Forma Disclosures
Pro forma information regarding net income (loss) and net income (loss) per
share is presented in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
requires that the information be disclosed as if the Company had accounted for
its employee stock-based compensation plans under the fair value method
prescribed by SFAS 123.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998:
2000 1999 1998
---------- ---------- ----------
Risk free interest rates 5.17% 5.62% 5.34%
Expected life. . . . . . 3.3 years 3.3 years 3.3 years
Expected volatility. . . 222.25% 221.48% 61.4%
Expected dividend yield. 0% 0% 0%
The weighted average fair value of options granted in 2000, 1999 and 1998
was $8.09, $2.76, and $1.60, respectively.
Under the 1989 Employee Stock Purchase Plan, the Company does not recognize
compensation cost related to employee purchase rights under the Stock Purchase
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 2000, 1999 and 1998.
2000 1999 1998
---------- ---------- ----------
Risk free interest rates 5.17% 4.95% 5.42%
Expected life. . . . . . 0.5 years 0.5 years 0.5 years
Expected volatility. . . 222.25% 221.48% 61.4%
Expected dividend yield. 0% 0% 0%
The weighted average fair value of those purchase rights granted in 2000,
1999 and 1998 was $4.66, $1.31 and $0.48, 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 loss and basic
and diluted net loss per share would have been the pro forma amounts indicated
below (in thousands, except per share data):
2000 1999 1998
--------- -------- ---------
Pro forma net loss available to common
shareholders . . . . . . . . . . . . . . . . $(12,578) $(2,781) $(32,380)
Pro forma net loss per share-basic and diluted $ (0.66) $ (0.15) $ (1.88)
The above pro forma effects on net loss may not be representative of the
effects on future results as options granted typically vest over several years
and additional option grants are expected to be made in future years.
F-14
Stock Compensation
In 1998 and 1999, the Company granted options to outside consultants to
purchase 23,000 and 5,000 shares of common stock, respectively. These options
have exercise prices between $0.875 and $3.03 per share. The options vest over
three years and expire between February 2001 and March 2002. The work is to be
conducted over a 3 year period coinciding with the vesting of the options.
Unvested options are to be forfeited if the consultants cease performing their
work. The Company accounts for consultants options in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In
accordance with this standard, changes in the estimated fair value of these
options will be recognized as compensation expense in the period of the change.
The Company recorded none, $45,000 and $218,000 as compensation expense relating
to these options in 1998, 1999 and 2000, respectively.
In addition, the Company recorded $209,000 of stock compensation in 2000
resulting from a shortfall in shares approved for the ESPP. The calculation and
recording of expense was made in accordance with EITF 97-12, "Accounting for
Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase
Plan under APB Opinion No. 25." In accordance with this consensus, a
compensation charge is calculated for the amount by which the quoted stock price
on the date of shareholder approval, less a 15% discount, exceeds the price at
which options were granted under the ESPP. The compensation charge so determined
is amortized over the term of the options issued under the ESPP that remains
after shareholder approval of additional shares.
NOTE 9. EMPLOYEE BENEFIT PLAN
During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit
Plan") to provide retirement and incidental benefits for eligible employees. The
Benefit Plan provides for Company contributions as determined by the Board of
Directors that may not exceed 6% of the annual aggregate salaries of those
employees eligible for participation. In 2000, 1999 and 1998, the Company
contributed $142,002, $30,000 and $62,000, respectively, to the Benefit Plan.
NOTE 10. OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Interest income. $ 252 $ 336 $ 77
Interest expense (118) (4) (186)
Foreign exchange (58) 330 301
Other, net . . . 32 7 (278)
------ ------ ------
$ 108 $ 669 $ (86)
====== ====== ======
NOTE 11. INCOME TAXES
Income tax expense for the years ended December 31, 2000, 1999 and 1998 was
$490,000, $177,000 and $1,000 respectively.
The components of income (loss) before income taxes were as follows (in
thousands):
2000 1999 1998
-------- -------- ---------
Domestic loss before taxes . . . . . . . . . . . . . $(3,829) $(2,231) $(26,829)
Foreign income (loss) before taxes . . . . . . . . . 1,438 791 (770)
-------- -------- ---------
Loss before taxes and cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . $(2,391) $(1,440) $(27,599)
======== ======== =========
F-15
In 1998, the income tax expense consisted of current state tax. In 1999 and
2000, the income tax expense was due to current foreign taxes.
The Company's effective tax rate for the years ended December 31, 2000,
1999 and 1998 differs from the U.S. federal statutory income tax rate as
follows:
2000 1999 1998
----- ----- -----
Federal income tax at statutory rate 35% 35% 35%
Foreign income taxes . . . . . . . . (20) (18) 0
Net operating loss not benefited . . (35) (29) (35)
----- ----- -----
(20)% (12)% (0)%
===== ===== =====
The components of the net deferred tax asset comprise the following (in
thousands):
2000 1999
--------- ---------
Deferred tax assets (liabilities):
Net operating loss carry-forwards . . . . . . . . $ 28,682 $ 27,635
Tax credit carry-forwards . . . . . . . . . . . . 1,161 1,999
Inventory, accounts receivable and other reserves 1,556 1,455
Non-deductible accrued expenses and reserves. . . 855 422
Depreciation and amortization . . . . . . . . . . 2,182 1,411
Deferred income . . . . . . . . . . . . . . . . . (3,610) 0
Valuation allowance . . . . . . . . . . . . . . . (30,826) (32,923)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . . $ 0 $ 0
========= =========
The deferred tax assets valuation allowance at December 31, 2000 and 1999
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these tax
assets such that a full valuation allowance is necessary. These factors include
the lack of a significant history of consistent profits and the lack of
carry-back capacity to realize these assets. Based on these factors, management
is unable to assert that it is more likely than not that the Company will
generate sufficient taxable income to realize the Company's net deferred tax
assets.
At December 31, 2000, the Company had the following income tax
carry-forwards available (in thousands):
TAX REPORTING EXPIRATION DATES
-------------- ----------------
U.S. regular tax operating losses $ 80,509 2005-2020
U.S. business tax credits . . . . $ 1,610 2002-2020
State net operating losses. . . . $ 6,730 2001-2005
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The annual limitation may
result in the expiration of net operating loss carry-forwards and credits before
utilization.
NOTE 12. SEGMENT INFORMATION
Effective for 1998, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information."
Management of the Company has identified its operating segments based on
differences in products and services. The Company's operations have consisted of
thin film and MeV ion implant product lines. The Company sold its MeV ion
implant product line to Varian in July 1998. The Company has aggregated
F-16
its two product lines for financial reporting purposes because its product lines
have similar long-term economic characteristics and because the products and
services, production processes, types of customers, and the methods used to
distribute the products and provide the services of the product lines are
similar. All reportable segment information is equal to the financial
information reported in the Company's consolidated financial statements and
notes thereto.
Currently, the Company operates in one industry segment. The Company is
engaged in the design, manufacture, marketing and servicing of advanced thin
film deposition systems used in the semiconductor manufacturing industry.
Net sales from thin film products and services accounted for 100%, 100%,
and 35% of the Company's net sales for 2000, 1999 and 1998, respectively. Net
sales from MeV ion implant products and services accounted for 65% of the
Company's net sales in 1998. . During 1998, the Company recorded revenues of
$21.1 million and an operating loss of approximately $8.8 million,(see note 13),
for the ion implant product line.
Export Sales
For reporting purposes, export sales are determined by the location of the
parent company of the Company's customer, regardless of where the delivery was
made by the Company.
Net sales by geographical region for the years ended December 31, 2000,
1999, and 1998 were as follows (in thousands):
2000 1999 1998
------- ------- -------
United States $ 3,095 $ 3,830 $14,318
South Korea . 37,123 23,819 9,602
Japan . . . . 149 216 4,566
Rest of world 271 495 3,945
------- ------- -------
$40,638 $28,360 $32,431
======= ======= =======
The Company did not hold any material long-lived assets in countries other
than the United States at December 31, 2000 or 1999.
Major Customers
In 2000, Samsung Electronics Company, Ltd. and Micron Technology, Inc
accounted for 91% and 5% of net sales, respectively. In 1999, Samsung
Electronics Company, Ltd. and Micron Technology, Inc accounted for 84% and 11%
of net sales, respectively. In 1998, three customers, Samsung Electronics
Company, Ltd., Advanced Micro Devices and Micron Technology, Inc. accounted for
28%, 15% and 12%, respectively, of net sales.
NOTE 13. SALE OF ION IMPLANT PRODUCT LINE
In July 1998, the Company sold selected assets and transferred selected
liabilities related to the MeV ion implant equipment product line to Varian
Associates, Inc. for approximately $24.1 million. The net assets and liabilities
transferred to Varian included inventory of $20.9 million, capital equipment and
other assets of $9.7 million, and warranty, installation and other liabilities
of $ 4.5 million. In addition, the Company incurred transaction fees of $0.6
million resulting in a loss on sale of $2.6 million. As a result of the Varian
transaction, the Company no longer engages in the ion implant business and has
refocused its efforts on thin film deposition. The Company used a portion of the
net proceeds for repayment for certain outstanding indebtedness and the
redemption of 70,000 shares of Series A Convertible Preferred Stock, with the
remaining proceeds to be used for working capital and general corporate
purposes, including investment in research and development of thin film
products. In connection with the Varian transaction and the refocusing of the
Company's business on thin film products, the Company significantly reduced the
workforce at its Sunnyvale, California location.
F-17
NOTE 14. RESTRUCTURING AND OTHER
In 1998, the Company recorded restructuring and other charges of
$7,308,000. The $7,308,000 is comprised of $2,575,000 loss on sale of assets to
Varian, $472,000 legal costs for the dispute with Varian and $4,261,000 of
restructuring charges.
The restructuring strategy was to downsize the thin film operation so that
profitability could be achieved at lower revenue levels, and included
maintaining our market share in our core tungsten silicide product business to
sustain us during the 1998-1999 recession. Additionally, we would focus our
resources towards designing and manufacturing thin film products that would meet
the future requirements of the semiconductor industry and provide growth
opportunities going forward. The restructuring included a worldwide workforce
reduction to bring the headcount in line with projected revenue levels, closing
foreign sales and service offices where short term business opportunities were
unlikely, and writing off inventory related to discontinued product lines.
Actual costs recorded against this restructuring accrual were as follows (in
thousands):
CLOSING
OFFICES AND
RELATED
PERSONNEL LEASEHOLD LOSSES
CHARGES IMPROVEMENTS (CASH AND
(CASH) (NON-CASH) NON-CASH) TOTAL
------------- -------------- ----------- --------
Restructuring accrual. . . . $ 1,746 $ 1,113 $ 1,402 $ 4,261
Amounts incurred in 1998 . . (1,446) (1,113) (1,182) (3,741)
------------- -------------- ----------- --------
Balance at December 31, 1998 300 0 220 520
Amounts incurred in 1999 . . (136) 0 (77) (213)
Release of reserves. . . . . (164) 0 (143) (307)
------------- -------------- ----------- --------
Balance at December 31, 1999 $ 0 $ 0 $ 0 $ 0
============= ============== =========== ========
Personnel charges relate to severance costs paid and accrued for 102
employees to be terminated as a result of the restructuring decision. This
affected 26 employees in the thin film product line and corporate departments,
45 employees in the Ion Implant product line, 6 employees in Japan, 15 employees
in Korea and 10 employees in Europe. The agreement with Varian provided for
funds to be held in escrow for severance liabilities to employees that were
transferred to Varian. In 1998, the Company reserved $300,000 for the estimated
costs of such payments and during 1999, $136,000 was paid and the remaining
reserve was released.
Leasehold improvements relate to costs incurred to write down the
manufacturing cleanroom, offices, furniture and partitions that are no longer
used in our leased premises in Sunnyvale, California pursuant to the Company's
restructuring plans.
Costs incurred in association with closing offices are primarily related to
the costs of honoring prior lease and other commitments of $179,000, value
added tax benefits not recoverable from tax authorities upon the closure of
certain European branches of $800,000 as well as other incidental costs such as
legal fees and abandonment of assets amounting to $280,000 directly related to
the closure of branches.
F-18
In 1999, the Company recorded an additional charge of $543,000 by writing
off the balance previously recorded as a receivable from Varian for the final
settlement of a dispute with Varian. This charge related to funds that were held
in escrow for possible claims made under the Company's change of control
agreements with key ion implant employees who transferred to Varian as part of
the Varian transaction. No funds were distributed from this escrow account, and
the final change of control agreement expired in July 1999.
There was no restructuring reserve remaining as of December 31, 1999.
F-19
ITEM 14 (A) 2. FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Of Genus, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 12, 2001, except as to the second paragraph of Note 6, which is
as of March 28, 2001, appearing in this Annual Report on Form 10-K/A2 also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K/A2. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 12, 2001
F-20
Genus, Inc.
Schedule II "Valuation and Qualifying Accounts"
- --------------------------------------------------------------------------------
Description Balance at Additions Deductions Balanace at
Beginning of Charged to Charged to end of period
Period costs/exp Other
- --------------------------------------------------------------------------------
1998
Allowance for doubtful
accounts
$1,097 $1,670 $2,267 $ 500
Inventory reserve $5,406 $5,150 $6,787 $3,769
1999
Allowance for doubtful
accounts $ 500 $ 308 $ 257 $ 551
Inventory reserve $3,769 $ 533 $1,857 $2,445
2000
Allowance for doubtful
accounts $ 551 $ 188 $ 363
Inventory reserve $2,445 $ 400 $ 15 $2,830
- --------------------------------------------------------------------------------
F-21
GENUS, INC.
ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED DECEMBER 31, 2000
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
2.1 Asset Purchase Agreement, dated April 15, 1998, by and between
Varian Associates, Inc. and Registrant and exhibits thereto (15)
3.1 Amended and Restated Articles of Incorporation of Registrant as
filed June 6, 1997 (11)
3.2 By-laws of Registrant, as amended (13)
4.1 Common Shares Rights Agreement, dated as of April 27, 1990,
between Registrant and Bank of America, N.T. and .A., as Rights
Agent (4)
4.2 Convertible Preferred Stock Purchase Agreement, dated February 2,
1998, among the Registrant and the Investors (14)
4.3 Registration Rights Agreement, dated February 2, 1998, among the
Registrant and the Investors (14)
4.4 Certificate of Determination of Rights, Preferences and
Privileges of Series A Convertible Preferred Stock (14)
4.5 Certificate of Determination of Rights, Preferences and
Privileges of Series B Convertible Preferred Stock (17)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the
Registrant and the Investors (17)
10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4
Mulliken Way, Newburyport, Massachusetts, and amendment and
extension of lease, dated March 17, 1987 (1)
10.2 Assignment of Lease, dated April 1986, for Registrant's
facilities at Unit 11A, Melbourn Science Park, Melbourn, Hertz,
England (1)
10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10)
10.5 Registrant's 2000 Stock Plan (19)
10.7 Distributor/Representative Agreement, dated August 1, 1984,
between Registrant and Aju Exim (formerly Spirox Holding Co./You
One Co. Ltd.) (1)
10.8 Exclusive Sales and Service Representative Agreement, dated
October 1, 1989, between Registrant and AVBA Engineering Ltd. (3)
10.9 Exclusive Sales and Service Representative Agreement, dated as of
April 1, 1990, between Registrant and Indosale PVT Ltd. (3)
10.10 License Agreement, dated November 23, 1987, between Registrant
and Eaton Corporation (1)
10.11 Exclusive Sales and Service Representative Agreement, dated May
1, 1989, between Registrant and Spirox Taiwan, Ltd. (2)
10.12 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)
10.13 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.14 License and Distribution Agreement, dated September 8, 1992,
between the Registrant and Sumitomo Mutual Industries, Ltd. (8)
10.15 Lease Agreement, dated October 1995, for Registrant's facilities
at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts
(9)
10.16 International Distributor Agreement, dated July 18, 1997,
between Registrant and Macrotron Systems GmbH (12)
10.17 Credit Agreement, dated August 18, 1997, between Registrant and
Sumitomo Bank of California (12)
10.18 Settlement Agreement and Mutual Release, dated April 20, 1998,
between Registrant and James T. Healy (16)
10.19 Form of Change of Control Severance Agreement (16)
10.20 Settlement Agreement and Mutual Release, dated January 1998,
between the Registrant and John Aldeborgh (18)
F-22
10.21 Settlement Agreement and Mutual Release, dated May 1998, between
the Registrant and Mary Bobel (18)
10.22 Factoring Agreement, dated March 28, 2001, between the
Registrant and Cupertino National Bank (20)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-23861) filed August
18, 1988, and amended on September 21, 1988, October 5, 1988,
November 3, 1988, November 10, 1988, and December 15, 1988, which
Registration Statement became effective November 10, 1988.
(2) Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-1 (No. 33-28755)
filed on May 17, 1989, and amended May 24, 1989, which
Registration Statement became effective May 24, 1989.
(3) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989.
(4) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990.
(5) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990.
(6) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1992.
(7) Incorporated by reference to the exhibit filed with the
Registrant's Report on Form 8-K dated June 12, 1992.
(8) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on
Form 10-K for the year ended December 21, 1992.
(9) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
(10) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
(11) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(12) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(13) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
(14) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K dated February 12, 1998.
(15) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K dated April 15, 1998.
(16) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K/A2 for the year ended
December 31, 1997.
(17) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K dated July 29, 1998.
(18) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q/A for the quarter
ended June 30, 1998.
(19) Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
(20) Incorporated by reference to the exhibit filed on July 20, 2001
with the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 2000
F-23
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 6th day of August 2001.
GENUS, INC.
By: /s/Kenneth Schwanda
--------------------
Kenneth Schwanda
Chief Financial Officer
(Principal Financial and
Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/William W.R. Elder Chairman of the Board, President August 6,
----------------------- and Chief Executive Officer 2001
William W.R. Elder
/s/Kenneth Schwanda Vice President, Finance August 6, 2001
--------------------
Kenneth Schwanda Chief Financial Officer
/s/G. Frederick Forsyth Director August 6, 2001
-------------------------
G. Frederick Forsyth
/s/Todd S. Myhre Director August 6, 2001
------------------
Todd S. Myhre
/s/Mario M. Rosati Director August 6, 2001
--------------------
Mario M. Rosati
/s/George D. Wells Director August 6, 2001
--------------------
George D. Wells
/s/Robert J. Richardson Director August 6, 2001
-------------------------
Robert J. Richardson