================================================================================
================================================================================
As filed with the Securities and Exchange Commission on March 27, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 2002
-----------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-17139
-------
GENUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2790804
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1139 KARLSTAD DRIVE, SUNNYVALE, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 747-7120
---------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par
value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [ ] No [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average bid and asked price as of the last business
day of the registrant's most recently completed second fiscal quarter (June 28,
2002)as reported by the Nasdaq National Market, was approximately $55 million.
Shares of common stock held by each officer and director and by each person who
owns 5% or more of the outstanding voting stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 28, 2003, Registrant had 28,943,409 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-K Report: Proxy Statement for Registrant's 2003 Annual Meeting of
Shareholders - Items 10, 11, 12 and 13.
================================================================================
TABLE OF CONTENTS
PART I. PAGE
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceeding 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Consolidated Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 39
PART III.
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
Item 14. Controls and Procedures 41
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43
SIGNATURES 69
EXHIBITS 73
CERTIFICATIONS 71
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Since 1982, we have been supplying advanced manufacturing systems to the
semiconductor industry worldwide. Major semiconductor manufacturers use our
leading-edge thin film deposition equipment and process technology to produce
integrated circuits, commonly called chips, that are incorporated into a variety
of products, including personal computers, communications equipment and consumer
electronics. We pioneered the development of chemical vapor deposition (CVD)
tungsten silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, today we are leading the commercialization of
atomic layer deposition, also known as ALD technology. This technology is
designed to enable a wide spectrum of thin film applications such as aluminum
oxide, hafnium oxide and other advanced insulating and conducting materials for
advanced integrated circuit manufacturing.
We have also implemented a strategy of targeting non-semiconductor markets,
as we are confident that our developed films can serve multiple applications in
both semiconductors and non-semiconductor segments. In addition to expanding our
total available market, this strategy of diversifying our customer base is
intended to provide some protection against cyclical downturns in the
semiconductor industry. We believe our emerging ALD technology will prove
effective in expanding and diversifying our customer base.
We continue to develop enabling thin film technology that addresses the
scaling challenges facing the semiconductor industry relating to gate and
capacitor materials. The International Technology Roadmap for Semiconductors
(ITRS) has labeled these challenges as "red zones" because there are no known
solutions that allow for further reduction in feature sizes and improved
performance. Our innovative thin film technology solutions are designed to
enable chip manufacturers to simplify and advance their integrated circuit
production processes and lower their total cost of manufacturing per chip, known
as cost of ownership.
As it is in the semiconductor industry, non-semiconductor business segments
have scaling initiatives as well. For example, the making of thin film magnetic
heads in the data storage industry has scaling requirements analogous to the
scaling trends in semiconductors. A key part of our business strategy includes
providing enabling thin film solutions for non-semiconductor applications.
We provide a production-proven platform that is used for both the
development and volume production of new thin films in integrated circuit
manufacturing. This platform is based on a common architecture and a high
percentage of common parts that are designed to provide manufacturers with high
reliability and low cost of ownership across a wide range of thin film
deposition applications. The modular design of our system permits manufacturers
to add capacity and to service their manufacturing systems easily. In addition
to the modular platform architecture, our systems operate on standardized
software that is designed to support a wide range of thin film deposition
processes.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Our current customers include semiconductor
manufacturers such as Infineon Technologies, NEC and Samsung Electronics
Company, Ltd. and non-semiconductor customers such as IBM Corporation, Read-Rite
Corporation, and Seagate Technologies.
INDUSTRY BACKGROUND
The manufacture of an integrated circuit requires a number of complex steps
and processes. Most integrated circuits are built on a base of silicon, called a
wafer, and consist of two main structures. The lower structure is made up of
components, typically transistors or capacitors, and the upper structure
consists of the circuitry that connects the components. Building an integrated
circuit requires the deposition of a series of film layers, which may be
3
conductors, dielectrics (insulators), or semiconductors. The overall growth of
the semiconductor industry and the increasing complexity of integrated circuits
have led to increasing demand for advanced semiconductor equipment. Although the
semiconductor industry has grown over 30 years with an average annual growth
rate (CAGR) of 14.8%, it is prone to cyclic variations, including significant
downturns. Typically there are periods of high demand followed by periods of low
demand. Each cycle is one to three years of high growth and one to three years
of low growth. Currently we are witnessing the biggest recession in the history
of the semiconductor and semiconductor equipment industries. VLSI Research, Inc.
an independent research company specializing in the high technology industry,
estimates that industry shipments in 2002 were down 69% compared to 2001.
Additionally, VLSI expects 2003 shipments to be flat to moderate growth of 7%
growth compared to 2002.
INDUSTRY DRIVERS: LOWERING THE COST PER FUNCTION AND INCREASING PERFORMANCE
The growth of computer markets and the emergence and growth of new markets
such as wireless communications and digital consumer electronics have
contributed to growth in the semiconductor industry. This increase also has been
fueled by the semiconductor industry's ability to supply increasingly complex,
higher performance integrated circuits, while continuing to reduce cost. The
increasing complexity of integrated circuits and the accompanying reductions in
feature size require more advanced and expensive wafer fabrication equipment,
which can increase the average cost of advanced wafer fabrication facilities.
Technological advances in semiconductor manufacturing equipment have
historically enabled integrated circuit manufacturers to lower cost per function
and improve performance dramatically by:
- reducing feature size of integrated circuits and the introduction of
new materials with scaled dimensions;
- increasing the wafer size;
- increasing manufacturing yields; and
- improving the utilization of wafer fabrication equipment.
REDUCING FEATURE SIZES AND ADDING NEW ENABLING THIN FILMS
Smaller feature sizes allow more circuits to fit on one wafer. These
reductions have contributed significantly to reducing the manufacturing cost per
chip. The semiconductor industry is driven by performance (mainly the increased
speed for logic and memory signals) and increased chip density (mainly the
increased density of memory and logic capacity). In addition to the continued
reduction in feature sizes, there is a paradigm shift for the use of new
materials to improve performance of integrated circuits. New materials are
required for gate, capacitor and interconnect application segments within the
semiconductor manufacturing process. The adoption of new types of thin film
conducting and insulating materials will accelerate the trend toward higher
levels of semiconductor performance and integration while maintaining the
historic trend of reduction of cost per function.
LARGER WAFER SIZES
By increasing the wafer size, integrated circuit manufacturers can produce
more circuits per wafer, thus reducing the overall manufacturing costs per chip.
Leading-edge wafer fabrication lines are currently using 300-millimeter (mm)
wafers, in addition to the 200mm wafers that they have been using for the last
ten to fifteen years. We believe that most major manufacturers will add 300mm
production capabilities within the next one to four years.
4
HIGHER MANUFACTURING YIELDS
In the last fifteen years, manufacturing yields, or the percentage of good
integrated circuits per wafer, have increased substantially, while the time to
reach maximum yield levels during a production lifecycle has decreased
significantly. As the complexity of chips increases, manufacturers must
continually reduce defect density to obtain higher yields.
IMPROVED EQUIPMENT UTILIZATION AND INTRODUCING NEW EQUIPMENT ARCHITECTURES
The utilization of semiconductor manufacturing lines has improved in the
last ten years. Manufacturing lines now operate continuously. In addition, new
architectures of production equipment are being explored that allow for higher
throughputs, better reliability, high quality, and low overall cost-of-ownership
as measured by the total cost to process each wafer through the equipment.
While these production techniques are important for reducing the cost per
function of chips, we believe that the most beneficial production solution is
likely to combine feature size reduction and the use of new thin film materials.
"RED ZONE" CHALLENGES FACING THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is driven by the need for higher performance and
greater chip density as measured by an increasing number of functions on the
chip. The semiconductor industry has historically been able to double the number
of transistors on a given space of silicon every 18 to 24 months by reducing
feature sizes. However, as the industry approaches feature size dimensions of
0.13 micron and below, the industry will face significant challenges and
roadblocks pertaining to improving device performance and feature size
reduction. The International Technology Roadmap has labeled these challenges
"red zones" for semiconductors because there are no known solutions to allow for
further reduction in feature sizes and improved performance. It is estimated
that semiconductor manufacturers need approximately two to four years to
research, develop and commercially produce a new type of integrated circuit.
As part of its strategy to solve the challenges posed by the red zones, the
semiconductor industry is moving towards the use of ultra-thin dielectrics with
high insulating capabilities for gate dielectrics and capacitors as well as
ultra-thin metal barriers for copper-based interconnect processes. Emerging thin
films with high dielectric capabilities for gate and capacitor applications
include metal oxides such as aluminum oxide.
THE GENUS SOLUTION
We are an innovative supplier of thin film deposition equipment to
semiconductor and non-semiconductor manufacturers and are focused on developing
enabling thin film technology to solve the challenges posed by the red zones.
Our patented multi-purpose process chamber serves as the foundation for all of
our current products. Our products are designed to deliver high throughput, low
cost of ownership and quick time to market, enhancing the ability of
manufacturers to achieve productivity gains. We support our innovative thin film
deposition systems with a focused level of customer service.
5
INNOVATIVE THIN FILM SOLUTIONS
Our systems and processes are designed to provide innovative thin film
solutions that address technical and manufacturing problems experienced by the
semiconductor industry. We provide our customers with advanced systems and
processes for depositing thin films such as CVD tungsten silicide, tungsten
nitride, and blanket tungsten, and ALD films such as aluminum oxide, zirconium
oxide and hafnium oxide. These innovative thin films solve certain key device
and interconnect problems faced by semiconductor manufacturers as they scale
their device geometries below 0.13 micron.
VERSATILE PRODUCTION PLATFORM
Our LYNX series and StrataGem family of systems are based on a common
outsourced, reliable wafer-handling robotic platform. The systems are designed
to be flexible and can be configured for multiple deposition processes, such as
CVD, plasma enhanced CVD and ALD. Our systems offer the following advantages:
- a production-proven platform that allows for easier and faster
migration from research and development to production;
- a platform based upon a large number of standardized parts used across
our systems to enhance reliability; 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 and StrataGem family of equipment offer low cost of
ownership by featuring multiple deposition processes capabilities,
production-proven process chamber design, advanced software architecture and
reliable wafer handling. Based on feedback from our installed customer base, we
estimate that our production systems consistently achieve greater than 90%
availability, and that the mean time between failures of our system is greater
than 300 hours. In addition, our customers have confirmed that we offer among
the lowest costs of operation. We are committed to improving these results;
achieving these same levels of performance or better with our new thin film
products.
CUSTOMER SUPPORT
We believe we deliver superior customer support and service to enhance our
long-term customer relationships. We maintain an international customer support
infrastructure with fully staffed customer support capabilities in United
States, Korea, Japan and Europe. We provide training 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.
MARKETS AND APPLICATIONS
In 2002, we continued to expand our CVD product line with new films and
applications that allow us to serve broader markets. In 1999, Genus had CVD
tungsten silicide and tungsten nitride for gate and barrier applications and we
6
were just introducing ALD technology. As we turn into 2003, we have developed
films using tungsten silicide, tungsten nitride and blanket tungsten by
conventional CVD, and aluminum oxide, tantalum oxide, titanium oxide, hafnium
oxide and zirconium oxide. In addition, Genus has the demonstrated capability
to integrate these ALD films as alloys and nanolaminates (layered structures)
for the engineering of specialized capabilities on its platforms. These films
serve the Company for applications in semiconductors for gate and capacitor, as
well as non-semiconductor applications (e.g., in particular, aluminum oxide for
thin film magnetic heads of hard disk drives).
By focusing on a broader set of film markets, we believe we can reduce our
dependence on the volatile dynamic-random-access memory (DRAM) market, as well
as benefit from participation in the logic segment and non-semiconductor market
opportunities. We are now participating in semiconductor memory with gate and
capacitor films, in semiconductor logic with advanced gate films, and in
non-semiconductor gap dielectrics for thin film magnetic heads. We moved from
solely memory applications to this level of diversification in the last three
years.
We focus on the following thin film market segments:
CVD SILICIDE AND METAL, AND ALD DIELECTRICS AND METAL BARRIERS FOR GATE STACK
FILMS
CVD tungsten silicide is used to reduce the electrical resistance of the
gate material in a transistor device structure. Our tungsten silicide gate thin
films are used in DRAM integrated circuit production. In the future, we expect
the tungsten gate material to migrate from tungsten silicide to the low
resistance tungsten gate films, such as Rapid integrated gate (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, including cylinder ("stacked"), trench, embedded, rf and
decoupling capacitor applications. One semiconductor customer has selected ALD
technology for volume production. The state of the art has been advanced due to
high conformality and high quality Genus ALD films.
Non-semiconductor films
Genus has developed a market for its ALD films in the thin film magnetic
head (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. Two data storage customers have selected ALD technology for volume
production. The market is scaling to thinner films, ideally suited to the ALD
approach. Other non-semiconductor markets are targeted, these include:
Magnetic Random Access Memory (MRAM), Optical interconnects / filters, Organic
Light Emiting Diodes (OLEDs), Microelectromechanical Systems (MEMS), and photo
masks, in fact anywhere that film uniformity and conformality are enabling.
However, it is too early to predict our ability to penetrate in many of these
markets.
PRODUCTS AND TECHNOLOGY
We have developed our product strategy around the LYNX and StrataGem
platforms concept. The LYNX system refers specifically to the vacuum robotic
7
wafer handler and its wafer controlling software. The LYNX process modules are
generically appropriate for CVD and plasma enhanced CVD, and is used for
depositing the following films:
- tungsten silicide-monosilane
- tungsten silicide-dichlorosilane
- tungsten nitride
- tungsten
In the summer of 2002 Genus introduced a family of ALD products called
StrataGem. These are serving the semiconductor and storage technology
markets.
StrataGem 200mm and 300mm and StrataGem TFH are used for depositing the
following films:
- aluminum oxide
- advanced metal oxides (e.g., tantalum oxide, titanium oxide, zirconium
oxide, hafnium oxide)
- nanolaminates and alloys
- metal films (e.g., titanium nitride and tungsten nitride)
LYNX Series
LYNX2(R). Manufacturers of advanced DRAM devices of 0.35 to 0.13 micron
currently use the LYNX2(R) system in production. LYNX2(R) systems support over
150 process modules in high volume production. Production availability for the
LYNX2(R)system runs from 90-95%. LYNX2(R) platforms are also used for customer
development and pilot manufacturing for more advanced semiconductor applications
below 0.18 micron. The LYNX2(R)features a wafer-handling platform that is
compatible with the Modular Equipment Standards Committee (MESC). This platform
uses a centrally located, dual-end effectors robot for high throughput
operation. The system is controlled by a graphical user interface that provides
the operator with real-time information such as recipe, set points, and hardware
status and service features. The modular design of the LYNX2(R)allows the
addition of up to four process modules, which can be run serially or in
parallel. The LYNX2(R) 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.
LYNX3(TM). We introduced the LYNX3(TM) 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(TM) is designed to run all films currently
supported by the LYNX2(R), as well as all films currently in development. The
LYNX3 system supports up to four process modules, which can be run serially or
in parallel. Also, we have developed an advanced version of the LYNX3(TM), which
is designed to be a "bridge tool", capable of running either 200 or 300mm
wafers.
StrataGem Family (StrataGem 200mm, StrataGem 300mm and StrataGem TFH)
The ranges of thin films that can be deposited using the StrataGem family
products include:
8
- ALD Dielectrics. In July 1999, we announced the availability of ALD
aluminum oxide. ALD has many possible applications in the
semiconductor market including as a high dielectric constant oxide for
either capacitors or for gate dielectrics, as an etch stop for
advanced structures, or for hard mask applications. We made other
advanced ALD dielectrics available during 2000 and 2001. We believe
that our ALD aluminum oxide-based technology will find near-term
opportunities in the DRAM capacitor application. Other ALD dielectrics
will find longer-term applications in both capacitor and gate
dielectric structures.
- ALD Metal Films. Metal films have been developed and offer application
for metal gate (work function control as well as barrier), capacitor
electrodes, contact and interconnect barriers. The applications are
current in the case of capacitor electrodes and contact barrier. For
interconnects they will likely come to be needed below the 90nm
feature size, where barrier film thickness decrease below 100
angstroms. Somewhat beyond 2005, there will be an interest in these
barriers for metal gate electrodes.
- Metal Oxide Alloys and Nanolaminates. With the development of Genus
ALD, the Company has been able to demonstrate a film flexibility
otherwise not known. For example, Genus ALD system can provide the
flexibility to deposit up to 3 compound films in alloy and / or
nanolaminate form. The capability has become enabling for the
"engineering" of composite films for optimal performance in next
generation semiconductor devices. Composites of both dielectrics and
metals can be achieved.
Genus 8700 Series and 6000 Series. While we no longer actively sell these
thin film products, we continue to sell spare parts and provide service for the
installed base worldwide.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Currently, the Company operates in one industry segment. The Company is
engaged in the design, manufacturing, marketing and servicing of advanced thin
film deposition systems used in the semiconductor manufacturing industry and the
Thin Film Head segment of the Data Storage Industry. Please refer to Item 6,
Selected Financial Data, and Item 8, Consolidated Financial Statements and
Supplementary Data of this 10-K report for geographic financial information.
CUSTOMER SUPPORT
We believe that our customer support organization is critical to
establishing and maintaining the long-term customer relationships that often are
the basis upon which semiconductor manufacturers select their equipment vendor.
Our customer support organization is headquartered in Sunnyvale, California with
additional employees located in Japan, South Korea and Europe. Our support
personnel are available on a 24-hour a day, seven days a week basis with a
maximum one-hour response time. All support personnel have technical
backgrounds, most with process, mechanical and electronics training, and are
supported by our engineering and applications personnel. Support personnel
install systems, perform warranty and out-of-warranty service and provide sales
support.
We offer a 12-month labor warranty and a 24-month parts warranty. During
the third quarter of 2002, we made a strategic decision to explore opportunities
to increase revenues by selling the services of our customer support engineers
on an hourly basis. We also offer training to our customers at our headquarters
and on-site support as an enhancement to our standard warranty program.
9
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 United States, 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 2002 included Samsung, IBM Corporation and
Seagate Technologies. As of December 31, 2002 we had nine customers serving four
market segments - Memory, Logic, Data Storage and MEMS.
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 $24.7 million as of December 31, 2002
compared to a backlog of $3.2 million as of December 31, 2001. The year-to-year
fluctuation is due primarily to the cyclical nature of the semiconductor
industry. Because of possible changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily representative of
actual sales for any succeeding period. In particular, during periods of
industry downturns we have experienced significant delays relating to orders
that were previously booked and included in backlog.
RESEARCH AND DEVELOPMENT
We focus our research and development efforts on developing innovative thin
film products. During recent periods, we have devoted a significant amount of
resources to the StrataGem200 and StrataGem300 systems and CVD systems. We
expect to focus our future efforts on our StrataGem system for 200 and 300mm
applications and StrataGem TFH for advanced film technologies. We maintain a
Class 1 applications laboratory and a separate thin films development area in
California. By basing our products on the LYNX and StrataGem systems, we believe
that we can focus our development activities on the process chamber and develop
new products quickly and at relatively low cost.
Our research and development expenses were $8.0 million for 2002, $12.1
million for 2001, and $8.7 million for 2000, representing 20%, 25%, and 21% of
revenues, respectively.
The worldwide semiconductor industry is characterized by rapidly changing
technology, evolving industry standards and continuous improvements in products
and services. Because of continual changes in these markets, we believe that our
future success will depend upon our ability to continue to improve our existing
systems and process technologies, and to develop systems and new technologies
that compete effectively. We must adapt our systems and processes to
technological changes and to support emerging industry standards for target
markets. We cannot be sure that we will complete our existing and future
development efforts within our anticipated schedule or that our new or enhanced
products will have the features to make them successful.
We may experience difficulties that could delay or prevent the successful
development, introduction or marketing of new or improved systems or process
technologies. These new and improved systems and process technologies may not
meet the requirements of the marketplace and achieve market acceptance.
Furthermore, despite testing by us, difficulties could be encountered with our
products after shipment, resulting in loss of revenue or delay in market
acceptance and sales, diversion of development resources, injury to our
10
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.
Our direct competitors in the CVD tungsten silicide market include Applied
Materials, Inc. and Tokyo Electron, Ltd. Our direct competitors in the ALD
market include ASM International, ASML and Veeco Instruments. Competition from
these competitors increased in 2001 and 2002, and we expect that this
competition will continue to intensify. We believe that we compete favorably on
each of the competitive elements in this market.
We may not be able to maintain our competitive position against current and
potential competition. New products, pricing pressures, rapid changes in
technology and other competitive actions from both new and existing competitors
could materially affect our market position. Some of our competitors have
substantially greater installed customer bases and greater financial, marketing,
production, technical and other resources than we do and may be able to respond
more quickly to new or changing opportunities, technologies and customer
requirements. Our competitors may introduce or acquire competitive products that
offer enhanced technologies and improvements. In addition, some of our
competitors or potential competitors have greater name recognition and more
extensive customer bases that could be leveraged to gain market share to our
detriment. We believe that the semiconductor equipment industry will continue to
be subject to increased consolidation, which will increase the number of larger,
more powerful companies and increase competition.
11
MANUFACTURING AND SUPPLIERS
Our manufacturing operations are based in our Sunnyvale, California
facility and consist of procurement, subassembly, final assembly, test and
reliability engineering. Our manufacturing facility maintains and operates a
Class-1 clean room to demonstrate integrated applications with its customers.
The LYNX and StrataGem family systems are based on an outsourced wafer-handling
platform, enabling us to use a large number of common subassemblies and
components. Many of the major assemblies are procured completely from outside
sources. We focus our internal manufacturing efforts on those precision
mechanical and electro-mechanical assemblies that differentiate our systems from
those of our competitors.
Most of the components for our thin film systems are produced in
subassemblies by independent domestic suppliers according to our design and
procurement specifications. We anticipate that the use of such subassemblies
will continue to increase to achieve additional manufacturing efficiencies. Many
of these components are obtained from a limited group of suppliers. In addition,
a limited number of these components are available from only one supplier. We
generally acquire these components on a purchase order basis and not under
long-term supply contracts. Our reliance on outside vendors generally, and a
limited group of suppliers in particular, involves several risks, including a
potential inability to obtain an adequate supply of required components and
reduced control over pricing and timely delivery of components.
Because the manufacture of certain of these components and subassemblies is
an extremely complex process and can require long lead times, we could
experience delays or shortages caused by suppliers. We are not currently aware
of any specific problems regarding the availability of components that might
significantly delay the manufacturing of our systems in the future. However, the
inability to develop alternate sources or to obtain sufficient source components
as required in the future, could result in delays of product shipments that
would have a material adverse effect on our business, results of operations and
financial condition.
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during our sales demonstrations and research and development.
Failure to comply with present or future regulations could result in substantial
liability to us, suspension or cessation of our operations, restrictions on our
ability to expand at our present locations or requirements for the acquisition
of significant equipment or other significant expense. To date, we have
adequately complied with environmental rules and regulations. Such compliance
has not materially affected our operations.
In December 2002 we received ISO 9001-2000 and ISO 14001 Certification by
NSAI, a qualified examiner for ISO Certification.
INTELLECTUAL PROPERTY
We believe that because of the rapid technological change in the
semiconductor industry, our future prospects will depend primarily upon the
expertise and creative skills of our personnel in process technology, new
product development, marketing, application engineering and product engineering,
rather than on patent protection. Nevertheless, we have a policy to actively
pursue domestic and foreign patent protection to cover technology developed by
us. We hold 33 United States patents with 17 patent applications pending in the
United States as well as several foreign patents and patent applications
covering various aspects of our products and processes. Where appropriate, we
intend to file additional patent applications to strengthen our intellectual
property rights.
12
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we cannot be sure that we
will be able to protect our technology adequately, and our competitors could
independently develop similar technology, duplicate our products or design
around our patents. To the extent we wish to assert our patent rights, we cannot
be sure that any claims of our patents will be sufficiently broad to protect our
technology or that our pending patent applications will be approved. In
addition, litigation is uncertain, expensive and time consuming and there can be
no assurance that we will prevail in any litigation. Regardless of the results
of any such litigation, the related costs could have a material adverse effect
on our business and financial condition. Moreover, there can be no assurance
that any patents issued to us will not be challenged, invalidated or
circumvented, that any rights granted under these patents will provide adequate
protection to us, or that we will have sufficient resources to protect and
enforce our rights. In addition, the laws of some foreign countries may not
protect our proprietary rights to as great an extent as do the laws of the
United States.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. We are currently in
litigation with ASM America, Inc ("ASMA") as discussed below. It is our policy
to respect all parties' legitimate intellectual property rights, and we will
defend against such claims or negotiate licenses on commercially reasonable
terms where appropriate. However, no assurance can be given that, if we are
required to obtain licenses to third party intellectual property, we will be
able to negotiate necessary licenses on commercially reasonable terms, or at
all, or that any litigation resulting from third party claims would not have a
material adverse effect on our business and financial results.
On June 6, 2001, ASMA filed a patent infringement action against Genus.
ASMA's Complaint alleges that Genus is directly and indirectly infringing U.S.
Patent No. 5,916,365 ("the '365 Patent"), entitled "Sequential Chemical Vapor
Deposition," and U.S. Patent No. 6,015,590 ("the '590 Patent") entitled "Method
For Growing Thin Films," which ASMA claims to own or exclusively license. The
Complaint seeks monetary and injunctive relief. Genus' served its Answer to
ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed
against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S.
Patent No. 5,294,568 ("the '568 Patent") entitled "Method of Selective Etching
Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are
invalid, unenforceable, and not infringed by Genus; and (3) antitrust
violations. An initial Case Management Conference was held on October 16, 2001.
On January 9, 2002, the Court issued an order granting ASMA leave to amend its
complaint to add an individual as a party and to add a claim that Genus is
directly and indirectly infringing U.S. Patent No. 4,798,165 ("the '165 Patent")
entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas
Flow"), which ASMA claims to own. The court also severed and stayed discovery
and trial of Genus' antitrust claims until after trial of the patent claims. On
February 4, 2002, Genus served its Amended Answer to ASMA's amended complaint
and counterclaimed against ASMA for declaratory judgment that the '165 Patent is
invalid, unenforceable, and not infringed by Genus. On August 15, 2002, the
Court issued a claim construction order regarding the '590, '365, and '598
Patents. A claim construction hearing regarding the '165 Patent was held on
September 26, 2002, and the Court issued a claim construction ruling regarding
this patent on November 13, 2002. On September 23, 2002 Genus filed motions for
summary judgment on noninfringement regarding the '590 and '365 Patents. On
November 20, 2002, the Court granted Genus' motion for summary judgment of
noninfringement of the '365 Patent. On January 10, 2003, the Court granted
Genus' motion for summary judgment of noninfringement of the '590 Patent. A
hearing for dispositive motions on the remaining patent claims in the case is
currently set for June 20, 2003, and trial on those claims is currently set for
January 12, 2004.
13
We intend to defend our position vigorously. The outcome of this 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 licenses or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale of our atomic layer products. In this case our business may
not develop as planned, and our results could materially suffer.
EMPLOYEES
As of December 31, 2002, we employed 134 full-time and temporary employees
worldwide, 29 of which were engaged in research and development. The success of
our future operations depends in large part on our ability to recruit and retain
qualified employees, particularly those highly skilled design, process and test
engineers involved in the manufacture of existing systems and the development of
new systems and processes. The competition for such personnel is intense,
particularly in the San Francisco bay area, where our headquarters are located.
At times we have experienced difficulty in attracting new personnel, and we may
not be successful in retaining or recruiting sufficient key personnel in the
future. None of our employees is represented by a labor union, and we have never
experienced a work stoppage, slowdown or strike. We consider our relationships
with our employees to be good.
Information regarding our foreign and domestic operations and export
revenues is included in Note 12 of the Notes to the Consolidated Financial
Statements.
Genus' financial statements are available at the Company's website at
www.Genus.com and the SEC's website at www.SEC.gov.
- -------------
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 for the Sunnyvale facility expires
in October 2012. Commencing in 2003, our annual rental expense will be
$1,828,000, which includes $200,000 per year to recognize the impact of future
rental increases on a straight-line basis. Our monthly cash rent payments start
at a lower rate in the first few years and then increase periodically during the
term of the lease. We also have leases for our sales and support offices in
Seoul, South Korea and Tokyo, Japan. The rent expense increase between 2002 and
2003 was primarily due to increased monthly rent amounts in the United States.
We believe that our existing facilities are adequate to meet our current
requirements and that suitable additional or substitute space will be available
as needed.
In 2000, we subleased approximately 27,000 square feet to a third party. In
September 2001, this third party terminated their sublease and we reclaimed the
office space. Total amount of sublease income in 2001 was approximately
$596,000. In 2002, we had no sublease income.
ITEM 3. LEGAL PROCEEDINGS
On June 6, 2001, ASM America, Inc ("ASMA") filed a patent infringement
action against Genus. ASMA's Complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 ("the '365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 ("the '590
Patent") entitled "Method For Growing Thin Films," which
14
ASMA claims to own or exclusively license. The Complaint seeks monetary and
injunctive relief. Genus' served its answer to ASMA's complaint on August 1,
2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM
International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568
("the '568 Patent") entitled "Method of Selective Etching Native Oxide"; (2)
declaratory judgment that the '365 and '590 Patents are invalid, unenforceable,
and not infringed by Genus; and (3) antitrust violations. An initial Case
Management Conference was held on October 16, 2001. On January 9, 2002, the
Court issued an order granting ASMA leave to amend its complaint to add an
individual as a party and to add a claim that Genus is directly and indirectly
infringing U.S. Patent No. 4,798,165 ("the '165 Patent") entitled "Apparatus for
Chemical Vapor Deposition Using an Axially Symmetric Gas Flow"), which ASMA
claims to own. The court also severed and stayed discovery and trial of Genus'
antitrust claims until after trial of the patent claims. On February 4, 2002,
Genus served its Amended Answer to ASMA's amended complaint and counterclaimed
against ASMA for declaratory judgment that the '165 Patent is invalid,
unenforceable, and not infringed by Genus. On August 15, 2002, the Court issued
a claim construction order regarding the '590, '365, and '598 Patents. A claim
construction hearing regarding the '165 Patent was held on September 26, 2002,
and the Court issued a claim construction ruling regarding this patent on
November 13, 2002. On September 23, 2002 Genus filed motions for summary
judgment on noninfringement regarding the '590 and '365 Patents. On November
20, 2002, the Court granted Genus' motion for summary judgment of
noninfringement of the '365 Patent. On January 10, 2003, the Court granted
Genus' motion for summary judgment of noninfringement of the '590 Patent. A
hearing for dispositive motions on the remaining patent claims in the case is
currently set for June 20, 2003, and trial on those claims is currently set for
January 12, 2004.
We may in the future be party to litigation arising in the course of our
business, including claims that we allegedly infringe third party trademarks and
other intellectual property rights. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 2002, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, are as
follows:
NAME AGE POSITION
- ----------------------- --- ------------------------------------------------------
William W.R. Elder. . . 64 Chairman and Chief Executive Officer
Thomas E. Seidel, Ph.D. 67 Executive Vice President, Chief Technical Officer
Shum Mukherjee. . . . . 52 Executive Vice President, Finance, Chief Financial Officer
Werner Rust . . . . . . 60 Vice President, Worldwide Sales & Marketing
Eddie Lee . . . . . . . 51 Executive Vice President, Advanced Engineering
Except for Mr. Mukherjee, Mr. Rust and Mr. Lee, all of the officers have
been associated with us in their present or other capacities for more than the
past five years. Officers are elected annually by the Board of Directors and
serve at the discretion of the Board. There are no family relationships among
our executive officers.
WILLIAM W.R. ELDER was a founder of Genus and is our Chairman of the Board,
President and our Chief Executive Officer. From October 1996 to April 1998, Dr.
Elder served only as Chairman of the Board. From April 1990 to September 1996,
Dr. Elder was Chairman of the Board, President and Chief Executive Officer of
the Company. From November 1981 to April 1990, Dr. Elder was President and a
director of the Company.
THOMAS E. SEIDEL has served as our Executive Vice President and Chief
Technical Officer since January 1996. From July 1988 to January 1996, Dr. Seidel
was associated with SEMATECH, a semiconductor-industry consortium, in various
senior management positions, most recently as Chief Technologist and Director of
Strategic Technology.
SHUM MUKHERJEE has served as our Executive Vice President of Finance and
Chief Financial Officer since October 2001. Mr. Mukherjee has broad financial
management experience. From 1978 to 1984, Mr. Mukherjee was with Ford of Europe,
Raychem Corporation (now a division of Tyco International) from 1984 to 1998 and
with E*TRADE Group from 1998 to 2001. Mr. Mukherjee earned a Masters Degree in
Management from the Sloan School of Management at Massachusetts Institute of
Technology.
WERNER RUST has served as our Vice President of Sales and Marketing
Worldwide since November 2001. Mr. Rust has more than 20 years' experience in
semiconductor sales and marketing. From 1994 to 1996, Mr. Rust served as
Director of Marketing at GaSonics. From 1997 to 1998, Mr. Rust served as General
Manager of Low-K Dielectric at Fairchild Technologies. From 1998 to February
2001, Mr. Rust served as Director of Marketing at SVG. From February 2001 to
September 2001, Mr. Rust served as CMO/Etch of Strategic Marketing at Applied
Materials.
EDDIE LEE has served as our Executive Vice President, Advanced Technology,
Engineering and Strategic Marketing since February 2001. Mr. Lee joined the
Company in August 2000, as Vice President of New Technology Business
Development. Prior to joining the Company, Mr. Lee was Vice President of
Technology at Silicon Valley Group. Working in the thin film industry since
1974, Mr. Lee has held managerial positions at Honeywell, Advanced Micro Devices
and Varian. He is currently on the technical advisory board of two other
privately held companies in a non-competing field with Genus.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Common Stock Information
Our common stock is traded in the over-the-counter market under the NASDAQ
symbol GGNS. The only class of Genus securities that is traded is Genus common
stock. The high and low closing sales prices for 2002 and 2001 set forth below
are as reported by the NASDAQ National Market System. At February 28, 2003, we
had 432 registered shareholders as reported by Mellon Investor Services. The
closing sales price of Genus common stock on December 31, 2002, the last trading
day in 2002, was $ 2.29.
2002 2001
------------ ------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter. . . . . . . . . . . . . . $3.35 $2.26 $4.09 $1.66
Second Quarter . . . . . . . . . . . . . 4.40 1.93 7.28 2.88
Third Quarter. . . . . . . . . . . . . . 1.95 1.00 6.05 1.77
Fourth Quarter . . . . . . . . . . . . . $2.81 $1.00 $3.25 $1.91
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.
17
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2002 (3) 2001 2000(3) 1999 1998(1)
--------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . $ 39,767 $48,739 $40,638 $28,360 $ 32,431
Costs and expenses:
Costs of goods sold. . . . . . . . . . . . 29,143 32,500 24,385 16,628 29,600
Research and development . . . . . . . . . 8,011 12,118 8,659 5,368 8,921
Selling, general and administrative. . . . 12,621 10,381 10,093 7,930 14,115
Restructuring and other(2) . . . . . . . . 0 0 0 543 7,308
--------- -------- -------- -------- ---------
Loss from operations . . . . . . . . . . . . (10,008) (6,260) (2,499) (2,109) (27,513)
Other income (expense), net. . . . . . . . . (1,074) (336) 108 669 (86)
--------- -------- -------- -------- ---------
Loss before provision for income taxes and
cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . (11,082) (6,596) (2,391) (1,440) (27,599)
Provision for income taxes . . . . . . . . . 538 70 490 177 1
--------- -------- -------- -------- ---------
Loss before cumulative effect of change in
accounting principle. . . . . . . . . . . (11,620) (6,666) (2,881) (1,617) (27,600)
Cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . 0 0 (6,770) 0 0
--------- -------- -------- -------- ---------
Net loss . . . . . . . . . . . . . . . . . . (11,620) (6,666) (9,651) (1,617) (27,600)
Deemed dividends on preferred stock. . . . . 0 0 0 0 (1,903)
--------- -------- -------- -------- ---------
Net loss attributable to common
shareholders. . . . . . . . . . . . . . . $(11,620) $(6,666) $(9,651) $(1,617) $(29,503)
========= ======== ======== ======== =========
Net loss per share before cumulative
effect of change in accounting principle
Basic . . . . . . . . . . . . . . . . . . (0.43) (0.31) (0.15) (0.09) (1.71)
Diluted . . . . . . . . . . . . . . . . . (0.43) (0.31) (0.15) (0.09) (1.71)
Cumulative effect of change in accounting
principle (3)
Basic. . . . . . . . . . . . . . . . . . . (0.36)
Diluted. . . . . . . . . . . . . . . . . . (0.36)
Net loss per share:
Basic. . . . . . . . . . . . . . . . . . . (0.43) (0.31) (0.51) (0.09) (1.71)
Diluted. . . . . . . . . . . . . . . . . . (0.43) (0.31) (0.51) (0.09) (1.71)
Shares used in computing net loss
per share:
Basic. . . . . . . . . . . . . . . . . . . 26,934 21,163 18,937 18,134 17,248
Diluted. . . . . . . . . . . . . . . . . . 26,934 21,163 18,937 18,134 17,248
18
The following are pro forma amounts with the change in accounting principle
related to revenue recognition applied retroactively to years prior to 2000.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000(3) 1999 1998(1)(2)
---------------- -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues. . . . . . $ 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)
<FN>
(1) In 1998, we sold our ion implant equipment product line.
(2) 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.
(3) In 2000, the Company changed its accounting method for recognizing revenue
to comply with Staff Accounting Bulletin number 101.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000 1999 1998
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . $11,546 $ 3,043 $ 3,136 $ 6,739 $ 8,125
Working capital . . . . . . . . . . . . . . 9,650 (2,600) 896 14,151 15,799
Total assets. . . . . . . . . . . . . . . . 41,510 35,902 44,535 27,744 31,827
Convertible notes and long term liabilities 5,571 0 0 0 50
Redeemable Series B convertible
preferred stock. . . . . . . . . . . . . 0 0 0 0 773
Total shareholders' equity. . . . . . . . . $13,797 $12,128 $11,292 $19,378 $19,953
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. In addition to historical
information, the discussion in this Annual Report on Form 10-K contains certain
forward-looking statements that involve risks and uncertainties. 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.
OVERVIEW
Since 1982, we have been supplying advanced manufacturing systems to the
semiconductor industry worldwide. Major semiconductor manufacturers use our
leading-edge thin film deposition equipment and process technology to produce
integrated circuits, commonly called chips, that are incorporated into a variety
of products including personal computers, communications, equipment and consumer
electronics. We pioneered the development of chemical vapor deposition (CVD)
tungsten silicide, which is used in certain critical steps in the manufacture of
integrated circuits. In addition, today we are leading the commercialization of
atomic layer deposition, also known as ALD technology and of our StrataGem
family of products. This technology is designed to enable a wide spectrum of
thin film applications such as aluminum oxide, hafnium oxide and other advanced
dielectric insulating and conducting metal barrier materials for advanced
integrated circuit manufacturing.
Genus' consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(US GAAP). The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. On a quarterly basis,
management reevaluates its estimates and judgments based on historical
experience and relevant current conditions and adjusts the financial statements
as required.
Our global customer base consists of semiconductor manufacturers in the
United States, Europe and Asia. Over the past few years we were dependent on
one customer, Samsung, for a majority of our thin film product revenue. In 2002,
Samsung accounted for 58% of our revenue, 73% in 2001 and 92% in 2000. There is
no long-term agreement between us and Samsung. Over the past three years, we
have gradually expanded our customer base and at the end of 2002, we had nine
customers.
During the third quarter of 2002, Genus increased efforts to generate
revenue from service activities by providing on-site services and support for
fees based on the time spent by our engineers. Currently, revenues from such
services are not material, but the Company hopes to expand service revenues in
the future.
International revenue accounted for 72% of revenue in 2002, 93% of revenue
in 2001 and 98% of revenue in 2000. We anticipate that international sales, and,
in particular, sales from South Korea, will continue to account for a
significant portion of our total revenue.
The local currency is the functional currency for our foreign operations in
South Korea and Japan. All other foreign operations are dollar denominated.
Gains or losses from translation of foreign operations where the local
currencies are the functional currency are included as a component of
shareholders' equity and comprehensive loss. Foreign currency transaction gains
and losses are recognized in the statement of operations. To date, these gains
and losses have not been material.
20
Business activity in the semiconductor and semiconductor manufacturing
equipment industries has been cyclical; for this and other reasons, Genus'
results of operations for the twelve months ended December 31, 2002, may not
necessarily be indicative of future operating results.
In order to support our business strategy and maintain our competitiveness,
we will be required to make significant investments in research and development.
In addition, we will need to divert additional resources to administration to
comply with our reporting requirement under the Sarbanes-Oxley Act of 2002.
Based on our cost structure, we believe selling, general and administrative
expenses will increase as sales volumes increase. We depend on increases in
sales in order to attain profitability. If our sales do not increase, we may
need to reduce our operating costs, which could impair our competitiveness and
our future viability.
Critical Accounting Policies
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and require
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying consolidated financial statements
and related footnotes. As such, we are required to make certain estimates,
judgments and assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
Revenue recognition
The Company derives revenue from the sale and installation of semiconductor
manufacturing systems and from engineering services and the sale of spare parts
to support such systems.
Equipment selling arrangements generally involve contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title. Effective January 1, 2000, at which time the Company did not
have verifiable objective evidence of the fair value of installation services,
the Company commenced deferring recognition of revenue from such equipment sales
until installation was complete and the product was accepted by the customer to
comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101. In the third quarter of 2002, the Company
established verifiable objective evidence of fair value of installation
services, one of the requirements for Genus to recognize revenue for
multiple-element arrangements prior to completion of installation services.
Accordingly, under SAB 101, if Genus has met defined customer acceptance
experience levels with both the customer and the specific type of equipment,
then the Company recognizes equipment revenue upon shipment and transfer of
title. A portion of revenue associated with undelivered elements such as
installation and on-site support related tasks is recognized for installation
when the installation is completed and the customer accepts the product and for
on-site support as the support service is provided. For products that have not
been demonstrated to meet product specifications for the customer prior to
shipment, revenue is recognized when installation is complete and the customer
accepts the product. Revenues can fluctuate significantly as a result of the
timing of customer acceptances. At December 31, 2002 and 2001, the Company had
deferred revenue of $2.7 million and $7.4 million, respectively.
21
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
Accrual for warranty expenses
The Company provides one-year labor and two-year material warranty on its
products. Warranty expenses are accrued at the time that revenue is recognized
from the sale of products. At present, based upon historical experience, the
Company accrues material warranty equal to 2% and 5% of shipment value for its
200mm and 300mm products, respectively, and labor warranty equal to $20,000 per
system for both its 200mm and 300mm products. At the end of every quarter, the
Company reviews its actual spending on warranty and reassesses if its accrual is
adequate to cover warranty expenses on the systems in the field which are still
under warranty. Differences between the required accrual and recorded accrual
are charged or credited to warranty expenses for the period. At December 31,
2002 and 2001, the Company had accrued $970,000 and $803,000, respectively, for
material and labor warranty obligations. Actual results could differ from
estimates. In the unlikely event that a problem is identified that would result
in the need to replace components on a large scale, we would experience
significantly higher expenses and our results of operations and financial
condition could be materially and adversely effected.
Valuation of Inventories
Inventories are recorded at the lower of standard cost, which approximates
actual cost on a first-in-first-out basis, or market value. We write down
inventories to net realizable value based on forecasted demand and market
conditions. Raw material and purchased parts include spare parts inventory for
systems were $4.5 million and $4.4 million at December 31, 2002 and 2001,
respectively. The forecasted demand for spare parts takes into account the
Company's obligations to support systems for periods that are as long as five
years.
Actual demand and market conditions may be different from those projected
by the Company. This could have a material effect on operating results and the
financial position. For example in 2002, as a result of unfavorable economic
conditions diminished demand for semiconductor products, and a change in the mix
of products sold, the Company experienced a decline in sales and recorded
inventory charges of $2.2 million related primarily to excess inventories. These
charges have been included in cost of sales in our consolidated statements of
operations. At December 31, 2002 and 2001, the Company had written down
inventories on hand by $4.3 million and $2.1 million, respectively.
Valuation of research and demonstration equipment
Equipment includes research and demonstration equipment, which is located
in our Applications Laboratory and is used to demonstrate to our customers the
capabilities of our equipment to process wafers and deposit films. The gross
value of demonstration equipment is based on the cost of materials and actual
factory labor and overhead expenses incurred in manufacturing the equipment.
Costs related to refurbishing or maintaining existing demonstration equipment,
which do not add to the capabilities or useful life of the equipment, are not
capitalized and are expensed as incurred. Demonstration equipment is stated at
cost and depreciated over a period of five years. If the Company sells the
equipment, it may experience gross margins that are different from the gross
margins achieved on equipment manufactured specifically for customers.
22
RESULTS OF OPERATIONS
Net Sales
Revenues were $39.8 million, $48.7 million and $40.6 million in 2002, 2001
and 2000, respectively. Revenues were down 18% in 2002 from 2001 and up 20% in
2001 from 2000. Revenue from the sale of systems, spares and from services in
2002 were $32.9 million, $6.5 million and $376,000, respectively. Revenues in
2002 included four 200mm systems using CVD technology, four StrataGem 200mm
systems, one StrataGem 200mm upgrade, two 300mm systems using CVD technology and
one StrataGem 300mm system. Revenues in 2001 included seven 200mm systems using
CVD technology, one 300mm system using CVD technology and four StrataGem 200mm
systems. Revenues in 2000 were recognized on twelve systems.
Export sales were 72%, 93% and 98% of total revenues in 2002, 2001 and
2000, respectively.
Gross Profit Margin
Gross profit margin in 2002 was 27% of revenues compared to 33% in 2001.
Average selling prices were slightly higher in 2002 than 2001. Gross profit
margins were lower in 2002 due to the following factors:
- Our revenues were lower in 2002 due to customer delays in
purchases. Our manufacturing overheads did not decline at the
rate that revenues declined.
- We incurred manufacturing inefficiencies of $626,000 related to
expediting components supplies and compressing processing
schedules to help our customers meet their production commitments
in the fourth quarter of 2002.
- We recorded provisions related to inventory reserves for spare
parts for our CVD equipment of $2.2 million and $317,000 in 2002
and 2001, respectively.
- Severance costs in cost of sales were $178,000 and $77,000 in
2002 and 2001, respectively.
Gross profit margin in 2001 was 33% of revenues compared to a gross profit
margin of 40% in 2000. Although average selling prices in 2001 were slightly
higher than in 2000, overall gross margin was lower in 2001 due to the following
two factors:
- First, capacity variances were incurred due to our lower
production volume, particularly in the fourth quarter, and fixed
costs related to manufacturing and international service
operations. We partially addressed this capacity issue in October
2001 by laying off 10 employees and implementing an across the
board reduced work week.
- Second, we incurred incremental manufacturing variances of
approximately $1.5 million, primarily attributable to the
introduction of LYNX3, and excess-inventory write-offs of
approximately $317,000 during the third quarter of 2001.
- Severance costs in cost of sales were $77,000 and none in 2001
and 2000, respectively.
We have implemented additional purchasing controls and have worked with our
suppliers and customers to better time the delivery of our products. We believe
that these actions will assist us in improving our gross margins. However, we
may need to hire additional manufacturing personnel to address the increased
volumes and bookings, which may cause us to incur start up costs with these
personnel which may negatively impact margins in the short term.
23
Research and Development
Research and Development (R&D) expenses were $8.0 million, $12.1 million
and $8.7 million in 2002, 2001 and 2000 respectively. As a percentage of total
revenues, R&D expenses were 20%, 25% and 21% of total revenues in 2002, 2001 and
2000 respectively. The decrease in absolute dollars and as a percentage of
sales in 2002 was due to cost saving measures implemented beginning in the
fourth quarter of 2001, including reduced use of outside consultants. The
increase in 2001 was due to the addition of significant capacity in our
demonstration lab, which enabled us to compile customer demos of wafers in 15 to
30 days, increased usage of outside consultants and higher depreciation
expenses.
Severance costs in R&D were $129,000, $43,000, and none in 2002, 2001 and
2000, respectively.
Going forward, we expect our R&D expenses to be higher in 2003 to support
customer requested new application development and higher investments in
information and control systems.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $12.6 million,
$10.4 million and $10.1 million in 2002, 2001 and 2000 respectively. As a
percentage of sales, SG&A expenses were 32%, 21% and 25% in 2002, 2001 and 2000
respectively. The increase in absolute dollars and as a percentage of net sales
in 2002 was primarily due to higher legal expenses of $2.2 million related to
the ASM lawsuit. In addition, the Company received sub-leasing revenue of
$596,000 that was offset against 2001 SG&A expenses. The Company had minimal
governmental grants and no sub-leasing income in 2002. The decrease in SG&A
expenses as a percentage of net sales in 2001 when compared to 2000 was
primarily due to higher net sales in 2001.
Severance costs in SG&A were $152,000, $46,000 and none in 2002, 2001 and
2000, respectively.
Going forward, we expect our SG&A expenses to be higher due primarily to
increased commissions as well as increased administrative expenses associated
with enhanced reporting requirements under the Sarbanes-Oxley Act of 2002.
Interest Expense
Interest expenses were $1.2 million and $496,000 in 2002 and 2001,
respectively. The increase in 2002 was due to an increase in net interest
charges on bank loans of approximately $452,000, and interest cost of $727,000
relating to the convertible notes. In connection with the convertible notes,
the Company expects to incur interest expense of $1.4 million in 2003. The
interest expense includes the accretion of the value of the beneficial
conversion feature and amortization of issuance costs related to the convertible
notes.
Interest expenses were $496,000 and $118,000 in 2001 and 2000,
respectively. The increase in 2001 was due to increased levels of debt
outstanding in 2001, compared to 2000.
Provision for Income Taxes
We recorded tax expenses of $538,000, $70,000 and $490,000 in 2002, 2001
and 2000, respectively, for our South Korean subsidiary. We did not record any
provision for income taxes in the United States and Japan, as we incurred losses
in these entities. We provide for a full valuation allowance against tax
benefit associated with these losses.
24
Cumulative effect of change in accounting principle
In 2000, we recorded a non-recurring charge of $6.8 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.
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 was complete and the product was accepted by the customer.
Prior to the introduction of SAB 101, the Company 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 in prior years of the change in accounting
method was a charge of $6.8 million or $0.36 per diluted share.
In the third quarter of 2002, the Company established verifiable objective
evidence of fair value of installation services, one of the requirements for
Genus to recognize revenue for multi-element arrangements prior to completion of
installation services. Accordingly, under SAB 101, if Genus has met defined
customer acceptance experience levels with both the customer and the specific
type of equipment, then the Company recognizes equipment revenue upon shipment
and transfer of title. As a result, the total revenue recognized in 2002 for
equipment sales where installation had not been completed and the system was not
accepted was $5.6 million.
Service revenue is recognized when service has been completed over the
duration of the contract.
Liquidity and Capital Resources
At December 31, 2002, our cash and cash equivalents were $11.5 million,
compared to $3.0 million as of December 31, 2001. Accounts receivable were $7.5
million, an increase of $3.2 million from $4.3 million as of December 31, 2001,
as the majority of our shipments occurred in the latter part of 2002.
Cash used in operating activities were $12.1 million, $1.9 million and $2.3
million in 2002, 2001 and 2000 respectively. Cash used in operating activities
in 2002 consisted primarily of net loss of $11.6 million, decreases in deferred
revenues of $4.7 million and accounts payable of $1.9 million, and an increase
in accounts receivable of $3.2 million, partially offset by depreciation of $3.7
million, provision for excess and obsolete inventory at $2.2 million and an
increase in customer advances of $1.8 million.
Cash used by operating activities totaled $1.9 million 2001, and consisted
primarily of net loss of $6.7 million and decreases in deferred revenues of
$11.2 million, partially offset by depreciation of $3.0 million and reductions
in receivables of $4.2 million and reductions in inventories of $9.2 million.
Inventory reductions were primarily related to improved supply chain management,
decreases in inventory held at customer sites from $9.5 million to $5.1 million
and to reductions in shipment backlog, which reduced from $8.4 million at the
end of December 2000 to $3.2 million on December 31, 2001.
25
Financing activities provided cash of $21.0 million, $9.4 million and $4.0
million in 2002, 2001 and 2000 respectively. In January 2002, the Company
received net proceeds of $7.8 million in a private placement. In August 2002,
the Company received $7.0 million, net of issuance costs, from the sale of
subordinated convertible notes and warrants. In addition, the Company received
$1.8 million from warrant exercises and $654,000 from stock option exercises and
the employee stock purchase plan.
Financing activities provided cash of $9.4 million for 2001. In May 2001,
we received approximately $6.9 million of net proceeds from the sale of 2.5
million shares of our common stock and warrants for 1.3 million additional
shares of our common stock. Additionally, we increased our net short-term
borrowings by $1.8 million.
We incurred capital expenditures of approximately $502,000 in 2002 and $7.4
million in 2001. Expenditures in 2001 were primarily related to the continuing
program of upgrading existing equipment in our development and applications
laboratories to meet our most advanced system capabilities and specifications,
especially for our ALD processes. This has improved our product and film
development capabilities, and increased our customer demonstration capabilities,
which is critical in the sales process.
Our primary source of funds at December 31, 2002 consisted of $11.5 million
in cash and cash equivalents, and $7.5 million of accounts receivable, most of
which we have collected or expect to collect during the three months ending
March 31, 2003.
Significant financing transactions completed since December 31, 2001
include the following:
On December 20, 2001 and as amended on March 27, 2002 and March 20, 2003,
we maintained line of credit facilities from Silicon Valley bank for $15.0
million, secured against eligible receivables and inventory. The interest rate
is prime plus 1.75% per annum and the facility expires on June 29, 2004. The
loan is collateralized by a first priority perfected security interest in our
assets and has a covenant requiring us to maintain a minimum tangible net worth
(calculated as the excess of total assets over total liabilities adjusted to
exclude intangible assets and balances receivable from officers or affiliates
and to exclude debt subordinated to Silicon Valley Bank) of $15 million. As of
December 31, 2002, there was $7.8 million outstanding under this credit
facility.
On January 4, 2002, we received gross proceeds of $1.2 million under a
secured loan with CitiCapital, a division of Citigroup. The loan is payable over
36 months, accrues interest of 8.75% per annum and is secured by two systems in
our demonstration lab. There was a $515,000 outstanding balance under this
agreement at December 31, 2002.
26
A summary of our contractual obligations as of December 31, 2002 is as follows
(amounts in thousands):
Less than After 5
Total Revolving 1 year 1-3 years 4-5 years years
------- ---------- ---------- ---------- ---------- --------
Silicon Valley Bank $ 7,813 $ 7,813 $ 0 $ 0 $ 0 $ 0
Citicapital 515 0 245 270 0 0
Convertible Notes* 7,125 0 0 7,125 0 0
Operating Leases 18,087 N/A 1,628 3,256 3,452 9,751
------- ---------- ---------- ---------- ---------- --------
$33,540 $ 7,813 $ 1,873 $ 10,651 $ 3,452 $ 9,751
======= ========== ========== ========== ========== ========
*In the event of a change of control in the Company, the note holder may elect
to receive repayment of the notes at a premium of 10%
As of February 28, 2003, our cash balance was $9.2 million. We believe that
our existing working capital, credit lines and cash from operations will be
sufficient to satisfy our cash needs for the next 12 months. Accordingly, these
financial statements have been prepared on a going concern basis.
We are actively marketing our existing and new products, which we believe
will ultimately lead to profitable operations. Management believes that the
cash resources and borrowing capacity will be sufficient to meet projected
working capital, capital expenditures and other cash requirements for the next
twelve months. However, there can be no assurance the currently available funds
will meet the company's cash requirements in the future, or, that any required
additional funding will be available on terms attractive to us or at all, which
could have a material adverse affect on our business, financial condition and
results of operations. Any additional equity financing may be dilutive to
shareholders, and any additional debt financing, if available, may involve
restrictive covenants.
RELATED PARTY TRANSACTIONS
A board member of the Company is also a partner of Wilson, Sonsini,
Goodrich & Rosati, the general counsel of the Company. In 2002, 2001 and 2000,
the Company incurred $630,000, $781,000 and $224,000 in legal costs,
respectively, and paid approximately $1.1 million, $57,000 and $222,000,
respectively, to Wilson Sonsini Goodrich & Rosati. At December 31, 2002, the
Company owed approximately $297,000 to Wilson Sonsini Goodrich & Rosati. Our
business activities with Wilson, Sonsini, Goodrich & Rosati are at arms length.
RECENT ACCOUNTING PRONOUNCEMENTS.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of long-lived assets, except for certain
obligations of leases. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We are currently assessing the impact of SFAS No.
143 on our financial position and results of operations.
27
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes
costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002 and early application is encouraged. We will adopt SFAS No. 146 during
the first quarter ended March 31, 2003. The effect on adoption of SFAS No. 146
will change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred.
In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. We have adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002 and we have not assessed the impact of the recognition and
measurement provisions of FIN No. 45 on our consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire our stock. We have adopted the annual disclosure provisions of SFAS No.
148 in our financial reports for the year ended December 31, 2002 and will adopt
28
the interim disclosure provisions for our future quarterly financial reports. As
the adoption of this standard involves disclosures only, we do not expect a
material impact on our consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We are currently assessing the impact of FIN No.
46 on our consolidated financial statements.
RISK FACTORS
The risks described below are not the only risks that we face. Additional
risks and uncertainties not presently known to us, or that are currently deemed
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by, and
the trading price of our common stock could decline due to any of those risks.
You should also refer to the other information and our financial statements
included in this 10K report and the related information incorporated by
reference into this 10K report.
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 $11.6 million, $6.7 million and $9.6 million
for 2002, 2001 and 2000, respectively.
While we believe our cash position is sufficient for the next twelve
months, we cannot provide assurances that future cash flows from operations will
be sufficient to meet operating requirements and allow us to service debt and
repay any underlying indebtedness at maturity. If we do not achieve the cash
flows that we anticipate, we may not be able to meet our planned product release
schedules and our forecast sales objectives. In such event we will require
additional financing to fund on-going and planned operations and may need to
implement further expense reduction measures, including, but not limited to, the
sale of assets, the consolidation of operations, workforce reductions, and/or
the delay, cancellation or reduction of certain product development, marketing,
licensing, or other operational programs. Some of these measures would require
third-party consents or approvals, including that of our bank, and we cannot
provide assurances that these consents or approvals will be obtained. There can
be no assurance that we will be able to make additional financing arrangements
on satisfactory terms, if at all, and our operations and liquidity would be
materially adversely affected.
We cannot assure our shareholders and investors that we will achieve
profitability in fiscal 2003 and beyond, nor can we provide assurances that we
will achieve the sales necessary to avoid further expense reductions in the
future.
29
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
In 2002, Samsung Electronics Company, Ltd., Seagate Technologies, Inc.,
IBM, and Asuka Project accounted for 58%, 24%, 7%, and 6% of revenues,
respectively. In 2001, Samsung Electronics Company, Ltd, Read-Rite Corporation,
NEC, Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues,
respectively. In 2000, Samsung Electronics Company, Ltd. and Micron Technology,
Inc. accounted for 91% and 5% of revenues, respectively.
The semiconductor manufacturing industry generally consists of a limited
number of larger companies. Consequently, we expect that a significant portion
of our future product sales will continue to be concentrated within a limited
number of customers, even though we are making progress in reducing the
concentration of our reliance on these customers through our strategy of product
and customer diversification.
None of our customers 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
could be materially harmed. Customers may delay or cancel orders or may stop
doing business with us for a number of reasons including:
- customer departures from historical buying patterns;
- general market conditions;
- economic conditions; or
- competitive conditions in the semiconductor industry or in the
industries that manufacture products utilizing integrated circuits.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS.
We rely on third parties to manufacture the components used in our
products. Some of our suppliers are sole or limited source. In addition, some
of these suppliers are relatively small-undercapitalized companies that may have
difficulties in raising sufficient funding to continue operations. There are
risks associated with the use of independent suppliers, including unavailability
of or delays in obtaining adequate supplies of components and potentially
reduced control of quality, production costs and timing of delivery. We may
experience difficulty identifying alternative sources of supply for certain
components used in our products. In addition, the use of alternate components
may require design alterations, which may delay installation and increase
product costs. These components may not be available in the quantities
required, on reasonable terms, or at all. Financial or other difficulties faced
by our suppliers or significant changes in demand for these components or
materials could limit their availability. Any failures by these third parties
to adequately perform may impair our ability to offer our existing products,
delay the submission of products for regulatory approval, and impair our ability
to deliver products on a timely basis or otherwise impair our competitive
position. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. Our
business, results of operations and financial condition would be adversely
affected if we were unable to continue to obtain components in the quantity and
quality desired and at the prices we have budgeted.
30
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 72%, 93% and 98% of our total net
sales in 2002, 2001 and 2000, respectively. Net sales to our South Korean-based
customers accounted for approximately 56%, 73% and 92% of total net sales in
2002, 2001 and 2000, 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;
- military confrontation;
- 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
increase the cost of our products to our customers and could lead these
customers to delay or defer their purchasing decisions.
Wherever currency devaluations occur abroad, our goods become more
expensive for our customers in that country. In addition, difficult economic
conditions may limit capital spending by our customers. These circumstances may
also affect the ability of our customers to meet their payment obligations,
resulting in the cancellations or deferrals of existing orders and the
limitation of additional orders.
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. Although we
are marketing our atomic layer deposition technology to non-semiconductor
markets such as markets in magnetic thin film heads, flat panel displays,
micro-electromechanical systems and inkjet printers, we are still dependent on
sales to semiconductor manufacturers. The semiconductor industry is cyclical
which impacts the semiconductor industry's demand for semiconductor
manufacturing capital equipment.
Semiconductor industry downturns have significantly decreased our revenues,
operating margins and results of operations in the past. During the industry
downturn in 1998, several of our customers delayed or cancelled investments in
new manufacturing facilities and equipment due to declining DRAM prices, the
Asian economic downturn, and general softening of the semiconductor market. This
caused our sales in 1998 to be significantly lower than in the prior three
years.
31
After the dramatic industry boom for semiconductor equipment that peaked
early in the year 2000, another cyclical downturn is presently occurring. The
sharp and severe industry downturn in 2001 was the largest in the industry's
history. Almost all previous downturns have been solely due to pricing declines.
However, the 2001 downturn in the industry marked a corresponding decline in
unit production, as well as price reduction. We expect that our revenues will
continue to be further impacted by the continued downturn in the semiconductor
industry and global economy, which may prevent us from increasing our revenues
and achieving profitability.
OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW PRODUCTS AND MARKET
ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE PRODUCTS
We believe that our future growth will depend in large part upon the
acceptance of our new thin films and processes, especially our atomic layer
deposition technology. As a result, we expect to continue to invest in research
and development in these new thin films and the systems that use these films.
There can be no assurance that the market will accept our new products or that
we will be able to develop and introduce new products or enhancements to our
existing products and processes in a timely manner to satisfy customer needs or
achieve market acceptance. The failure to do so, or even a delay in our
introduction of new products or enhancements, could harm our business, financial
condition and results of operations.
We must manage product transitions successfully, as introductions of new
products could harm sales of existing products. We derive our revenue primarily
from the sale of equipment used to chemically deposit tungsten silicide in the
manufacture of memory chips. We estimate that the life cycle for these tungsten
silicide deposition systems is three-to-ten years. There is a risk that future
technologies, processes or product developments may render our product offerings
obsolete and we may not be able to develop and introduce new products or
enhancements to our existing products in a timely manner or at all.
WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES
The semiconductor manufacturing capital equipment industry is highly
competitive. We face substantial competition throughout the world. We believe
that to remain competitive, we will require significant financial resources to
develop new products, offer a broader range of products, establish and maintain
customer service centers and invest in research and development.
Many of our existing and potential competitors have substantially greater
financial resources, more extensive engineering, manufacturing, marketing,
customer service capabilities and greater name recognition. We expect our
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with improved
price and performance characteristics.
If our competitors enter into strategic relationships with leading
semiconductor manufacturers covering thin film products similar to those sold by
us, it would materially adversely affect our ability to sell our products to
such manufacturers. In addition, to expand our sales we must often replace the
systems of our competitors or sell new systems to customers of our competitors.
Our competitors may develop new or enhanced competitive products that will offer
price or performance features that are superior to our systems. Our competitors
may also be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their product lines. We may not be able to
maintain or expand our sales if our resources do not allow us to respond
effectively to such competitive forces.
32
WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR
OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND
PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility and
proven system performance.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. To do otherwise creates risk for the manufacturer because the
manufacture of a semiconductor requires many process steps and a fabrication
facility will contain many different types of machines that must work cohesively
to produce products that meet the customers' specifications. If any piece of
equipment fails to perform as expected, the customer could incur significant
costs related to defective products, production line downtime, or low production
yields.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we have
observed that once a particular piece of equipment is selected from a vendor,
the customer is likely to continue purchasing that same piece of equipment from
the vendor for similar applications in the future. Our customer list, though
limited, has expanded in recent months. Yet our broadening market share remains
at risk due to choices made by customers that continue to be influenced by
pre-existing installed bases by competing vendors. Consequently, our penetrating
these markets and our ability to get additional orders may be limited.
A semiconductor manufacturer frequently will attempt to consolidate its
other capital equipment requirements with the same vendor. Accordingly, we may
face narrow windows of opportunity to be selected as the "vendor of choice" by
potential new customers. It may be difficult for us to sell to a particular
customer for a significant period of time once that customer selects a
competitor's product, and we may not be successful in obtaining broader
acceptance of our systems and technology. If we are not able to achieve broader
market acceptance of our systems and technology, we may be unable to grow our
business and our operating results and financial condition will be harmed.
OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF
OUR REVENUE
Sales of our systems depend upon the decision of a prospective customer to
increase manufacturing capacity. That decision typically involves a significant
capital commitment by our customers. Accordingly, the purchase of our systems
typically involves time-consuming internal procedures associated with the
evaluation, testing, implementation and introduction of new technologies into
our customers' manufacturing facilities. For many potential customers, an
evaluation as to whether new semiconductor manufacturing equipment is needed
typically occurs infrequently. Following an evaluation by the customer as to
whether our systems meet its qualification criteria, we have experienced in the
past and expect to experience in the future delays in finalizing system sales
while the customer evaluates and receives approval for the purchase of our
systems and constructs a new facility or expands an existing facility.
Due to these factors, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort. The time
between our first contact with a customer and the customer placing its first
order typically lasts from nine to twelve months and is often longer. This
33
lengthy sales cycle makes it difficult to accurately forecast future sales and
may cause our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected for that period.
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
appropriate. However, no assurance can be given that we will be able to
negotiate any such necessary licenses on commercially reasonable terms, or at
all, or that any litigation resulting from such claims would not have a material
adverse effect on our business and financial results.
Litigation is time consuming, expensive and its outcome is uncertain. We
may not prevail in any litigation in which we are involved. Should we be found
to infringe any of the patents asserted or any other intellectual property
rights of others, in addition to potential monetary damages and any injunctive
relief granted, we may need either to obtain a license to commercialize our
products or redesign our products so they do not infringe any third party's
intellectual property. If we are unable to obtain a license or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale or our atomic layer products. In this case our business
may not develop as planned, and our results could materially suffer.
On June 6, 2001, ASM America, Inc ("ASMA") filed a patent infringement
action against Genus. ASMA's Complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 ("the '365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 ("the '590
Patent") entitled "Method For Growing Thin Films," which ASMA claims to own or
exclusively license. The Complaint seeks monetary and injunctive relief. Genus'
served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001,
Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1)
infringement of U.S. Patent No. 5,294,568 ("the '568 Patent") entitled "Method
of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and
'590 Patents are invalid, unenforceable, and not infringed by Genus; and (3)
antitrust violations. An initial Case Management Conference was held on October
16, 2001. On January 9, 2002, the Court issued an order granting ASMA leave to
amend its complaint to add an individual as a party and to add a claim that
Genus is directly and indirectly infringing U.S. Patent No. 4,798,165 ("the '165
Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow"), which ASMA claims to own. The court also severed and
stayed discovery and trial of Genus' antitrust claims until after trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASMA's
amended complaint and counterclaimed against ASMA for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. On August
15, 2002, the Court issued a claim construction order regarding the '590, '365,
and '598 Patents. A claim construction hearing regarding the '165 Patent was
held on September 26, 2002, and the Court issued a claim construction ruling
regarding this patent on November 13, 2002. On September 23, 2002 Genus filed
motions for summary judgment on noninfringement regarding the '590 and '365
Patents. On November 20, 2002, the Court granted Genus' motion for summary
judgment of noninfringement of the '365 Patent. On January 10, 2003, the Court
granted Genus' motion for summary judgment of noninfringement of the '590
Patent. A hearing for dispositive motions on the remaining patent claims in the
case is currently set for June 20, 2003, and trial on those claims is currently
set for January 12, 2004. We intend to defend our position vigorously.
34
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.
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
and process engineers. Competition for such personnel is intense, particularly
in the San Francisco bay area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop and
market our products and perform services for our customers. As a result, our
growth could be limited due to our lack of capacity to develop and market our
products to customers, or fail to meet delivery commitments or experience
deterioration in service levels or decreased customer satisfaction.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations. If we fail to
comply with present or future regulations, we could be subject to substantial
liability for clean up efforts, property damage, personal injury and fines or
suspension or cessation of our operations.
We use the following regulated gases at our manufacturing facility in
Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen.
We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The
city of Sunnyvale, California, imposes high environmental standards to
businesses operating within the city. Genus has received an operating license
from Sunnyvale. Presently, our compliance record indicates that our methods and
practices successfully meet standards. Moving forward, if we fail to
continuously maintain high standards to prevent the leakage of any toxins from
our facilities into the environment, restrictions on our ability to expand or
continue to operate our present locations could be imposed upon us or we could
be required to acquire costly remediation equipment or incur other significant
expenses.
WE DEPEND UPON 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 United States, Europe, South Korea and
Japan and through six independent sales representatives and distributors in the
United States, Europe, South Korea, Taiwan, China and Malaysia. We do not have
35
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. To date, we have had
limited success in penetrating in Japanese semiconductor industry. Although we
continue to invest significant resources in our Japan office, we may not be able
to attract new customers in the Japanese semiconductor industry, and as a
result, we may fail to yield a profit or return on our investment in Japan.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR
TO SECURITIES LITIGATION
Our common stock has experienced substantial price volatility, particularly
as a result of quarter-to-quarter variations in our, our competitors or our
customers' actual or anticipated financial results, our competitors or our
customers' announcements of technological innovations, revenue recognition
policies, changes in earnings estimates by securities analysts and other events
or factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which we do
business, may adversely affect the market price of our common stock.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A disaster
could severely damage our ability to deliver our products to our customers. Our
products depend on our ability to maintain and protect our operating equipment
and computer systems, which are primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. Although we maintain general
business insurance against interruptions such as fires and floods, there can be
no assurance that the amount of coverage will be adequate in any particular
case.
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE WILL DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS
As of January 31, 2003, we have approximately of 7,184,478 shares of common
stock underlying warrants and outstanding employee stock options. Of the stock
options, 2,228,349 shares are exercisable as of January 31, 2003. All of the
shares underlying the warrants are currently exercisable. Some warrants have
terms providing for an adjustment of the number of shares underlying the
warrants in the event that we issue new shares at a price lower than the
exercise price of the warrants, where we make a distribution of common stock to
our shareholders or effect a reclassification.
If all of the shares underlying the exercisable options and warrants were
exercised and sold in the public market, the value of your current holdings in
Genus may decline because there may not be sufficient demand to purchase the
increased number of shares that would be available for sale.
36
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
On September 7, 2000, the Company's Board of Directors declared a dividend
pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar
earlier plan that had expired on July 3, 2000. The intended purpose of the
Rights Plan is to protect shareholders' rights and to maximize share value in
the event of an unfriendly takeover attempt. As of the record date of October
13, 2000, each share of common stock of Genus, Inc. outstanding was granted one
right under the new plan. Each right is exercisable only under certain
circumstances and upon the occurrence of certain events and permits the holder
to purchase from the Company one one-thousandth (0.001) of a share of Series C
Participating Preferred Stock at an initial exercise price of forty dollars
($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred
stock authorized in connection with the Rights Plan will be used for the
exercise of any preferred shares purchase rights in the event that any person or
group (the Acquiring Person) acquires beneficial ownership of 15% or more of the
outstanding common stock. In such event, the shareholders (other than the
Acquiring Person) would receive common stock of the Company having a market
value of twice the exercise price. Subject to certain restrictions, the Company
may redeem the rights issued under the Rights Plan for $0.001 per right and may
amend the Rights Plan without the consent of rights holders. The rights will
expire on October 13, 2010, unless redeemed by the Company.
In the event that circumstances trigger the transferability and
exercisability of rights granted in our Rights Plan, your current holdings in
Genus may decline as a result of dilution to your percentage ownership in Genus
or as a result of a reduction in the per share value of our stock resulting from
the increase in the number of outstanding shares available and your failure to
exercise your rights under the Rights Plan.
FORWARD-LOOKING STATEMENTS
This 10-K report contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding, among other items, our business
strategy, growth strategy and anticipated trends in our business. We may make
additional written or oral forward-looking statements from time to time in
filings with the Securities and Exchange Commission or otherwise. When we use
the words "believe," "expect," "anticipate," "project" and similar expressions,
this should alert you that this is a forward-looking statement.
We base these forward-looking statements on our expectations. They are
subject to a number of risks and uncertainties that cannot be predicted,
quantified or controlled. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements.
Statements in this 10-K report, and in documents incorporated into this
10-K report, including those set forth above in "Risk Factors," describe
factors, among others, that could contribute to or cause these differences. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this 10-K report will in fact transpire
or prove to be accurate. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Approximately 85.9% of our revenues are U.S. dollar denominated sales.
Consequently, fluctuations in our exchange rate could make our products
relatively more expensive to our customers, which could lead to reduced demand
for our products.
Similarly, 14.1% of our sales are denominated in non-U.S. based currencies.
As exchange rates fluctuate, our revenues from sales of foreign currency
denominated products will fluctuate which could have an adverse impact on our
margins. As a result, fluctuations in currency exchange rates could have a
material adverse effect on our business, results of operations and financial
condition.
We have both fixed rate and floating rate interest obligations. Fixed rate
obligations may result in interest expenses in excess of market rates if
interest rates fall, while floating rate obligations may result in additional
interest costs if interest rates rise. An increase of one percentage point in
interest rates would not materially impact the results of our operations.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, independent accountants, dated February 7, 2003,
except as to the first paragraph of Note 7, which is as of March 20, 2003, are
included in a separate section of this Annual 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, 2002 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)
2002
Revenues $ 9,591 $ 6,743 $ 12,153 $ 11,280
Gross profit 2,124 1,573 4,327 2,600
Net loss (3,752) (3,609) (1,575) (2,684)
Basic net loss per share $ (0.15) $ (0.13) $ (0.06) $ (0.09)
Diluted net loss per share $ (0.15) $ (0.13) $ (0.06) $ (0.09)
2001
Revenues $ 14,309 $ 13,659 $ 15,094 $ 5,677
Gross profit 5,706 5,039 4,794 700
Net income (loss) 131 (853) (744) (5,200)
Basic net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.23)
Diluted net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.23)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to executive officers is
incorporated by reference to the section entitled "Executive officers of the
registrant" in Part I of this Form 10-K.
There are no family relationships among the Company's executive officers
and directors. As of December 31, 2002, the directors of the Company are as
follows:
NAME AGE POSITION
- ---------------------------- --- ------------------------------------
William W.R. Elder . . . . . 64 Chairman and Chief Executive Officer
Mario M. Rosati. . . . . . . 56 Secretary and Director
Todd S. Myhre. . . . . . . . 58 Director
G. Frederick Forsyth . . . . 58 Director
George D. Wells. . . . . . . 67 Director
Robert J. Richardson . . . . 56 Director
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.
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 of the law
firm Wilson Sonsini Goodrich & Rosati, Professional Corporation, general counsel
to the Company, since 1971. Mr. Rosati is also a director of Aehr Test Systems,
a manufacturer of computer hardware testing systems, Sanmina-SCI 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, interWAVE
Communications International Ltd., a provider of compact mobile wireless network
systems solutions in the Global System for Mobile Communications (GSM) markets,
and Vivus, a specialty pharmaceutical company, all publicly-held companies. He
is also a director of a number of privately held companies.
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
40
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 LSI 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. In March 2003, Mr. Richardson became a Director
of Applied Signal Technology.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"Board of Directors and Committees," "Summary Compensation Table," "Stock
Options and Stock Appreciation Rights" and "Retirement Benefits" in the
Company's definitive Proxy Statement for the fiscal year ended December 31,
2002, which we will file with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"Information Relating to Directors, Nominees and Executive Officers" in the
Company's definitive Proxy Statement for the fiscal year ended December 31,
2002, which we will file with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
"Certain Transactions" in the Company's definitive Proxy Statement for the
fiscal year ended December 31, 2002 which we will file with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days before filing this report, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are designed to
ensure that the information that the Company must disclose in its reports filed
under the Securities Exchange Act is communicated and processed in a timely
manner. William W.R. Elder, Chairman of the Board, President and Chief
Executive Officer and Shum Mukherjee, Executive Vice President and Chief
Financial Officer, participated in this evaluation.
41
Based on this evaluation, Messrs. Elder and Mukherjee concluded that, as
of the date of their evaluation, the Company's disclosure controls and
procedures were effective, except as noted in the next paragraph. Since the
date of the evaluation described above, there have not been any significant
changes in the Company's internal controls or in other factors that could
significantly affect those controls.
During the fiscal 2002 financial reporting process, management, in
consultation with the Company's independent accountants, identified deficiencies
involving internal controls over inventories, warranties and the Company's
Korean operations which constituted a "Reportable Condition" under standards
established by the American Institute of Certified Public Accountants.
Management believes that these matters have not had any material impact on our
financial statements. Management has established a project plan and has
completed the initial design of processes and controls to address these
deficiencies. Development is ongoing and implementation/completion of this
project is anticipated in 2003.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Operations - Years Ended December 31, 2002, 2001
and 2000
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(loss) - Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001
and 2000
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule.
Schedule II "Valuation and Qualifying Accounts"
3. Exhibits and reports on form 8-K. 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.
43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Genus, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15 (a)(1) present fairly, in all material respects, the
financial position of Genus, Inc. and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, 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 7, 2003, except as to the first paragraph of Note 7,
which is as of March 20, 2003
44
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------
2002 2001
---------- ---------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 11,546 $ 3,043
Accounts receivable (net of allowance for doubtful accounts
of $69 in 2002 and 2001, respectively) . . . . . . . . . . 7,505 4,262
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 11,405 12,648
Other current assets . . . . . . . . . . . . . . . . . . . . 1,336 1,221
---------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . 31,792 21,174
Equipment, furniture and fixtures, net . . . . . . . . . . . . 8,661 14,573
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,057 155
---------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 41,510 $ 35,902
========== =========
LIABILITIES
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . . $ 7,813 $ 4,481
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 6,498 8,352
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 3,064 3,553
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 2,713 7,388
Customer advances. . . . . . . . . . . . . . . . . . . . . . 1,809 0
Long term liabilities, current portion . . . . . . . . . . . 245 0
---------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . 22,142 23,774
Convertible Notes. . . . . . . . . . . . . . . . . . . . . . . 5,301 0
Long term liabilities. . . . . . . . . . . . . . . . . . . . . 270 0
---------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 27,713 23,774
---------- ---------
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized 2,000 shares; Issued and outstanding, none. . . . 0 0
Common stock, no par value:
Authorized 50,000 shares;
Issued and outstanding, 28,621 shares in 2002 and
22,365 shares in 2001. . . . . . . . . . . . . . . . . . . 123,890 110,753
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (107,809) (96,189)
Note receivable from shareholder . . . . . . . . . . . . . . . (151) (151)
Accumulated other comprehensive loss . . . . . . . . . . . . . (2,133) (2,285)
---------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . 13,797 12,128
---------- ---------
Total liabilities and shareholders' equity . . . . . . . . $ 41,510 $ 35,902
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
45
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
--------- -------- --------
Revenues $ 39,767 $48,739 $40,638
Costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 29,143 32,500 24,385
Research and development . . . . . . . . . . . . . . . . . . 8,011 12,118 8,659
Selling, general and administrative. . . . . . . . . . . . . 12,621 10,381 10,093
--------- -------- --------
Loss from operations . . . . . . . . . . . . . . . . . . . . . (10,008) (6,260) (2,499)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (1,237) (496) (118)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . 83 75 252
Other income (expense), net. . . . . . . . . . . . . . . . . . 80 85 (26)
--------- -------- --------
Loss before provision for income taxes and cumulative effect
of change in accounting principle. . . . . . . . . . . . . . (11,082) (6,596) (2,391)
Provision for income taxes . . . . . . . . . . . . . . . . . . 538 70 490
--------- -------- --------
Loss before cumulative effect of change in accounting principle (11,620) (6,666) (2,881)
Cumulative effect of change in accounting principle. . . . . . 0 0 (6,770)
--------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,620) $(6,666) $(9,651)
========= ======== ========
Per share data:
Basic and diluted loss per share before cumulative effect . . $ (0.43) $ (0.31) $ (0.15)
Cumulative effect of change in accounting principle. . . . . . 0 0 (0.36)
--------- -------- --------
Basic and diluted net loss per share . . . . . . . . . . . . . $ (0.43) $ (0.31) $ (0.51)
========= ======== ========
Shares used to compute basic and diluted net loss per share. . 26,934 21,163 18,937
========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
46
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(IN THOUSANDS)
NOTES RETAINED OTHER TOTAL
COMMON STOCK RECEIVABLE EARNINGS COMPRE- SHARE-
------------------- FROM (ACCUMULATED HENSIVE HOLDERS
SHARES AMOUNT SHAREHOLDERS DEFICIT) LOSS EQUITY
------ ----------- -------------- ---------------- --------- ---------
Balances, December 31, 1999. . . . . 18,469 101,042 0 (79,872) (1,792) 19,378
Issuance of shares of common stock
under stock option plan. . . . . 490 1,023 0 0 0 1,023
Issuance of shares of common
stock from warrants and options 72 0 0 0 0 0
Issuance of shares of common stock
under employee stock purchase
plan . . . . . . . . . . . . . . 288 282 0 0 0 282
Stock-based compensation . . . . . 0 490 0 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. . . . . 19,319 102,837 0 (89,523) (2,022) 11,292
Issuance of shares of common
stock and warrants to purchase
common stock under private
placement, net of issuance cost
of $725. . . . . . . . . . . . . 2,542 6,900 0 0 0 6,900
Issuance of shares of common stock
under stock option plan. . . . . 243 521 (151) 0 0 370
Issuance of shares of common stock
under employee stock purchase
plan . . . . . . . . . . . . . . 261 417 0 0 0 417
Stock-based compensation . . . . . 0 78 0 0 0 78
Net loss . . . . . . . . . . . . . 0 0 0 (6,666) 0
Translation adjustments. . . . . . 0 0 0 0 (263)
Comprehensive loss . . . . . . . . . 0 0 0 0 0 (6,929)
------ ----------- -------------- ---------------- --------- ---------
Balances, December 31, 2001. . . . . 22,365 $ 110,753 $ (151) $ (96,189) $ (2,285) $ 12,128
------ ----------- -------------- ---------------- --------- ---------
47
NOTES RETAINED OTHER TOTAL
COMMON STOCK RECEIVABLE EARNINGS COMPRE- SHARE-
------------------- FROM (ACCUMULATED HENSIVE HOLDERS
SHARES AMOUNT SHAREHOLDERS DEFICIT) LOSS EQUITY
------ ----------- -------------- ---------------- --------- ---------
Balances, December 31, 2001. . . . . 22,365 110,753 (151) (96,189) (2,285) 12,128
Issuance of shares of common stock
and warrants to purchase common
stock under private placement,
net of issuance costs of $447 . . 3,871 7,750 0 0 0 7,750
Value of warrants related to the
issuance of 7% convertible notes
and warrants. . . . . . . . . . . 0 1,312 0 0 0 1,312
Value of beneficial conversion
feature related to the
issuance of 7% convertible notes
and warrants. . . . . . . . . . . 0 928 0 0 0 928
Issuance of warrants . . . . . . . 0 54 0 0 0 54
Exercise of warrants . . . . . . . 1,536 1,764 0 0 0 1,764
Conversion of notes payable to
shares of common stock. . . . . . 490 675 0 0 0 675
Issuance of shares of common stock
under stock option plan. . . . . . 159 324 0 0 0 324
Issuance of shares of common stock
under employee stock purchase
plan. . . . . . . . . . . . . . . 200 330 0 0 0 330
Net loss . . . . . . . . . . . . . 0 0 0 (11,620) 0
Translation adjustments. . . . . . 0 0 0 0 152
Comprehensive loss . . . . . . . . 0 0 0 0 0 (11,468)
------ ----------- -------------- ---------------- --------- ---------
Balances, December 31, 2002. . . . . 28,621 $ 123,890 ($151) ($107,809) ($2,133) $ 13,797
====== =========== ============== ================ ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
48
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,620) $ (6,666) $ (9,651)
Adjustments to reconcile net loss to net cash from operating
activities:
Cumulative effect of change in accounting principle. . . . 0 0 6,770
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 3,748 3,034 1,740
Provision for excess and obsolete inventories and
lower of cost or market . . . . . . . . . . . . . . . . 2,190 317 400
Provision for doubtful accounts. . . . . . . . . . . . . . 5 0 (188)
Amortization of deferred finance costs . . . . . . . . . . 525 0 0
Write off of fixed assets. . . . . . . . . . . . . . . . . 72 0 0
Stock-based compensation . . . . . . . . . . . . . . . . . 0 78 490
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (3,248) 4,217 (662)
Inventories. . . . . . . . . . . . . . . . . . . . . . . 1,647 8,884 (10,814)
Other assets . . . . . . . . . . . . . . . . . . . . . . (258) (512) 352
Accounts payable . . . . . . . . . . . . . . . . . . . . (1,854) (295) 4,501
Accrued expenses . . . . . . . . . . . . . . . . . . . . (489) 238 111
Deferred revenue . . . . . . . . . . . . . . . . . . . . (4,675) (11,174) 4,659
Customer advances. . . . . . . . . . . . . . . . . . . . 1,809 0 0
--------- --------- ---------
Net cash used in operating activities. . . . . . . . . . (12,148) (1,879) (2,292)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures . . . . . . (502) (7,400) (5,053)
--------- --------- ---------
Net cash used in investing activities. . . . . . . . . . (502) (7,400) (5,053)
--------- --------- ---------
Cash flows from financing activities:
Issuance of convertible notes and warrants net of cash
issuance costs of $814 . . . . . . . . . . . . . . . . . . . 6,986 0 0
Net proceeds from issuance of common stock and warrants. . . 10,168 7,687 1,305
Proceeds from short-term bank borrowings . . . . . . . . . . 28,122 14,236 6,719
Payments of short-term bank borrowings . . . . . . . . . . . (24,790) (12,474) (4,000)
Proceeds from debt . . . . . . . . . . . . . . . . . . . 1,200 0 0
Payments for debt. . . . . . . . . . . . . . . . . . . . . . (685) 0 (52)
--------- --------- ---------
Net cash provided by financing activities. . . . . . . . 21,001 9,449 3,972
--------- --------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . 152 (263) (230)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . 8,503 (93) (3,603)
Cash and cash equivalents, beginning of year . . . . . . . . . 3,043 3,136 6,739
--------- --------- ---------
Cash and cash equivalents, end of year . . . . . . . . . . . . $ 11,546 $ 3,043 $ 3,136
========= ========= =========
Supplemental Cash Flow Information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 227 $ 470 $ 76
Cash paid for income taxes . . . . . . . . . . . . . . . . . . 157 1 177
Non-cash investing and financing activities:
Transfer of fixed assets to inventory. . . . . . . . . . . . 2,594 0 0
Conversion of notes payable to common stock . . . . . . . 675 0 0
Issuance of warrants in connection with convertible
notes financing . . . . . . . . . . . . . . . . . . . . $ 54 $ 0 $ 0
The accompanying notes are an integral part of the consolidated financial
statements.
49
GENUS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Genus, Inc. (the "Company") was incorporated in
California in 1981. The Company designs, manufactures and markets capital
equipment and deposition processes for advanced semiconductor manufacturing. The
Company's products are marketed worldwide either directly to end-users or
through sales representative arrangements. In January 1996, the Company opened a
subsidiary in South Korea to provide sales and service support to Korean
customers. The Company's customers include semiconductor manufacturers located
throughout the United States, Europe and in the Pacific Rim including Japan,
South Korea and Taiwan. The following is a summary of the Company's significant
accounting policies.
Basis of Presentation. The consolidated financial statements include the
accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of
significant intercompany accounts and transactions. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Liquidity. The Company has incurred losses from continuing operations of
approximately $11.6 million, $6.7 million and $9.7 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Management believes that
existing cash and available financing will be sufficient to meet projected
working capital, capital expenditure and other cash requirements for the next
twelve months but cannot provide assurances that future cash flows from
operations will be sufficient to meet operating requirements and allow the
Company to service debt and repay any underlying indebtedness at maturity. The
Company is actively marketing its existing and new products, which it believes
will ultimately lead to profitable operations. However, if the Company does not
achieve the anticipated cash flows, we may not be able to meet planned product
release schedules and forecast sales objectives. In such event the Company will
require additional financing to fund on-going and planned operations and may
need to implement further expense reduction measures. In the event the Company
needs additional financing, there is no assurance that funds would be available
to the Company or, if available, under terms that would be acceptable to the
Company.
Risks and Uncertainties. The Company operates in the highly competitive and
rapidly changing semiconductor and semiconductor manufacturing equipment
industries and is dependant on limited financial resources, a small number of
suppliers and customers with a concentration in Asian countries. The Company's
future growth is dependant on acceptance of new products and market acceptance
of systems relating to those products. Significant technological changes in the
industry could affect operating results adversely.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents. Cash equivalents consist primarily of money market funds.
Fair Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, short term bank borrowings and accounts
payable approximate estimated fair value because of the short maturity of those
financial instruments. The fair value of the convertible notes maturing August
15, 2005 with a carrying value of $5.3 million was $5.5 million at December 31,
2002.
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
50
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 95% of accounts receivable at
December 31, 2002. One customer accounted for an aggregate of 99% of accounts
receivable at December 31, 2001. The Company has written off bad debts of
$5,000, $294,000 and $188,000 in 2002, 2001, and 2000, 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.
Included in the inventory are customer evaluation units. If not purchased
by the customer within 6 months after shipment date, the units are amortized
over 3 years.
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.
Equipment includes demonstration equipment, which is located in our
Applications Laboratory and is used to demonstrate to our customers the
capabilities of our equipment to process wafers and deposit films. The gross
value of demonstration equipment is based on the cost of materials and actual
factory labor and overhead expenses incurred in manufacturing the equipment.
These costs related to refurbishing or maintaining existing demonstration
equipment, which do not add to the capabilities or useful life of the equipment,
are expensed as incurred. Demonstration equipment is stated at cost and
depreciated over a period of five years.
Revenue recognition. The Company derives revenue from the sale and installation
of semiconductor manufacturing systems and from engineering services and the
sale of spare parts to support such systems.
Equipment selling arrangements generally involve contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title. Effective January 1, 2000, at which time the Company did not
have verifiable objective evidence of the fair value of installation services,
the Company commenced deferring recognition of revenue from such equipment sales
until installation was complete and the product was accepted by the customer to
comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101. In the third quarter of 2002, the Company
established verifiable objective evidence of fair value of installation
services, one of the requirements for Genus to recognize revenue for
multiple-element arrangements prior to completion of installation services.
Accordingly, under SAB 101, if Genus has met defined customer acceptance
experience levels with both the customer and the specific type of equipment,
then the Company recognizes equipment revenue upon shipment and transfer of
title. A portion of revenue associated with undelivered elements such as
installation and on-site support related tasks is recognized for installation
when the installation is completed and the customer accepts the product and for
on-site support as the support service is provided. For products that have not
been demonstrated to meet product specifications for the customer prior to
shipment, revenue is recognized when installation is complete and the customer
accepts the product. Revenues can fluctuate significantly as a result of the
timing of customer acceptances. At December 31, 2002 and 2001, the Company had
deferred revenue of $2.7 million and $7.4 million, respectively.
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
Product Warranty. The Company provides one-year labor and two-year material
warranty on its products. Warranty expenses are accrued upon revenue
51
recognition. At present, based upon historical experience, the Company accrues
material warranty equal to 2% and 5% of shipment value for its LYNX2(R) and
LYNX3 products, respectively, and labor warranty equal to $20,000 per system for
both its LYNX2(R) and LYNX3 products. At the end of every quarter, the Company
reviews its actual spending on warranty and reassess if its accrual is adequate
to cover warranty expenses on the systems in the field which are still under
warranty. Differences between the required accrual and recorded accrual are
charged or credited to warranty expenses for the period.
Income Taxes. The Company accounts for income taxes using a method that
requires deferred tax assets to be computed annually on an asset and liability
method and adjusted when new tax laws or rates are enacted. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts more
likely than not to be realized. Income tax expense (benefit) is the tax payable
(refundable) for the period plus or minus the change in deferred tax assets and
liabilities during the period.
Foreign Currency. The Company has foreign sales and service operations.
With respect to all foreign subsidiaries excluding South Korea and Japan, the
functional currency is the U.S. dollar, and transaction and translation gains
and losses are included in results of operations. The functional currency of the
Company's South Korean subsidiary is the won, and the functional currency of the
Company's Japanese subsidiary is the yen. The translation from the applicable
foreign currency to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using the weighted average exchange rate during the period.
Adjustments resulting from such translation are reflected as cumulative
translation adjustments.
Net Loss Per Share. Basic net loss per share is computed by dividing loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
loss available to common shareholders, adjusted for convertible preferred
dividends and after-tax interest expense on convertible debt, if any, by the sum
of the weighted average number of common shares outstanding and potential common
shares (when dilutive).
Stock Compensation. The Company accounts for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation." Generally, the Company's policy is
to grant options with an exercise price equal to the quoted market price of the
Company's stock on the date of the grant. Accordingly, no compensation cost has
been recognized in the Company's statements of operations. Pro forma information
regarding net loss and net loss per share as if the Company recorded
compensation expense based on the fair value of stock-based awards have been
presented in accordance with Statement of Financial Accounting Standards No.148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" and is as
follows for the years ended December 31, 2002, 2001 and 2000 (in thousands,
except per share data):
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
--------- -------- ---------
Net loss, as reported . . . . . . . . . . . . . $(11,620) $(6,666) $ (9,651)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects. . . (2,797) (3,240) (2,927)
--------- -------- ---------
Pro forma net loss attributable to common
Shareholders. . . . . . . . . . . . . . . . . . $(14,417) $(9,906) $(12,578)
========= ======== =========
Earnings per share
Basic - as reported . . . . . . . . . . . . . . $ (0.43) $ (0.31) $ (0.51)
Basic - pro forma . . . . . . . . . . . . . . . $ (0.54) $ (0.47) $ (0.66)
Diluted - as reported . . . . . . . . . . . . . $ (0.43) $ (0.31) $ (0.51)
Diluted - as pro forma. . . . . . . . . . . . . $ (0.54) $ (0.47) $ (0.66)
52
The above pro forma effects on net loss may not be representative of the
effects on future results as options granted typically vest over several years
and additional option grants are expected to be made in future years.
The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 2002, 2001 and 2000;
2002 2001 2000
Risk free interest rates . . . . . . . 2.03% 4.19% 5.17%
Expected life . . . . . . . . . . . . 3.0 years 3.0 years 3.3 years
Expected volatility . . . . . . . . . 112% 112% 222%
Expected dividend yield . . . . . . . 0% 0% 0%
The weighted average fair value of options granted in 2002, 2001 and 2000
was $1.42, $1.93 and $8.09, respectively.
The fair value of the employees' purchase rights under the 1989 Employee
Stock Purchase Plan was estimated using the Black-Scholes option-pricing model
with the following assumptions for those rights granted in 2002, 2001 and 2000.
2002 2001 2000
Risk free interest rates . . . . . . . . . 1.21% 3.42% 5.17%
Expected life. . . . . . . . . . . . . . . 0.5 years 0.5 years 0.5 years
Expected volatility . . . . . . . . .. . . 123% 78% 222%
Expected dividend yield. . . . . . . . . . 0% 0% 0%
The weighted average fair value of those purchase rights granted in 2002,
2001 and 2000 was $1.06, $1.30 and $4.66, respectively.
Comprehensive loss. Comprehensive loss includes all changes in equity
during a period from non-owner sources. The Company's comprehensive loss
includes net loss and foreign currency translation adjustments and is displayed
in the statement of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of long-lived assets, except for certain
obligations of leases. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is currently assessing the impact of
SFAS No. 143 on our financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
53
Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes
costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002 and early application is encouraged. The Company will adopt SFAS No.
146 during the first quarter ended March 31, 2003. The effect on adoption of
SFAS No. 146 will change on a prospective basis the timing of when restructuring
charges are recorded from a commitment date approach to when the liability is
incurred.
In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company have adopted the disclosure provision of FIN No. 45 for the
year ended December 31, 2002 and we have not assessed the impact of the
recognition and measurement provisions of FIN No. 45 on our consolidated
financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is currently assessing the impact of EITF Issue No. 00-21 on our
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The transition and annual disclosure requirements of SFAS No. 148
are effective for fiscal years ended after December 15, 2002. The interim
disclosure requirements are effective for interim periods beginning after
December 15, 2002. We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire our stock. We have adopted the annual disclosure provisions of SFAS No.
148 in our financial reports for the year ended December 31, 2002 and will adopt
the interim disclosure provisions for our future quarterly financial reports. As
the adoption of this standard involves disclosures only, the Company does not
expect a material impact on our consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." FIN No. 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company is
currently assessing the impact of FIN No. 46 on our consolidated financial
statements.
54
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 deferred recognition of revenue from such equipment sales until
installation was complete and the product was accepted by the customer. In the
third quarter of 2002, the Company established verifiable objective evidence of
fair value of installation services, one of the requirements for Genus to
recognize revenue for multi-element arrangements prior to completion of
installation services. Accordingly, under SAB 101, if Genus has met defined
customer acceptance experience levels with both the customer and the specific
type of equipment, then the Company recognizes equipment revenue upon shipment
and transfer of title. As a result, the total revenue recognized in 2002 for
equipment sales where installation had not been completed and the system was not
accepted was $5.6 million.
Prior to the introduction of SAB 101, the Company 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 $6.8 million or $0.36 per basic and diluted share.
Unaudited Pro forma amounts of the retroactive application of the change in
accounting principle under SAB 101 are as follows (amounts are in thousands):
YEAR ENDED
------------
DECEMBER 31
------------
2000
------------
Revenues. . . . . . . . . . . . . . . . . $ 40,638
Net loss. . . . . . . . . . . . . . . . . (2,881)
Net loss per share:
Basic . . . . . . . . . . . . . . . . . $ (0.15)
Diluted . . . . . . . . . . . . . . . . $ (0.15)
NOTE 3. INVENTORIES
Inventories comprise the following (in thousands):
DECEMBER 31,
-----------------
2002 2001
------- --------
Raw materials and purchased parts . . . . . . . . . $ 4,493 $ 4,446
Work in process . . . . . . . . . . . . . . . . . . 3,417 2,499
Finished goods. . . . . . . . . . . . . . . . . . . 175 630
Inventory at customers' locations . . . . . . . . . 3,320 5,073
------- --------
$11,405 $ 12,648
======= ========
Finished goods include customer evaluation units with a net book value of
$175,000 and $619,000 at December 31, 2002 and 2001, respectively. Inventory at
customers' locations represent the cost of systems shipped to customers for
which the Company is awaiting customer acceptance.
NOTE 4. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost and comprise the
following (in thousands):
55
DECEMBER 31,
------------------------
2002 2001
----------- -----------
Equipment (useful life of 3 years) . . . . . . . . . . . . . $ 9,481 $ 9,165
Demonstration equipment (useful life ranges from 3-5 years) 21,258 24,161
Furniture and fixtures (useful life of 3 years). . . . . . . 1,045 1,083
Leasehold improvements (useful life ranges from 4-10 years) 4,332 4,385
----------- -----------
36,116 38,794
Less accumulated depreciation and amortization . . . . . . . (27,688) (27,611)
----------- -----------
8,428 11,183
Construction in progress . . . . . . . . . . . . . . . . . . 233 3,390
----------- -----------
$ 8,661 $ 14,573
=========== ===========
Depreciation expense was $3.7 million, $3.0 million and $1.7 million for 2002,
2001 and 2000, respectively.
NOTE 5. ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
Accrued expenses comprise the following (in thousands):
DECEMBER 31,
--------------
2002 2001
------ ------
System warranty . . . . . . . . . . . . $ 970 $ 803
Accrued commissions and incentives. . . 18 330
Accrued compensation and related items. 491 723
Federal, state and foreign income taxes 751 444
Other . . . . . . . . . . . . . . . . . 834 1,253
------ ------
$3,064 $3,553
====== ======
NOTE 6. WARRANTIES
The Company warrants that each of the products we sell shall be free of
defects in material and workmanship and meets performance specifications during
our warranty period. The warranty period means the period commencing upon the
earlier of successful completion of acceptance tests agreed in writing by the
Company's customers; the customer's use of products for the customer's
pre-production, production or product development activities; ninety days after
the product shipment date.
The Company's warranty period terminates for material coverage in
twenty-four months and for labor coverage in twelve months after the warranty
period begins, but in any event no later than twenty seven months from the
product shipment date for material coverage and fifteen months for labor
coverage, unless otherwise stated in the quotation. The Company provides labor
for all product repairs and replacement parts, excluding consumable items, free
of charge during the warranty period.
Changes in our warranty liability, which is included as a component of
"accrued expenses" on the Consolidated Balance Sheets, during the period
follows:
Balance at January 1, 2002 $803
Accrual for warranty liability for revenues recognized in the period 576
Settlements made (409)
-----
Balance at December 31, 2002 $970
=====
56
NOTE 7. SHORT-TERM BANK BORROWING
On December 20, 2001 and as amended on March 27, 2002 and March 20, 2003,
the Company maintained line of credit facilities from Silicon Valley bank for
$15.0 million, secured against eligible receivables and inventory. The interest
rate is prime plus 1.75% per annum and the facility expires on June 29, 2004.
The loan is collateralized by a first priority perfected security interest in
the Company's assets and has a covenant requiring the Company to maintain a
minimum tangible net worth (calculated as the excess of total assets over total
liabilities adjusted to exclude intangible assets and balances receivable from
officers or affiliates and to exclude debt subordinated to Silicon Valley Bank)
of $15 million. As of December 31, 2002, there was $7.8 million outstanding
under this credit facility.
On January 4, 2002, the Company received gross proceeds of $1.2 million
under a secured loan with CitiCapital, a division of Citigroup. The loan is
payable over 36 months, accrues interest of 8.75% per annum and is secured by
two systems in the Company's demonstration lab. There was a $515,000 outstanding
balance under this agreement at December 31, 2002.
NOTE 8. COMMITMENTS AND CONTINGENCIES
We maintain our headquarters, manufacturing and research and development
operations in Sunnyvale, California. Our lease for approximately 100,000 square
feet for our Sunnyvale facility expires in October 2012. Commencing in 2003,
our annual rental expense will be $1,828,000, which includes $200,000 per year
to recognize the impact of future rental increases on a straight-line basis. We
also have leases for our sales and support offices in Seoul, South Korea and
Tokyo, Japan. We believe that our existing facilities are adequate to meet our
current requirements and that suitable additional or substitute space will be
available as needed.
At December 31, 2002, minimum lease payments required under these operating
leases are as follows (in thousands):
2003 . . . . . . $ 1,628
2004 . . . . . . 1,628
2005 . . . . . . 1,628
2006 . . . . . . 1,653
2007 . . . . . . 1,799
Thereafter . . . 9,751
---------
$ 18,087
=========
Rent expense was $1.0 million, $682,000 and $806,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. Sublease rental income was $0,
$596,000 and $1.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. In September 2001, the sublease tenant terminated their
sublease and we reclaimed the office space.
Legal Proceedings
On June 6, 2001, ASM America, Inc ("ASMA") filed a patent infringement
action against Genus, Inc ("Genus"). ASMA's Complaint alleges that Genus is
directly and indirectly infringing U.S. Patent No. 5,916,365 ("the '365
Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No.
6,015,590 ("the '590 Patent") entitled "Method For Growing Thin Films," which
ASMA claims to own or exclusively license. The Complaint seeks monetary and
injunctive relief. Genus served its answer to ASMA's complaint on August 1,
2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM
57
International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568
("the '568 Patent") entitled "Method of Selective Etching Native Oxide"; (2)
declaratory judgment that the '365 and '590 Patents are invalid, unenforceable,
and not infringed by Genus; and (3) antitrust violations. An initial Case
Management Conference was held on October 16, 2001. On January 9, 2002, the
Court issued an order granting ASMA leave to amend its complaint to add Dr.
Sherman as a party and to add a claim that Genus is directly and indirectly
infringing U.S. Patent No. 4,798,165 ("the '165 Patent") entitled "Apparatus for
Chemical Vapor Deposition Using an Axially Symmetric Gas Flow"), which ASMA
claims to own. The court also severed and stayed discovery and trial of Genus'
antitrust claims until after trial of the patent claims. On February 4, 2002,
Genus served its Amended Answer to ASMA's amended complaint and counterclaimed
against ASMA for declaratory judgment that the '165 Patent is invalid,
unenforceable, and not infringed by Genus. On August 15, 2002, the Court issued
a claim construction order regarding the '590, '365, and '598 Patents. A claim
construction hearing regarding the '165 Patent was held on September 26, 2002,
and the Court issued a claim construction ruling regarding this patent on
November 13, 2002. On September 23, 2002 Genus filed motions for summary
judgment on noninfringement regarding the '590 and '365 Patents. On November
20, 2002, the Court granted Genus' motion for summary judgment of
noninfringement of the '365 Patent. On January 10, 2003, the Court granted
Genus' motion for summary judgment of noninfringement of the '590 Patent. A
hearing for dispositive motions on the remaining patent claims in the case is
currently set for June 20, 2003, and trial on those claims is currently set for
January 12, 2004. Management believes that the outcome of these matters will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows.
We may in the future be party to litigation arising in the ordinary course
of our business, including claims that we allegedly infringe third party
trademarks and other intellectual property rights. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
NOTE 9. CONVERTIBLE NOTES AND WARRANTS
On August 15, 2002, the Company raised $7.0 million, net of issuance costs,
by issuing unsecured 7% convertible notes and warrants to purchase 2,761,000
shares of common stock.
- $7.5 million of the convertible notes are convertible into common
stock at a price of $1.42 per share and a $300,000 convertible note is
convertible into common stock at a price of $1.25 per share. All
convertible notes accrue interest at 7% per annum, payable
semi-annually each February 15 and August 15, in cash or, at the
election of the Company, in registered stock. The convertible notes
are redeemable three years after issuance or may be converted into
5,521,000 shares of common stock prior to the redemption date at the
election of the investors.
- Warrants exercisable for 2,641,000 shares of common stock have an
exercise price of $1.42 per share and warrants exercisable for 120,000
shares of common stock have an exercise price of $1.25 per share. All
warrants are currently exercisable, expire on August 15, 2006 and are
callable by the Company after one year if the common stock price
exceeds 200% of the respective exercise prices. The Company determined
the fair value of the warrants, using the Black Scholes option pricing
model with a risk free intrest rate of 4.4 percent, volatility of 75%,
a term of three years and no dividend yield.
The Company classified the warrants as equity and allocated a portion of
the proceeds from the convertible notes to the warrants, using the relative fair
value method in accordance with APB No. 14. The allocation of proceeds to the
warrants reduced the carrying value of the convertible notes. As a result, the
fair value of the common stock issuable upon conversion of the notes exceeds the
carrying value of the convertible notes, resulting in a beneficial conversion
feature. The beneficial conversion feature is accreted over the stated term of
the convertible notes in accordance with EITF No. 00-27.
The net cash proceeds from the issuance of the convertible notes and
warrants were recorded as follows (in thousands):
58
Convertible note $ 5,560
Detachable warrants 1,312
Beneficial conversion feature 928
--------
7,800
Other asset, issuance costs (814)
--------
$ 6,986
========
The $2.2 million difference between the $5.6 million carrying value of the
notes and the $7.8 million face value of the notes, representing the value of
the warrants and the beneficial conversion feature, has been recorded as equity
and the corresponding debt discount is accreted as interest expense over the
three year term of the convertible notes, using the effective interest rate
method.
The Company incurred issuance costs of approximately $868,000, representing
cash obligations of $814,000 and the Black Scholes value of $54,000 of a warrant
to purchase 79,000 shares of common stock at $1.42 per share issued to a
placement agent in connection with the transaction. These warrants are currently
exercisable and expire on August 15, 2006. Issuance costs are deferred and
amortized as interest expense over the stated term of the convertible notes.
In the event of a change of control of the Company, the note holders may
elect to receive repayment of the notes at a premium of 10% over the face value
of the notes.
During the fourth quarter of 2002, convertible notes with a face value of
$675,000 were converted into 489,544 shares of common stock.
NOTE 10. SHAREHOLDERS' EQUITY
Sale of Common Stock
On May 17, 2001, the Company sold 2,541,785 shares of our common stock and
warrants to purchase up to 1,461,525 of additional shares of common stock for
net proceeds of approximately $6.9 million.
On January 25, 2002, the Company sold 3,871,330 shares of our common stock
and warrants to purchase up to 580,696 of additional shares of common stock for
net proceeds of approximately $7.9 million.
Warrants
Shares subject to warrants to purchase common stock (in thousands, except
per share amounts):
No. of Shares of No. of Shares of
Common Stock Common Stock
Exercise Underlying Warrants Underlying Warrants on
Date issued Price Upon Date of Issuance Reason December 31, 2002
- ------------- --------- ----------------- ----------------------------------- ----------------------
November 1999 $ 2.39 25 Credit Facility Costs 25
May 2001 $ 3.50 1,271(1) - Warrants Issued to Investors -
May 2001 $ 3.00 69 - Placement Agent (Financing Costs) 69
May 2001 $ 5.24 121 - Placement Agent (Financing Costs) 121
59
January 2002 $ 2.19 760(1) - Warrants Issued to Investors -
January 2002 $ 3.23 581 - Warrants Issued to Investors 581
August 2002 $ 1.42 2,641 Warrants Issued to Notes Holder 2,341
August 2002 $ 1.25 120 Warrants Issued to Notes Holder 120
August 2002 $ 1.42 79 Placement Agent (Financing Costs) 79
----------------- ----------------------
Totals 5,667 3,336
================= ======================
(1) Exercised in full prior to December 31, 2002.
In connection with the November 1999 $10.0 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 was amortized to interest expense over the
two-year life of the line.
In connection with the sale of common stock in May 2001, the Company issued
warrants to purchase 1,461,525 shares of common stock with exercise prices
ranging from $3.00 to $5.24. The warrants 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 the
Company makes distributions of common stock to its shareholders or effects a
reclassification. In January 2002, warrants exercisable for 1,270,891 shares of
common stock were adjusted and thereafter exercisable for an aggregate 760,203
additional shares of common stock. With the exception of certain warrants
exercisable for 190,634 shares of common stock, the warrants issued in May 2001
have been exercised in full.
In connection with the sale of common stock in January 2002, the Company
issued warrants to purchase 580,696 shares of common stock at an exercise price
of $3.23. The warrants have terms providing for an adjustment of the number of
shares underlying the warrants in the event that the Company issues new shares
at a price lower than the exercise price of the warrants, where the Company
makes a distribution of common stock to its shareholders or effects a
reclassification.
In connection with the issuance of convertible notes and warrants in August
2002, the Company issued warrants to purchase 2,760,669 shares of common stock
with exercise prices ranging from $1.25 to $1.42 to the note holders. The
Company determined the fair value of these warrants to be $1.3 million, using
the Black Scholes option-pricing model. Warrants to purchase 79,225 shares of
common stock were issued to the placement agent. Based on the Black-Scholes
option-pricing model, the fair market value of these warrants at the date of the
grant was $54,000, which was capitalized as part of the issuance costs and is
amortized to interest expense over the three-year life of the convertible notes.
Convertible notes
During 2002, the Company issued convertible notes with a face value of $7.8
million. These notes are convertible into common stock at the option of the note
holder. The conversion price for $7.5 million is $1.42 per share of common stock
and $1.25 per share of common stock for the remaining $300,000. During 2002, a
note holder converted notes with a face value of $675,000. At December 31, 2002,
the remaining notes with a face value of $7.1 million were convertible into
5,031,797 shares of common stock.
60
Shares reserved for future issuance
A summary of shares reserved for future issuance by the Company as of December
31, 2002 is as follows:
Exercise of warrants 3,336,224
Conversion of convertible notes 5,031,797
Stock options 4,142,254
Employee Stock Purchase Plan 31,811
----------
12,842,086
==========
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,
-----------------------------
2002 2001 2000
--------- -------- --------
Loss attributable to common shareholders before cumulative effect
of change in accounting principle:
Numerator-Basic and diluted:
Net loss attributable to common shareholders . . . . . . . . $(11,620) $(6,666) $(2,881)
========= ======== ========
Denominator-Basic and diluted:
Weighted average common stock outstanding . . . . . . . . . . 26,934 21,163 18,937
========= ======== ========
Basic and diluted net loss per share. . . . . . . . . . . . . . $ (0.43) $ (0.31) $ (0.15)
========= ======== ========
Net loss attributable to common shareholders:
Numerator-Basic and diluted:
Net loss attributable to common shareholders . . . . . . . . $(11,620) $(6,666) $(9,651)
========= ======== ========
Denominator-Basic and diluted:
Weighted average common stock outstanding . . . . . . . . . . 26,934 21,163 18,937
========= ======== ========
Basic and diluted net loss per share. . . . . . . . . . . . . . $ (0.43) $ (0.31) $ (0.51)
========= ======== ========
Stock options to purchase 4,142,254 shares of common stock with a weighted
average exercise price of $3.05 were outstanding on December 31, 2002, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 2002. Warrants for the purchase of 3,336,224 shares of common
stock with a weighted average exercise price of $1.89 were outstanding at
December 31, 2002 but were not included in the computation of diluted loss per
share because the Company has a net loss for 2002.
Stock options to purchase 3,378,321 shares of common stock with a weighted
average exercise price of $3.72 were outstanding on December 31, 2001, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 2001. Warrants for the purchase of 1,486,525 shares of
common stock with a weighted average exercise price of $3.60 were outstanding at
December 31, 2001, but were not included in the computation of diluted loss per
share because the Company has a net loss for 2001.
Stock options to purchase 2,972,386 shares of common stock with a weighted
average exercise price of $4.28 were outstanding on December 31, 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 with a weighted average exercise price of $3.57 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.
61
Stock Option Plan
In March of 2000, the Company adopted the 2000 Incentive Stock Option Plan
to replace the 1991 Incentive Stock Option Plan. The 1991 Incentive Stock Option
Plan was scheduled to expire ten years after its adoption in 1991. Under the
2000 Incentive Stock Option Plan, the Board of Directors can grant incentive and
nonstatutory stock options. The Board of Directors has the authority to
determine to whom options will be granted, the number of options, the term and
exercise price. The options are exercisable at times and increments as specified
by the Board of Directors, and generally vest over a three-year period and
expire five years from the date of grant. At December 31, 2002, the Company had
reserved 6,503,006 shares of common stock for issuance under the 2000 Incentive
Stock Option Plan, which included 700,000 and 1,000,000 shares added to the plan
in 2001 and 2002, respectively. At December 31, 2002, a total of 210,360 shares
remained available for future grants.
Activity under the 1991 and 2000 Incentive Stock Option Plans is set forth
in the table below:
(in thousands, except per share data):
Weighted
Available Options Outstanding Average
For ------------------- Exercise
Grant Options Price Per Share Amount Price
---------- --------- --------------------- --------------------- ---------
Balance, January 1, 2000 441 2,639 $ 0.88 to $8.00 $ 5,563 $ 2.11
Granted (1,052) 1,052 2.25 to 15.75 8,795 8.36
Exercised - (490) 0.88 to 3.22 (1,023) 2.09
Terminated 229 (229) 0.88 to 15.75 (602) 2.63
Authorized 800 - - - - -
---------- --------- --------------------- --------------------- ---------
Balance, December 31, 2000 418 2,972 0.88 to 15.75 12,733 4.28
Granted (1,005) 1,005 1.59 to 6.83 2,859 2.85
Exercised - (243) 2.02 to 7.32 (521) 2.15
Terminated 356 (356) 2.02 to 15.75 (2,489) 6.99
Authorized 700 - - - - -
---------- --------- --------------------- --------------------- ---------
Balance, December 31, 2001 469 3,378 0.88 to 15.75 12,582 3.72
Granted (1,629) 1,629 1.07 to 2.89 3,421 2.02
Exercised - (159) 0.88 to 3.03 (324) 2.05
Expired (336) - - - - -
Terminated 760 (706) 0.88 to 4.00 (3,044) 1.57
Authorized 1,000 - - - - -
---------- --------- --------------------- --------------------- ---------
Balance, December 31, 2002 210 4,142 $ 0.88 to $15.75 $ 12,635 $ 2.11
========== ========= ===================== ===================== =========
Options outstanding and currently exercisable by exercise price under the
option plan at December 31, 2002 are as follows:
62
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg. Exercise
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- --------------- ----------- -----------------------
$0.88 - $ 0.88 500,440 0.72 $ 0.88 500,440 $ 0.88
1.07 - 1.29 626,300 4.62 1.29 61,997 1.27
1.31 - 2.30 543,625 2.71 2.01 333,618 1.88
2.38 - 2.50 250,833 2.91 2.44 112,455 2.44
2.56 - 2.56 552,333 4.47 2.56 92,746 2.56
2.59 - 3.03 676,500 2.34 2.82 431,613 2.91
3.04 - 5.34 604,723 2.57 4.14 430,318 4.05
5.93 - 10.06 283,000 2.32 7.84 192,132 7.85
11.69 - 11.69 1,000 2.31 11.69 667 11.69
15.75 - 15.75 103,500 2.19 15.75 72,335 15.75
- --------------- ----------- ---------------- --------------- ----------- -----------------------
$0.88 - $15.75 4,142,254 2.88 $ 3.05 2,228,321 $ 3.28
=============== =========== ================ =============== =========== =======================
On January 24, 2001, the Company's Chief Executive Officer issued a full
recourse promissory note for $151,000 in connection with the exercise of stock
options. The note bears interest of 8% per annum and is repayable on January 24,
2004.
Employee Stock Purchase Plan
The Company has reserved a total of 3,250,000 shares of common stock for
issuance under a qualified stock purchase plan, which provides substantially all
Company employees with the right to acquire shares of the Company's common stock
through payroll deductions. This total includes 300,000 shares added to the plan
in each 2002 and 2001. Under the plan, the Company's employees, subject to
certain restrictions, may purchase shares of common stock at the lesser of 85%
of fair market value at either the beginning of period or the end of each
six-month purchase period. At December 31, 2002, 2,918,189 shares have been
issued under the plan. The Company has issued 200,247, 261,177 and 287,971
shares in 2002, 2001 and 2000, respectively. At December 31, 2002, shares
available for purchase under this plan were 331,811.
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 purpose of the
Rights Plan is to protect shareholders' rights and to maximize share value in
the event of an unfriendly takeover attempt. As of the record date of October
13, 2000, each share of common stock of Genus, Inc. outstanding was granted one
right under the new plan. Each right is exercisable only under certain
circumstances and upon the occurrence of certain events and permits the holder
to purchase from the Company one one-thousandth (0.001) of a share of Series C
Participating Preferred Stock at an initial exercise price of forty dollars
($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred
stock authorized in connection with the Rights Plan will be used for the
exercise of any preferred share purchase rights in the event that any person or
group (the Acquiring Person) acquires beneficial ownership of 15% or more of the
outstanding common stock. In such event, the shareholders (other than the
Acquiring Person) would receive common stock of the Company having a market
value of twice the exercise price. Subject to certain restrictions, the Company
may redeem the rights issued under the Rights Plan for $0.001 per right and may
amend the Rights Plan without the consent of rights holders. The rights will
expire on October 13, 2010, unless redeemed by the Company.
Stock Compensation
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 vested
63
over three years and expired between February 2001 and March 2002. The work was
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 are recognized as compensation expense in the period of the change.
The Company recorded none, $16,000 and $218,000 as compensation expense relating
to these options in 2002, 2001 and 2000, respectively.
In addition, the Company recorded $28,000 and $209,000 of stock compensation
in 2001 and 2000, respectively, 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.
During 2001, the Company recorded $34,000 of stock compensation in
connection with the accelerated vesting of options granted to a terminated
employee.
NOTE 11. 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 2002, 2001 and 2000, the Company
contributed $174,000, $101,000, and $142,000, respectively, to the Benefit Plan.
NOTE 12. OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------
2002 2001 2000
------ ------ ------
Foreign exchange, net . . . . . . . . 98 (27) (58)
Other, net. . . . . . . . . . . . . . (18) 112 32
------ ------ ------
$ 80 $ 85 $ (26)
====== ====== ======
NOTE 13. INCOME TAXES
Income tax expense for the years ended December 31, 2002, 2001 and 2000 was
$538,000, $70,000 and $490,000, respectively.
The components of income (loss) before income taxes were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
--------- -------- --------
Domestic loss before taxes . . . . . . . . . . . . $(11,407) $(6,905) $(3,829)
Foreign income (loss) before taxes . . . . . . . . 325 309 1,438
--------- -------- --------
Loss before taxes and cumulative effect of change
in accounting principle. . . . . . . . . . . . . . $(11,082) $(6,596) $(2.391)
========= ======== ========
64
The income tax expense for 2002, 2001 and 2000, respectively, was due to
current foreign taxes.
The Company's effective tax rate for the years ended December 31, 2002,
2001 and 2000 differs from the U.S. federal statutory income tax rate as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
2002 2001 2000
------- ------- -------
Federal income tax at statutory rate . . . . . . 35.0% 35.0% 35.0%
Foreign income taxes. . . . . . . . . . . . . . . (4.9) ( 1.1) (20.5)
Net operating loss not benefited. . . . . . . . . (35.0) (35.0) (35.0)
------- ------- -------
( 4.9%) ( 1.1%) (20.5%)
======= ======= =======
Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31,
----------------------
2002 2001
----------- ---------
Deferred tax assets
Depreciation and amortization . . . . . . . . . . $ 2,511 $ 1,118
Inventory, accounts receivable and other reserves 2,092 1,187
Tax credits . . . . . . . . . . . . . . . . . . . 2,921 1,517
Accrued expenses. . . . . . . . . . . . . . . . . 1,236 718
Deferred revenue. . . . . . . . . . . . . . . . . 1,563 1,063
Net operating loss carry forwards . . . . . . . . 33,900 32,446
----------- ---------
44,223 8,049
Deferred tax asset valuation allowance . . . . . ( 44,223) (38,049)
----------- ---------
Net deferred tax assets . . . . . . . . . . . . . $ - $ -
=========== =========
The deferred tax assets valuation allowance at December 31, 2002 and 2001
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.
TAX REPORTING EXPIRATION DATES
-------------- ----------------
U.S. regular tax operating losses $ 97,234 2005-2021
U.S. business tax credits 2,921 2003-2021
State net operating losses $ 9,102 2004-2005
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.
65
NOTE 14. SEGMENT INFORMATION
Currently, the Company operates in one industry segment. The Company is
engaged in the design, manufacture, marketing and servicing of advanced thin
film deposition systems used in the semiconductor manufacturing industry.
Export Revenues
For reporting purposes, export revenues are determined by the location of
the parent company of the Company's customer, regardless of where the delivery
was made by the Company.
Revenues by geographical region for the years ended December 31, 2002,
2001, and 2000 were as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------
2002 2001 2000
------- ------- -------
United States . . . . . . . . . . . $11,199 $ 3,200 $ 3,095
South Korea . . . . . . . . . . . . 22,430 35,767 37,123
Japan . . . . . . . . . . . . . . . 2,758 3,089 149
Taiwan. . . . . . . . . . . . . . . 85 2,300 0
Europe. . . . . . . . . . . . . . . 3,295 2,706 0
Rest of world . . . . . . . . . . . 0 1,677 271
------- ------- -------
$39,767 $48,739 $40,638
======= ======= =======
The Company did not hold any material long-lived assets in countries other
than the United States at December 31, 2002 and December 21, 2001.
Major Customers
In 2002, Samsung Electronics Company, Ltd, Seagate Technologies, Inc., IBM,
and Asuka Project accounted for 58%, 24%, 7%, and 6% of revenues, respectively.
In 2001, Samsung Electronics Company, Ltd, Read-Rite Corporation, NEC, Infineon
and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In
2000, Samsung Electronics Company, Ltd. and Micron Technology, Inc. accounted
for 91% and 5% of revenues, respectively.
NOTE 15. RELATED PARTY TRANSACTIONS
Mario Rosati, a board member of the Company, is also a partner of Wilson,
Sonsini, Goodrich & Rosati, the general counsel of the Company. In 2002, 2001
and 2000, the Company incurred $630,000, $781,000 and $224,000 in legal costs,
respectively, and paid approximately $1.1 million, $57,000 and $222,000,
respectively, to Wilson Sonsini Goodrich & Rosati. At December 31, 2002, the
Company owed approximately $297,000 to Wilson Sonsini Goodrich & Rosati.
66
ITEM 15 (a) 2. FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Genus, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 7, 2003, except as to the first paragraph of Note 7, which is as
of March 20, 2003, appearing in this Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
February 7, 2003
67
Genus, Inc.
Schedule II "Valuation and Qualifying Accounts"
- ----------------------------------------------------------------------------------------
Description Balance at Additions Deductions Balance at
Beginning of Charged to Charged to end
Period costs/exp Other of period
- ----------------------------------------------------------------------------------------
2002
Allowance for doubtful accounts $ 69 $ 5 $ 5 $ 69
Allowance for excess and
obsolete inventory 2,115 2,190 0 4,305
Deferred tax valuation allowance 38,049 6,174 0 44,223
2001
Allowance for doubtful accounts $ 363 $ 0 $ 294 $ 69
Allowance for excess and
obsolete inventory 2,830 317 (1,032) 2,115
Deferred tax valuation allowance 30,826 7,223 0 38,049
2000
Allowance for doubtful accounts $ 551 $ 0 $ 188 $ 363
Allowance for excess and
obsolete inventory 2,445 400 15 2,830
Deferred tax valuation allowance 32,923 (2,097) 0 30,826
- ----------------------------------------------------------------------------------------
68
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 27th day of March 2003
GENUS, INC.
By: /s/ Shum Mukherjee
---------------------------------
Shum Mukherjee
Executive Vice President, Finance
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Shum Mukherjee and William W R Elder,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------- ---------------------------------- --------------
/s/ William W.R. Elder Chairman of the Board, President March 27, 2003
- ----------------------- and Chief Executive Officer
William W.R. Elder (principal executive officer)
/s/ Shum Mukherjee Executive Vice President, Finance March 27, 2003
- ----------------------- Chief Financial Officer
Shum Mukherjee (principal financial officer and
principal accounting officer)
/s/G. Frederick Forsyth Director March 27, 2003
- -----------------------
G. Frederick Forsyth
/s/ Todd S. Myhre Director March 27, 2003
- -----------------------
Todd S. Myhre
/s/ Mario M. Rosati Director March 27, 2003
- -----------------------
Mario M. Rosati
/s/ George D. Wells Director March 27, 2003
- -----------------------
George D. Wells
69
/s/Robert J. Richardson Director March 27,2003
- -----------------------
Robert J. Richardson
70
Sarbanes-Oxley Section 302(a) Certifications
I, William W.R. Elder, certify that:
1. I have reviewed this annual report on Form 10-K of Genus, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ William W. R. Elder
---------------------------
William W.R. Elder
Chief Executive Officer
71
I, Shum Mukherjee, certify that:
1. I have reviewed this annual report on Form 10-K of Genus, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Shum Mukherjee
--------------------
Shum Mukherjee
Chief Financial Officer
72
GENUS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian
Associates, Inc. and Registrant and exhibits thereto (15)
3.1 Amended and Restated Articles of Incorporation of Registrant as filed
June 6, 1997 (11)
3.2 By-laws of Registrant, as amended (13)
4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between
Registrant and Bank of America, N.T. and S.A., as Rights Agent (4)
4.2 Convertible Preferred Stock Purchase Agreement, dated February 2,
1998, among the Registrant and the Investors (14)
4.3 Registration Rights Agreement, dated February 2, 1998, among the
Registrant and the Investors (14)
4.4 Certificate of Determination of Rights, Preferences and Privileges of
Series A Convertible Preferred Stock (14)
4.5 Certificate of Determination of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock (17)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the
Registrant and the Investors (17)
4.7 Registration Rights Agreement, dated January 17, 2002, as amended,
amongst the Registrant and the Investors (20)
4.8 Securities Purchase Agreement dated July 31, 2002 among the Company
and the Purchasers signatory thereto. (21)
4.9 Resale Registration Rights Agreement dated August 14, 2002 among the
Company and the Purchasers signatory thereto. (21)
4.10 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (21)
10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4
Mulliken Way, Newburyport, Massachusetts, and amendment and extension
of lease, dated March 17, 1987 (1)
10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at
Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1)
10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10)
10.5 Registrant's 2000 Stock Plan (19)
10.6 Distributor/Representative Agreement, dated August 1, 1984, between
Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.)
(1)
10.7 Exclusive Sales and Service Representative Agreement, dated October 1,
1989, between Registrant and AVBA Engineering Ltd. (3)
73
10.8 Exclusive Sales and Service Representative Agreement, dated as of
April 1, 1990, between Registrant and Indosale PVT Ltd. (3)
10.9 License Agreement, dated November 23, 1987, between Registrant and
Eaton Corporation (1)
10.10 Exclusive Sales and Service Representative Agreement, dated May 1,
1989, between Registrant and Spirox Taiwan, Ltd. (2)
10.11 Lease, dated April 7, 1992, between Registrant and The John A. and
Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad
Drive, Sunnyvale, California (6)
10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.13 License and Distribution Agreement, dated September 8, 1992, between
the Registrant and Sumitomo Mutual Industries, Ltd. (8)
10.14 Lease Agreement, dated October 1995, for Registrant's facilities at
Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9)
10.15 International Distributor Agreement, dated July 18, 1997, between
Registrant and Macrotron Systems GmbH (12)
10.16 Credit Agreement, dated August 18, 1997, between Registrant and
Sumitomo Bank of California (12)
10.18 Settlement Agreement and Mutual Release, dated April 20, 1998, between
Registrant and James T. Healy (16)
10.19 Form of Change of Control Severance Agreement (16)
10.20 Settlement Agreement and Mutual Release, dated January 1998, between
the Registrant and John Aldeborgh (18)
10.21 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Mary Bobel (18)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- -----------------------------
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988,
and amended on September 21, 1988, October 5, 1988, November 3, 1988,
November 10, 1988, and December 15, 1988, which Registration Statement
became effective November 10, 1988.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989,
and amended May 24, 1989, which Registration Statement became effective May
24, 1989.
(3) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.
(5) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended 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.
74
(9) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(10) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(12) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(13) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(14) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated February 12, 1998.
(15) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated April 15, 1998.
(16) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 1997.
(17) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated July 29, 1998.
(18) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998.
(19) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 21, 2000.
(20) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated January 25, 2002.
(21) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated August 20, 2002.
75