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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, 2003
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OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-17139
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GENUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2790804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1139 KARLSTAD DRIVE, SUNNYVALE, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 747-7120
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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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
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 30,
2003) as reported by the Nasdaq National Market, was approximately $84 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 27, 2004, Registrant had 39,625,284 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 2004 Annual Meeting of
Shareholders - Items 10, 11, 12 and 13.
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GENUS, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I.
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 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34
Item 8. Consolidated Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
Item 9A Controls and Procedures 36
PART III.
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Item 14. Principal Accountant Fees and Services 37
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
SIGNATURES 68
EXHIBITS 69
PART I
ITEM 1. BUSINESS
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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 and non-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 HGST,
Western Digital, Fujitsu, 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
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connects the components. Building an integrated circuit requires the deposition
of a series of film layers, which may be conductors, dielectrics (insulators),
or semiconductors. The overall growth of the semiconductor industry and the
increasing complexity of integrated circuits have led to increasing demand for
advanced semiconductor equipment. Although the semiconductor industry has grown
over 30 years with an average annual growth rate (CAGR) of 14.0%, 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. During 2003, we
continued to experience 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 and
grew by around 5% in 2003 from 2002. VLSI expects a growth in industry shipments
in 2004 of approximately 40% when compared to 2003.
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.
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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.
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
100nm and below, the industry continues to face significant challenges and
roadblocks pertaining to improving device performance and feature size
reduction. The International Technology Roadmap (2003) 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.
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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.
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 0.10 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;
- 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.
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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 and
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 to 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 one to two year parts
warranty and a one-year labor warranty.
MARKETS AND APPLICATIONS
In 2003, 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
were just introducing ALD technology. In 2003, we have developed films using
tungsten silicide, tungsten nitride and blanket tungsten by conventional CVD,
and aluminum oxide, hafnium oxide and zirconium oxide by ALD. In addition, Genus
has the demonstrated capability to integrate these ALD films as alloys and
nanolaminates (layered structures) for the engineering of specialized
capabilities on its platforms. These films serve the Company for applications in
semiconductors for gate and capacitor, as well as for non-semiconductor
applications (thin film magnetic heads used in the hard disk drive industry).
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 have 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.
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Capacitor films
Genus is commercializing its ALD technology with the application to
advanced capacitors, including cylinder ("stacked"), trench, embedded, rf and
decoupling capacitor applications. Two semiconductor customers have 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 market. This market developed because of a production ready-made solution
that the Genus ALD dielectrics provide for the scaling of the gap dielectrics.
Three data storage customers have selected Genus 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 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
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
Our ALD family of products called, StrataGem, serve the semiconductor and
storage technology markets. StrataGem 200 , StrataGem 300 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, lanthanmoxide)
- Metal films (e.g., titanium nitride and tungsten nitride)
- Nanolaminates and alloys
LYNX Series
LYNX2(R). Manufacturers of advanced DRAM devices of 0.35 to 0.10 micron
currently use the LYNX2 system in production. LYNX2 systems support over 200
process modules in high volume production. Production availability for the LYNX2
system runs from 90-95%. LYNX platforms are also used for customer development
and pilot manufacturing for more advanced semiconductor applications below 0.10
micron. The LYNX2 features a wafer-handling platform that is compatible with the
Modular Equipment Standards Committee (MESC). This platform uses a centrally
located, dual-end 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 allows the addition of up to four
process modules, which can be run serially or in parallel. The LYNX2 process
module design also offers a multi-zone resistive heater for more uniform wafer
heating, two-zone showerheads for improved film composition uniformity and a
state-of-the-art gas delivery system that minimizes chamber-to-chamber variance.
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LYNX3(TM). We introduced the LYNX3 in January 1999 as our first 300mm low
pressure CVD process module in a beta system. The LYNX3 process module is based
on a newly developed and patented process chamber concept that results in
exceptional uniformity. The LYNX3 is designed to run all films currently
supported by the LYNX2, as well as all films currently in development. The LYNX3
system supports up to four process modules, which can be run serially or in
parallel. Also, we have developed an advanced version of the LYNX3, which is
designed to be a "bridge tool", capable of running either 200 or 300mm wafers.
StrataGem Family (StrataGem 200, StrataGem 300 and StrataGem TFH)
The ranges of thin films that can be deposited using the StrataGem family
products include:
- ALD Dielectrics. In July 1999, we announced the availability of ALD
aluminum oxide. ALD has many possible applications in the
semiconductor market including as a high dielectric constant oxide for
either capacitors or for gate dielectrics, as an etch stop for
advanced structures, or for hard mask applications. We made other
advanced ALD dielectrics available during 2000 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.
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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 Annual Report on Form 10-K 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.
Generally, we offer a 12-month labor warranty and a 12 to 24-month parts
warranty. We also offer training to our customers at our headquarters and
on-site support as an enhancement to our standard warranty program.
SALES AND MARKETING
We maintain direct sales and service offices in the United States, Japan,
and South Korea. 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 United States, and Taiwan.
CUSTOMERS
We rely on a limited number of customers for a substantial portion of our
net sales. Our major customers in 2003 included Samsung, Hitachi Global Storage
Systems (HGST) and Seagate Technologies. As of December 31, 2003 we had 10
active customers serving three market segments - Memory, Logic, and Data
Storage.
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 or a letter of intent 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 $13.0
million as of December 31, 2003 compared to a backlog of $24.7 million as of
December 31, 2002. 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.
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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 $7.6 million for 2003, $8.0
million for 2002, and $12.1 million for 2001, representing 13%, 20%, and 25% 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
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
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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, Veeco Instruments and two private companies;
Aviza Technology, based in Silicon Valley and IPS, based in South Korea.
Competition from these competitors increased in 2002 and 2003, 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.
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.
12
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 45 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.
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. 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.
EMPLOYEES
As of December 31, 2003, we employed 156 full-time and temporary employees
Worldwide. The success of our future operations depends in large part on our
ability to recruit and retain qualified employees, particularly those highly
skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense, particularly in the San Francisco bay
area, where our headquarters are located. At times we have experienced
difficulty in attracting new personnel, and we may not be successful in
retaining or recruiting sufficient key personnel in the future. None of our
employees is represented by a labor union, and we have never experienced a work
stoppage, slowdown or strike. We consider our relationships with our employees
to be good.
Information regarding our foreign and domestic operations and export
revenues is included in Note 13 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.
- ------------- -----------
13
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 100,000 square feet. Our lease for the Sunnyvale facility expires
in October 2012. Commencing in 2004, our annual rental expense will be
approximately $1.8 million. 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.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. 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 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 the 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 the Genus motion for summary
judgment of noninfringement of the '365 Patent. On January 10, 2003, the Court
granted Genus' motion for summary judgment of non-infringement the '590 Patent.
On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement").
Under the terms of the Settlement, Genus gained a royalty-free license to each
of the patents ASMI asserted in the litigation, including both ALD patents as
well as Patent '165. By specific agreement of the parties, these licenses are
applicable to Genus' successors and affiliates. Genus has likewise obtained a
covenant from ASMI that it will not sue Genus for patent infringement or
antitrust violations for the next five years.
In return, Genus has granted ASMI and its successors and affiliates a
royalty-free license to the patent Genus asserted in the litigation, Patent
'568, and has agreed to dismiss its antitrust claims against ASMI. Genus has
also agreed not to sue ASMI for patent infringement or antitrust violations for
the next five years.
No payments have been made by either Genus or ASMI in exchange for these
licenses and the covenant not to sue. However, under the terms of the
Settlement, ASMI has the right to pursue an appeal of the District Court's
judgments of non-infringement regarding the ALD patents. The agreement specifies
that if the Federal Circuit vacates either of the existing judgments related to
the ALD patents based on a change in the District Court's claim construction,
Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents
it has been granted under the agreement.
14
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 2003, 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. . . 65 Chairman and Chief Executive Officer
Thomas E. Seidel, Ph.D. 68 Executive Vice President, Chief Technical Officer
Shum Mukherjee. . . . . 53 Executive Vice President, Finance and Operations,
and Chief Financial Officer
Eddie Lee . . . . . . . 52 Executive Vice President, Advanced Engineering
Except for Mr. Mukherjee, 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.
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.
15
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 2003 and 2002 set forth below
are as reported by the NASDAQ National Market System. At February 27, 2004, we
had 416 registered shareholders as reported by Mellon Investor Services. The
closing sales price of Genus common stock on December 31, 2003, the last trading
day in 2003, was $ 6.00.
2003 2002
------------------ ------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter. . . . $ 3.38 $ 1.51 $ 3.35 $ 2.26
Second Quarter . . . 3.25 1.56 4.40 1.93
Third Quarter. . . . 4.82 2.40 1.95 1.00
Fourth Quarter . . . $ 7.50 $ 3.85 $ 2.81 $ 1.00
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.
16
ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001 2000(1) 1999
-------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . . $56,861 $ 39,767 $48,739 $ 40,638 $28,360
Costs and expenses:
Costs of goods sold. . . . . . . . . . . . 39,249 29,143 32,500 24,385 16,628
Research and development . . . . . . . . . 7,597 8,011 12,118 8,659 5,368
Selling, general and administrative. . . . 11,741 12,621 10,381 10,093 7,930
Restructuring and other. . . . . . . . . . 0 0 0 0 543
--------------------------------------------------
Loss from operations . . . . . . . . . . . . . (1,726) (10,008) (6,260) (2,499) (2,109)
Other income (expense), net. . . . . . . . . . (1,565) (1,074) (336) 108 669
--------------------------------------------------
Loss before provision for income taxes and
cumulative effect of change in accounting
principle. . . . . . . . . . . . . . . . . . (3,291) (11,082) (6,596) (2,391) (1,440)
Provision for income taxes . . . . . . . . . . 228 538 70 490 177
--------------------------------------------------
Loss before cumulative effect of change in
accounting principle . . . . . . . . . . . . (3,519) (11,620) (6,666) (2,881) (1,617)
Cumulative effect of change in accounting
principle. . . . . . . . . . . . . . . . . . 0 0 0 (6,770) 0
--------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . $(3,519) $(11,620) $(6,666) $ (9,651) $(1,617)
==================================================
Net loss per share before cumulative
effect of change in accounting principle
Basic and diluted. . . . . . . . . . . . . (0.11) (0.43) (0.31) (0.15) (0.09)
Cumulative effect of change in accounting
principle (1)
Basic and diluted (0.36)
Net loss per share:
Basic and diluted. . . . . . . . . . . . . (0.11) (0.43) (0.31) (0.51) (0.09)
Shares used in computing net loss
per share:
17
Basic and diluted. . . . . . . . . . . . . 31,303 26,934 21,163 18,937 18,134
The following are pro forma amounts with the change in accounting principle
related to revenue recognition applied retroactively to the years ended
December 31, 2000 and 1999, respectively.
YEAR ENDED DECEMBER 31,
-------------------------------------
2000(1) 1999
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues. . . . . . . . $ 40,638 $ 27,992
Net loss. . . . . . . . (2,881) (3,232)
Net loss per share:
Basic . . . . . . . . $ (0.15) $ (0.18)
Diluted . . . . . . . $ (0.15) $ (0.18)
(1) In 2000, the Company changed its accounting method for recognizing revenue
to comply with Staff Accounting Bulletin number 101.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001 2000 1999
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . $41,608 $11,546 $ 3,043 $ 3,136 $ 6,739
Working capital . . . . . . . . . . . . . . 45,313 9,650 (2,600) 896 14,151
Total assets. . . . . . . . . . . . . . . . 71,768 41,510 35,902 44,535 27,744
Convertible notes and long term liabilities 5,806 5,571 0 0 0
Total shareholders' equity. . . . . . . . . $49,424 $13,797 $12,128 $11,292 $19,378
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. These
forward-looking statements include statements about trends and uncertainties in
our business, such as projected level of future expenses, revenues etc.
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.
18
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 and non-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 2003, Samsung accounted for 69% of our revenue, 58% in 2002 and 73%
in 2001. There is no long-term agreement between Genus and Samsung. Over the
past three years, we have gradually expanded our customer base and at the end of
2003, we had ten customers.
During the fiscal year 2003, 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 77% of revenue in 2003, 72% of revenue
in 2002 and 93% of revenue in 2001. 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 assets and liabilities 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.
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, 2003, 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 slightly 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.
19
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 the Company believes 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. 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. If a product delivered to a
customer 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, or where objective
and reliable evidence of the fair value of the undelivered elements, such as
installation is not available, 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 and the
applicability of multiple element accounting to products shipped in any
particular period. At December 31, 2003 and 2002, the Company had deferred
revenue of $331,000 and $2.7 million, respectively.
Revenues from sale of spare parts are recognized when title and risk of loss
passes to the customers, generally upon shipment. Revenues from engineering
services are recognized as the services are completed over the duration of the
contract.
Accrual for warranty expenses
In general, the Company's warranty period terminates for material coverage in
twelve to twenty-four months and for labor coverage in twelve months after the
warranty period begins, but in any event no later then 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. 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 in which such difference is determined. At December 31,
2003 and 2002, the Company had accrued $1,451,000 and $970,000, 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.
20
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 and was $4.6 million at December 31, 2003 and $4.5 million at December
31, 2002. 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 financial
position. At December 31, 2003 and 2002, the Company had cumulative inventory
write downs of $4.8 million and $4.3 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 three to 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.
RESULTS OF OPERATIONS
Net Sales
Revenues were $56.9 million, $39.8 million and $48.7 million in 2003, 2002,
and 2001 respectively. Revenues were up 43% in 2003 from 2002 and down 18% in
2002 from 2001. Revenues in 2003 included four 300mm CVD systems, and thirteen
Stratagem ALD systems of which four were for 300mm wafers and nine for 200mm
wafers. 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 from the sale of spares, upgrades and services were $10.2 million
in 2003 compared to $6.9 million in 2002 and $7.0 million in 2001. In 2003,
spares revenues accounted for $4.9 million, or 9% of total revenues, upgrades
revenues accounted for $4.6 million, or 8% of total revenues and service revenue
accounted for $726,000, or 1% of total revenues.
Export sales were 77%, 72% and 93% of total revenues in 2003, 2002 and 2001
respectively.
Based on our long production cycle, our quarter-to-quarter revenues could
vary significantly depending on the timing of our bookings.
Gross Profit Margin
Gross profit margin in 2003 was $17.6 million or 31 percent of revenues
compared to gross profit margin of $10.6 million or 27 percent of revenues in
2002 and gross profit margin of $16.2 million or 33 percent of revenues in 2001.
The increase in gross margins in 2003 compared to 2002 was primarily due to the
following factors:
- Increased manufacturing efficiencies and overall lower material costs
to manufacture our CVD and ALD systems was achieved
- Our revenues were higher in 2003 compared with 2002 and our fixed cost
did not increase at the same rate. As a result a higher absorption was
achieved from our manufacturing department's costs.
- In fiscal year 2003, we recorded $466,000 in inventory provisions for
spare parts compared to 2002, when we recorded $2.2 million in
provisions related to inventory write-downs. The reduction in
inventory write-downs in fiscal year 2003 as compared to fiscal year
2002 primarily resulted from improved inventory purchasing processes
implement in fiscal year 2003.
21
The reduction in gross profit margin in 2002 compared to 2001 was 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.
Research and Development
Research and Development (R&D) expenses were $7.6 million, $8.0 million,
and $12.1 million in 2003, 2002, and 2001 respectively. As a percentage of total
revenues, R&D expenses were 13 %, 20%, and 25% of total revenues in 2003, 2002,
and 2001 respectively. The decrease in R&D expenses in 2003 compared to 2002 and
2001 were primarily due to tighter cost controls and lower investments in new
R&D projects in 2003 as compared to 2002 and 2001.
Going forward, we expect our R&D expenses to be slightly higher in 2004 due
primarily to continued investment in new R&D projects. In 2004, we will continue
to invest in development of new films for our advanced application in gate, DRAM
and thin film head market segments.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $11.7 million,
$12.6 million and $10.4 million in 2003, 2002, and 2001 respectively. As a
percentage of sales, SG&A expenses were 21%, 32%, and 21% in 2003, 2002, and
2001 respectively. The reduction in the absolute level of SG&A expenses in 2003
compared to 2002 was primarily due to tighter cost controls and lower legal
expenses which declined from $2.9 million in 2002 to $1.2 million in 2003. The
Company incurred legal expenses related to the ASMI lawsuit, of approximately
$800,000, $2.2 million and $0 in 2003, 2002 and 2001, respectively. In addition,
the Company received sub-leasing revenue of $5,000, $1,000 and $596,000 in 2003,
2002, and 2001 respectively, and these were offset against the SG&A expenses in
2003, 2002, and 2001, respectively.
Going forward, we expect our SG&A expenses to be higher in 2004 due
primarily to increased sales commissions as well as increased administrative
expenses associated with enhanced reporting requirements under the
Sarbanes-Oxley Act.
Interest Expense
Interest expense was $1.7 million, $1.2 million and $496,000 in 2003, 2002,
and 2001, respectively. The increase in 2003 was mainly due to an increase in
net interest charges on bank loans of approximately $285,000, and a full year of
interest cost of $1.4 million relating to the convertible notes, which were
issued in August of 2002. In connection with the convertible notes, the Company
expects to incur interest expense of $1.4 million in 2004. The expected interest
expense includes $493,000 in interest expense related to convertibles notes
interest and $943,000 related to the accretion of the value of the beneficial
conversion feature and amortization of issuance costs related to the convertible
notes.
The increase in 2002 as compared with 2001 was due to increased levels of
debt including convertible debt outstanding in 2002, as compared to 2001.
In 2004, we expect to see a slight drop in interest expense due to lower
debt balances.
22
Provision for Income Taxes
We recorded a provision for income taxes of $228,000, $538,000 and $70,000
in 2003, 2002 and 2001, 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 have provided a full valuation allowance
against any future tax benefit associated with these losses given the
uncertainty related to the timing and amounts of any future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, our cash and cash equivalents were $41.6 million,
compared to $11.5 million as of December 31, 2002. At December 31, 2003,
accounts receivable were $9.6 million, an increase of $2.1 million from $7.5
million as of December 31, 2002.
Cash used in operating activities was $4.5 million, $11.9 million and $1.9
million in 2003, 2002 and 2001 respectively.
Cash used in operating activities in 2003 consisted primarily of net loss
of $3.5 million, decrease in deferred revenue of $2.4 million, decrease in
customer advance of $1.4 million, decrease in accounts payable of $1.5 million
and increase in accounts receivable of $2.1 million, partially offset by
increase in accrued expenses of $1.1 million and depreciation of $3.3 million.
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.
Financing activities provided cash of $37.4 million, $21.0 million, and
$9.4 million in 2003 2002, and 2001 respectively.
In November 2003, the Company issued 6.4 million shares of common stock
under a private placement and received proceeds, net of issuance costs, of $31.8
million. In addition, the Company received $4.9 million from warrants exercises
and $2.2 million from stock option exercises and the issuance of shares under
the Genus Employee Stock Purchase Plan which was partially offset by payment of
debt of $1.6 million.
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.
23
We had capital expenditures of approximately $2.8 million, $786,000,and
$7.4 million in 2003, 2002 and 2001 respectively. These 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, 2003 consisted of $41.6 million
in cash and cash equivalents, and $9.6 million of accounts receivable, most of
which we have collected or expect to collect during the three months ending
March 31, 2004.
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, 2003, there was $6.5 million outstanding under this credit facility
which has been classified as a current liability in our accompanying balance
sheet.
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 $249,000 outstanding balance under this
agreement at December 31, 2003.
A summary of our contractual obligations as of December 31, 2003 is as
follows (amounts in thousands):
Less than After 5
Total Revolving 1 year 1-3 years 4-5 years years
------- ---------- ---------- ---------- ---------- --------
Silicon Valley Bank $ 6,500 $ 6,500 $ 0 $ 0 $ 0 $ 0
Citicapital 249 0 249 0 0 0
Convertible Notes* 6,975 0 0 6,975 0 0
Operating Leases 16,774 N/A 1,700 3,525 3,729 7,820
------- ---------- ---------- ---------- ---------- --------
$30,498 $ 6,500 $ 1,949 $ 10,500 $ 3,729 $ 7,820
======= ========== ========== ========== ========== ========
<FN>
*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%
At December 31, 2003, the Company had approximately $ 5.5 million in open
purchase order obligations.
24
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
Mario Rosati, a director of the Company, is also a partner of Wilson
Sonsini Goodrich & Rosati, the general counsel of the Company. In 2003, 2002 and
2001, the Company incurred $259,000, $630,000 and $781,000 in legal costs,
respectively, and paid approximately $490,000, $1.1 million and $57,000,
respectively, to Wilson Sonsini Goodrich & Rosati. At December 31, 2003, the
Company owed approximately $67,000 to Wilson Sonsini Goodrich & Rosati. Our
business activities with Wilson Sonsini Goodrich & Rosati are at arms length.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21(EITF 00-21), Multiple-Deliverable Revenue Arrangements. EITF 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both which are
to be delivered separately in a bundled sales arrangement should be accounted
for separately because they are "separate units of accounting." The guidance can
affect the timing of revenue recognition for such arrangements, even though it
does not change rules governing the timing or patterns of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal periods beginning after June 15,
2003, with early adoption permitted. Additionally, companies are permitted to
apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with Accounting
Principles Board Opinion No. 20, Accounting Changes. The Company adopted EITF
00-21 during the third quarter of 2003 and the adoption did not result in any
material impact on our financial position, cash flows or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting of derivative instruments and hedging
activities under SFAS No. 133. The amendments pertain to decisions made: (i) as
part of the Derivatives Implementation Group process that require amendment to
SFAS 133, (ii) in connection with other FASB projects dealing with financial
instruments, and (iii) in connection with the implementation issues raised
related to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
designated hedging relationships after June 30, 2003. SFAS 149 will be applied
prospectively. The Company adopted SFAS 149 during the third quarter of 2003 and
the adoption did not result in any material impact on our financial position,
cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
establishes standards for how an issuer classifies and measures certain
25
financial instruments with characteristics of both liabilities and equity and
further requires that an issuer classify as a liability (or an asset in some
circumstances) financial instruments that fall within its scope because that
financial instrument embodies an obligation of the issuer. Many of such
instruments were previously classified as equity. The statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments as they relate
to minority interest in consolidated finite-lived entities. The Statement is to
be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance of the date of
the Statement and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The Company adopted SFAS 150 during the
third quarter of 2003 and the adoption did not result in any material impact on
our financial position, cash flows or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
FIN 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 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 46 must be applied to the first
reporting period beginning after June 15, 2004. The Company believes that the
adoption of this standard will have no material effect on our consolidated
financial statements.
RISK FACTORS
You should carefully consider the following risks before making an
investment decision in our common stock. 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
harmed by, and the trading price of our common stock could decline due to any of
those risks and you may lose all or part of your investment. You should also
refer to the other information and our financial statements included in this
Annual Report on Form 10K and the related information incorporated by reference
into this Annual Report on Form 10K.
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 $3.5 million, $11.6 million and $6.7 million
for 2003, 2002 and 2001, respectively.
While we believe our cash position, anticipated cash from operations, and
our available credit facilities are 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 2004 and beyond, nor can we provide assurances that we
will achieve the sales necessary to avoid further expense reductions in the
future.
26
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE COMPANIES
In 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies,
Inc., HGST (formerly IBM), and Western Digital (formerly Read-Rite Corporation)
accounted for 69%, 8%, 7%, 7%, and 4% of revenues, respectively. 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.
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 have 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.
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 77%, 72% and 93% of our total net
sales in 2003, 2002 and 2001, respectively. Net sales to our South Korean-based
customers accounted for approximately 68%, 56% and 73% of total net sales in
2003, 2002 and 2001, respectively. We anticipate that international sales,
including sales to South
27
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 foreign law or regulatory requirements;
- exchange rate volatility;
- tariffs and other barriers;
- political and economic instability;
- military confrontation;
- difficulties in accounts receivable collection;
- 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.
After the dramatic industry boom for semiconductor equipment that peaked
early in the year 2000, another cyclical downturn occurred from year 2000 to
around year 2003. 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.
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
28
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.
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.
29
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
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
30
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, Inc. 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 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 trail of Genus' antitrust claims until after the 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 the Genus motion for summary
judgment on noninfringement of the '365 Patent. On January 10, 2003, the Court
granted Genus' motion for summary judgment on the '590 Patent.
On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement").
Under the terms of the Settlement, Genus gained a royalty-free license to each
of the patents ASMI asserted in the litigation, including both ALD patents as
well as Patent '165. By specific agreement of the parties, these licenses are
applicable to Genus' successors and affiliates. Genus has likewise obtained a
covenant from ASMI that it will not sue Genus for patent infringement or
antitrust violations for the next five years.
In return, Genus has granted ASMI and its successors and affiliates a
royalty-free license to the patent Genus asserted in the litigation, Patent
'568, and has agreed to dismiss its antitrust claims against ASMI. Genus has
also agreed not to sue ASMI for patent infringement or antitrust violations for
the next five years.
No payments have been made by either Genus or ASMI in exchange for these
licenses and the covenant not to sue. However, under the terms of the
Settlement, ASMI has the right to pursue an appeal of the District Court's
judgments of non-infringement regarding the ALD patents. The agreement specifies
that if the Federal Circuit vacates either of the existing judgments related to
the ALD patents based on a change in the District Court's claim construction,
Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents
it has been granted under the agreement.
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.
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
31
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 FIVE 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 five independent sales representatives and distributors in the
United States, Europe, South Korea, Taiwan, Singapore and Malaysia. We do not
have any long-term contracts with our sales representatives and distributors.
Any disruption or termination of our existing distributor relationships could
negatively impact sales and revenue.
WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN
EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE
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
32
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 our office 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 February 29, 2004, we had approximately of 3,949,000 shares of common
stock underlying warrants and outstanding employee stock options. Of the stock
options, 1,824,000 shares were exercisable as of February 29, 2004. 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.
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
33
2,000 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.
In the event of a change of control of the Company, the convertible note
holders may elect to receive repayment of the notes at a premium of 10% over
face value of the notes.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K, and in documents
incorporated therein, 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 Annual Report
on Form 10-K 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------------
Approximately 83.8% 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, 16.2 % 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. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, reduce the
demand for our products. Reduced demand for our products could materially
adversely affect our business, results of operations and financial condition.
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
34
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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------------------
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, independent auditors dated March 11, 2004, are
included in a separate section of this Annual Report.
SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA (UNAUDITED)
The following table presents our unaudited consolidated statements of
operations data for each of the eight quarters in the period ended December 31,
2003 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
------------- ----------- ------------ ----------
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
2003
Revenues $ 17,695 $ 14,739 $ 9,107 $ 15,320
Gross profit 6,118 3,926 2,058 5,510
Net Income (loss) 408 (1,358) (2,837) 268
Basic net Income (loss) per share $ 0.01 $ (0.05) $ (0.09) $ 0.01
Diluted net Income (loss) per share $ 0.01 $ (0.05) $ (0.09) $ 0.01
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)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
None.
35
ITEM 9A. CONTROLS AND PROCEDURES
- ------------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated,
with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Annual Report on Form 10-K. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the fiscal
2002 financial reporting process, management, in consultation with the Company's
independent auditors, 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 established a
project plan and implemented processes and controls to address these
deficiencies in fiscal year 2003.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all potential frauds. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Genus have been detected.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------
Information about the Directors of the Company, including Company's audit
committee financial expert is incorporated by reference from our proxy statement
for the 2004 Annual Meeting of Shareholders filed with the SEC (the "Proxy
Statement") under the heading "Election of Directors". Information about Section
16 reporting compliance is incorporated by reference to the Proxy Statement
under the heading "Section 16 Beneficial Ownership Reporting Compliance."
Information about our Code of Conduct is incorporated by reference to the Proxy
Statement under the heading "Protocol." Information regarding our Executive
Officers is set forth in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant".
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 Proxy Statement
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 Proxy Statement
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------
The information required by this Item is incorporated by reference to
"Certain Transactions" in the Company's Proxy Statement
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- --------------------------------------------------------
The information required by this Item is incorporated by reference to
"Principal Accountant Fees and Services" in the Company's definitive Proxy
Statement.
37
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 Auditors
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations - Years Ended December 31, 2003, 2002
and 2001
Consolidated Statements of Shareholders' Equity and Comprehensive Loss -
Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002
and 2001
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule.
Schedule II "Valuation and Qualifying Accounts"
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed or furnished during the
quarter ended December 31, 2003:
1) A Report on Form 8-K was filed on November 10, 2003, reporting under Item 5
the announcement of the private placement transaction closed November 7,
2003.
2) A Report on Form 8-K was furnished on October 28, 2003 reporting under Item
7 and Item 12 financial results for the fiscal quarter ended September 30,
2003.
(c) Financial Statement Schedule 11 - Valuation and Qualifying Accounts (See
page 64)
(d) Exhibits: For a list of exhibits filed with this Form 10-K, refer to the
exhibit index beginning on page 65
38
REPORT OF INDEPENDENT AUDITORS
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, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
March 11, 2004
39
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
2003 2002
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,608 $ 11,546
Accounts receivable (net of allowances for doubtful accounts
of $0 in 2003 and $69 in 2002, respectively) . . . . . . . . . . . . . . . . . . . 9,606 7,505
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,783 11,405
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854 1,336
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,851 31,792
Equipment, furniture and fixtures, net . . . . . . . . . . . . . . . . . . . . . . . 8,748 8,661
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,169 1,057
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,768 $ 41,510
========== ==========
LIABILITIES
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,500 $ 7,813
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,956 6,498
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,130 3,064
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 2,713
Customer advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 1,809
Long term liabilities, current portion . . . . . . . . . . . . . . . . . . . . . . . 249 245
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,538 22,142
Convertible notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,806 5,301
Long term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 270
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,344 27,713
---------- ----------
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized 2,000 shares; Issued and outstanding, none. . . . . . . . . . . . . . . . . - -
Common stock, no par value:
Authorized 100,000 shares on December 31, 2003 and 50,000 shares on December 31 2002;
Issued and outstanding, 39,554 shares in 2003 and
28,621 shares in 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,061 123,890
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111,328) (107,809)
Note receivable from shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . (187) (151)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . (2,122) (2,133)
---------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,424 13,797
---------- ----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . $ 71,768 $ 41,510
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
40
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
-------- --------- --------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . $56,861 $ 39,767 $48,739
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . 39,249 29,143 32,500
Research and development. . . . . . . . . . . . . . . . . 7,597 8,011 12,118
Selling, general and administrative . . . . . . . . . . . 11,741 12,621 10,381
-------- --------- --------
Loss from operations. . . . . . . . . . . . . . . . . . . . (1,726) (10,008) (6,260)
Interest expense. . . . . . . . . . . . . . . . . . . . . . (1,723) (1,237) (496)
Interest income . . . . . . . . . . . . . . . . . . . . . . 56 83 75
Other income, net . . . . . . . . . . . . . . . . . . . . . 102 80 85
-------- --------- --------
Loss before provision for income taxes. . . . . . . . . . . (3,291) (11,082) (6,596)
Provision for income taxes. . . . . . . . . . . . . . . . . 228 538 70
-------- --------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(3,519) $(11,620) $(6,666)
======== ========= ========
Per share data:
Basic and diluted net loss per share. . . . . . . . . . . . $ (0.11) $ (0.43) $ (0.31)
======== ========= ========
Shares used to compute basic and diluted net loss per share 31,303 26,934 21,163
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
41
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, 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
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
====== ======== ============== ============== ========= =========
42
NOTES RETAINED OTHER TOTAL
COMMON STOCK RECEIVABLE EARNINGS COMPRE- SHARE-
---------------- FROM (ACCUMULATED HENSIVE HOLDERS
SHARES AMOUNT SHAREHOLDERS DEFICIT) LOSS EQUITY
------ -------- -------------- ----------- --------- --------
Balances, December 31, 2002 . . . . . . . 28,621 $123,890 $ (151) $ (107,809) $ (2,133) $13,797
Issuance of shares of common stock
under private placement,
net of issuance costs of $1.8 million 6,400 31,828 0 0 0 31,828
Exercise of warrants. . . . . . . . . . 3,094 4,946 0 0 0 4,946
Conversion of notes payable to
shares of common stock. . . . . . . . 120 150 0 0 0 150
Interest from notes receivable. . . . . 0 0 (36) 0 0 (36)
Issuance of shares of common stock
under stock option plan . . . . . . . 1,143 1,887 0 0 0 1,887
Issuance of shares of common stock
under employee stock purchase
plan. . . . . . . . . . . . . . . . . 176 360 0 0 0 360
Net loss . . . . . . . . . . . . . . . 0 0 0 (3,519) 0 0
Translation adjustments . . . . . . . . 0 0 0 0 11
Comprehensive loss. . . . . . . . . . . 0 0 0 0 0 (3,508)
------ -------- -------------- ----------- --------- --------
Balances, December 31, 2003 . . . . . . . 39,554 $163,061 ($187) ($111,328) ($2,122) $49,424
======== ======== ============== =========== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
43
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,519) $(11,620) $ (6,666)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . 3,287 3,748 3,034
Provision for excess and obsolete inventories and
lower of cost or market. . . . . . . . . . . . . . . . . 466 2,190 317
Provision for doubtful accounts. . . . . . . . . . . . . . 40 5 0
Amortization of deferred finance costs . . . . . . . . . . 943 525 0
Write off of fixed assets. . . . . . . . . . . . . . . . . 140 72 0
Stock-based compensation . . . . . . . . . . . . . . . . . 0 0 78
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (2,141) (3,248) 4,217
Inventories. . . . . . . . . . . . . . . . . . . . . . . 945 1,647 8,884
Other assets . . . . . . . . . . . . . . . . . . . . . . (409) 26 (512)
Accounts payable . . . . . . . . . . . . . . . . . . . . (1,542) (1,854) (295)
Accrued expenses . . . . . . . . . . . . . . . . . . . . 1,066 (489) 238
Deferred revenue . . . . . . . . . . . . . . . . . . . . (2,382) (4,675) (11,174)
Customer advances. . . . . . . . . . . . . . . . . . . . (1,437) 1,809 0
--------- --------- ---------
Net cash used in operating activities. . . . . . . . . . (4,543) (11,864) (1,879)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures . . . . . . (2,573) (502) (7,400)
Acquisition of Intangible assets . . . . . . . . . . . . . . (275) (284) 0
--------- --------- ---------
Net cash used in investing activities. . . . . . . . . . . . . (2,848) (786) (7,400)
--------- --------- ---------
Cash flows from financing activities:
Issuance of convertible notes and warrants net of cash
issuance costs of $814 . . . . . . . . . . . . . . . . . . 0 6,986 0
Net proceeds from issuance of common stock and warrants. . . 39,021 10,168 7,687
Proceeds from short-term bank borrowings . . . . . . . . . . 32,356 28,122 14,236
Payments of short-term bank borrowings . . . . . . . . . . . (33,669) (24,790) (12,474)
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . - 1,200 0
Payments for debt. . . . . . . . . . . . . . . . . . . . . . (266) (685) 0
--------- --------- ---------
Net cash provided by financing activities. . . . . . . . 37,442 21,001 9,449
--------- --------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . 11 152 (263)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . 30,062 8,503 (93)
Cash and cash equivalents, beginning of year . . . . . . . . . 11,546 3,043 3,136
--------- --------- ---------
Cash and cash equivalents, end of year . . . . . . . . . . . . $ 41,608 $ 11,546 $ 3,043
========= ========= =========
Supplemental Cash Flow Information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 778 $ 227 $ 470
Cash paid for income taxes . . . . . . . . . . . . . . . . . . 431 157 1
Non-cash investing and financing activities:
Transfer of fixed assets to inventory. . . . . . . . . . . . 0 2,594 0
Transfer of inventory to fixed assets. . . . . . . . . . . . 143 0 0
Transfer of other assets to fixed assets . . . . . . . . . . 600 0 0
Conversion of notes payable to common stock. . . . . . . . . 150 675 0
Issuance of warrants in connection with convertible
notes financing. . . . . . . . . . . . . . . . . . . . . . $ 0 $ 54 $ 0
The accompanying notes are an integral part of these consolidated financial
statements.
44
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 of approximately $3.5 million,
$11.6 million and $6.7 million for the years ended December 31, 2003, 2002 and
2001, respectively and had an accumulated deficit of $111.3 million at December
31, 2003. The Company raised $31.8 million, net of issuance costs, from a
private placement in November of 2003. 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 $5.8 million was approximately $30 million at
December 31, 2003.
Concentration of Credit Risk. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash and cash equivalents and trade receivables. The Company places cash not
required for current disbursement in money market funds in the United States.
The Company does not require collateral from its customers and maintains an
allowance for credit losses.
45
Three customers accounted for an aggregate of 91% of accounts receivable at
December 31, 2003. Two customers accounted for an aggregate of 95% of accounts
receivable at December 31, 2002. The Company has written off bad debts of
$152,000, $5,000 and $294,000 in 2003, 2002, and 2001, respectively. The Company
recovered $109,000 from previously written off bad debts during 2003.
Inventories. Inventories are stated at the lower of cost or market, using
standard costs that approximate actual costs under the first-in, first-out
method.
Long-Lived Assets. Equipment, furniture and fixtures are stated at cost and
depreciated using the straight-line method over their estimated useful lives,
ranging between three and five 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.
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 three to 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. 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. If a product delivered to a
customer 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 or where objective and
reliable evidence of the fair value of the undelivered elements, such as
installation, is not available, 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,
2003 and 2002, the Company had deferred revenue of $331,000 and $2.7 million,
respectively.
Revenues from sale of spare parts are recognized when title and risk of
loss passes to the customer, generally upon shipment. Revenues from engineering
services are recognized as the services are completed over the duration of the
contract.
Product Warranty. In general, the Company's warranty period terminates for
material coverage in twelve to twenty-four months and for labor coverage in
twelve months after the warranty period begins, but in any event no later then
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. Warranty expenses
are accrued upon revenue 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.
46
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, 2003, 2002 and 2001 (in thousands,
except per share data):
YEARS ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
-------- --------- --------
Net loss, as reported. . . . . . . . . . . . . . . $(3,519) $(11,620) $(6,666)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects . . . (2,049) (2,797) (3,240)
-------- --------- --------
Pro forma net loss attributable to common
shareholders . . . . . . . . . . . . . . . . . . $(5,568) $(14,417) $(9,906)
======== ========= ========
Earnings per share
Basic and diluted - as reported. . . . . . . . . $ (0.11) $ (0.43) $ (0.31)
Basic and diluted - pro forma . . . . . . . . . $ (0.18) $ (0.54) $ (0.47)
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 2003, 2002 and 2001;
47
2003 2002 2001
Risk free interest rates . 2.50% 2.03% 4.19%
Expected life. . . . . . . 3.73 yrs 3.0 yrs 3.0 yrs
Expected volatility. . . . 103% 112% 112%
Expected dividend yield. . 0% 0% 0%
The weighted average fair value of options granted in 2003, 2002 and 2001
was $2.80, $1.42 and $1.93, 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 2003, 2002 and 2001.
2003 2002 2001
Risk free interest rates . 1.01% 1.21% 3.42%
Expected life. . . . . . . 0.5 yrs 0.5 yrs 0.5 yrs
Expected volatility. . . . 78% 123% 78%
Expected dividend yield. . 0% 0% 0%
The weighted average fair value of those purchase rights granted in 2003,
2002 and 2001 was $0.90, $1.06 and $1.30, respectively.
Software development costs. Software development costs have been accrued
for in accordance with SFAS No. 86 " Accounting for the Costs of Computer
Software to be Sold, Leased or otherwise Marketed". Capitalization of software
development costs begins upon establishment of technological feasibility,
subject to net realizable considerations. During the years ended December 2003
and 2002, the Company capitalized $275,000 and $284,000, respectively.
Capitalized costs are amortized over a three-year period on a straight-line
basis. The Company recorded amortization expenses related to capitalized
software of $130,000 during the year ended December 31, 2003. No amortization
expenses of capitalized software was recorded in 2002 and 2001.
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.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
year financial statements to conform to current year's presentation. Such
reclassifications had no effect on the previously reported loss from operations
or retained earnings.
RECENT ACCOUNTING PRONOUNCEMENTS.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21(EITF 00-21), Multiple-Deliverable Revenue Arrangements. EITF 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both which are
to be delivered separately in a bundled sales arrangement should be accounted
for separately because they are "separate units of accounting." The guidance can
affect the timing of revenue recognition for such arrangements, even though it
does not change rules governing the timing or patterns of revenue recognition of
individual items accounted for separately. The final consensus is applicable to
agreements entered into in fiscal periods beginning after June 15, 2003, with
early adoption permitted. Additionally, companies are permitted to apply the
consensus guidance to all existing arrangements as the cumulative effect of a
change in accounting principle in accordance with Accounting Principles Board
Opinion No. 20, Accounting Changes. The Company adopted EITF 00-21 during the
third quarter of 2003 and the adoption did not result in any material impact on
our financial position, cash flows or results of operations.
48
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting of derivative instruments and hedging
activities under SFAS No. 133. The amendments pertain to decisions made: (i) as
part of the Derivatives Implementation Group process that require amendment to
SFAS 133, (ii) in connection with other FASB projects dealing with financial
instruments, and (iii) in connection with the implementation issues raised
related to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
designated hedging relationships after June 30, 2003. SFAS 149 will be applied
prospectively. The Company adopted SFAS 149 during the third quarter of 2003 and
the adoption did not result in any material impact on our financial position,
cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
further requires that an issuer classify as a liability (or an asset in some
circumstances) financial instruments that fall within its scope because that
financial instrument embodies an obligation of the issuer. Many of such
instruments were previously classified as equity. The statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments as they relate
to minority interest in consolidated finite-lived entities. The Statement is to
be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance of the date of
the Statement and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The Company adopted SFAS 150 during the
third quarter of 2003 and the adoption did not result in any material impact on
our financial position, cash flows or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
FIN 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 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 46 must be applied to the first
reporting period beginning after June 15, 2004. The Company believes that the
adoption of this standard will have no material effect on our consolidated
financial statements.
NOTE 2. INVENTORIES
- ---------------------
Inventories comprise the following (in thousands):
DECEMBER 31,
---------------------
2003 2002
--------- ----------
Raw materials and purchased parts. . . $ 4,602 $ 4,493
Work in process. . . . . . . . . . . 3,686 3,417
Finished goods. . . . . . . . . . . . 478 175
Inventory at customers' locations . . 1,017 3,320
--------- ----------
$ 9,783 $ 11,405
========= ==========
49
Finished goods include customer evaluation units with a net book value of
$478,000 and $175,000 at December 31, 2003 and 2002, respectively. Inventory at
customers' locations represent the cost of systems shipped to customers for
which the Company is awaiting customer acceptance.
NOTE 3. EQUIPMENT, FURNITURE AND FIXTURES
- ----------------------------------------------
Equipment, furniture and fixtures are stated at cost and comprise the
following (in thousands):
DECEMBER 31,
--------------------
2003 2002
--------- ---------
Equipment (useful life of 3 years). . . . . . . . . . . . . $ 10,005 $ 9,481
Demonstration equipment (useful life ranges from 3-5 years) 18,584 21,258
Furniture and fixtures (useful life of 3 years) . . . . . . 1,078 1,045
Leasehold improvements (useful life ranges from 4-10 years) 4,337 4,332
--------- ---------
34,004 36,116
Less accumulated depreciation . . . . . . . . . . . . . . . (25,929) (27,688)
--------- ---------
8,075 8,428
Construction in progress. . . . . . . . . . . . . . . . . . 673 233
--------- ---------
$ 8,748 $ 8,661
========= =========
Depreciation expense was $3.2 million, $3.7 million and $3.0 million for
2003, 2002 and 2001, respectively.
NOTE 4. ACCRUED EXPENSES
- ---------------------------
Accrued expenses are comprised of the following (in thousands):
DECEMBER 31,
----------------
2002 2001
------ --------
System warranty . . . . . . . . . . . . . $1,451 $ 970
Accrued compensation and related expenses 720 491
Federal, state and foreign income taxes . 511 751
Accrued rent. . . . . . . . . . . . . . . 362 162
Accrued professional fees . . . . . . . . 260 87
Accrued sales tax. . . . . . . . . . . . 270 19
Accrued interest. . . . . . . . . . . . . 184 202
Other . . . . . . . . . . . . . . . . . . 372 382
------ --------
$4,130 $ 3,064
====== ========
NOTE 5. 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.
50
In general, the Company's warranty period terminates for material coverage
in twelve to 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
Accrual for warranty liability for revenues recognized in the period 1,938
Settlements made (1,457)
--------
Balance at December 31, 2003 $ 1,451
========
NOTE 6. 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, borrowable amounts based on eligible receivables and inventory.
The interest rate is prime plus 1.75% per annum (as at December 31, 2003) and
the facility expires on June 29, 2004. The line of credit 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, 2003 and 2002, there was $6.5 million and $7.8 million outstanding
respectively, 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. The balance outstanding under
this agreement was $249,000 and $515,000 at December 31, 2003 and 2002
respectively.
NOTE 7. 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 approximately $1.8 million. 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.
51
At December 31, 2003, minimum lease payments required under these operating
leases are as follows (in thousands):
2004 . . . . . . . . . $ 1,700
2005 . . . . . . . . . 1,752
2006 . . . . . . . . . 1,773
2007 . . . . . . . . . 1,799
2008 . . . . . . . . . 1,930
Thereafter . . . . . . 7,820
---------
$ 16,774
=========
Rent expense was $1.9 million; $1.0 million and $682,000 for the years
ended December 31, 2003, 2002 and 2001, respectively. Sublease rental income was
$5,000, $1,000 and $596,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
At December 31, 2003, the Company had approximately $5.5 million in open
purchase order obligations.
Legal Proceedings
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. 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 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 the 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 the Genus motion for summary
judgment of noninfringement of the '365 Patent. On January 10, 2003, the Court
granted Genus' motion for summary judgment of non-infringement on the '590
Patent.
On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement").
Under the terms of the Settlement, Genus gained a royalty-free license to each
of the patents ASMI asserted in the litigation, including both ALD patents as
well as Patent '165. By specific agreement of the parties, these licenses are
applicable to Genus' successors and affiliates. Genus has likewise obtained a
covenant from ASMI that it will not sue Genus for patent infringement or
antitrust violations for the next five years.
In return, Genus has granted ASMI and its successors and affiliates a
royalty-free license to the patent Genus asserted in the litigation, Patent
'568, and has agreed to dismiss its antitrust claims against ASMI. Genus has
also agreed not to sue ASMI for patent infringement or antitrust violations for
the next five years.
No payments have been made by either Genus or ASMI in exchange for these
licenses and the covenant not to sue. However, under the terms of the
Settlement, ASMI has the right to pursue an appeal of the District Court's
judgments of non-infringement regarding the ALD patents. The agreement specifies
that if the Federal Circuit
52
vacates either of the existing judgments related to the ALD patents based on a
change in the District Court's claim construction, Genus will pay ASMI $1
million for the royalty-free licenses to the ALD patents it has been granted
under the agreement.
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.
NOTE 8. CONVERTIBLE NOTES AND WARRANTS
- -------------------------------------------
On August 15, 2002, the Company raised $7.0 million, net of issuance costs,
by issuing $7.8 million unsecured 7% convertible notes and warrants to purchase
2,761,000 shares of common stock.
- $7.5 million of the convertible notes were convertible into common
stock at a price of $1.42 per share and a $300,000 convertible note
was convertible into common stock at a price of $1.25 per share.
During 2002, convertible notes with a face value of $525,000 were
converted into common stock at a price of $1.42 and convertible notes
with a face value of $150,000 were converted at a price of $1.25 per
share. During 2003, convertible notes with a face value of $150,000
were converted at a price of $1.25 per share. The remaining
convertible notes with a face value of $6,975,000 are redeemable three
years after issuance or may be converted into 4,912,000 shares of
common stock at a price of $1.42 per share prior to the redemption
date at the election of the investors. 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.
- Warrants exercisable for 2,641,000 shares of common stock had an
exercise price of $1.42 per share and warrants exercisable for 120,000
shares of common stock had an exercise price of $1.25 per share. In
2002, warrants for 300,000 shares were exercised for cash proceeds of
$400,000. The remaining warrants were exercised during 2003 for cash
proceeds of $3.5 million.
The net cash proceeds from the issuance of the convertible notes and
warrants were recorded as follows (in thousands):
Convertible note(face value $7.8 million) $5,560
Detachable warrants 1,312
Beneficial conversion feature 928
-------
Proceeds from convertible notes and warrants 7,800
Other asset, issuance costs (814)
-------
Net cash proceeds $6,986
=======
53
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. " Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants". The Company determined the fair
value of the warrants, using the Black Scholes option pricing model with a risk
free interest rate of 4.4 percent, volatility of 75%, a term of three years and
no dividend yield. 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 exceeded the carrying value
of the convertible notes, resulting in a beneficial conversion feature. The
value of the beneficial conversion feature is accreted over the stated term of
the convertible notes in accordance with EITF No. 98-5 " Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF No. 00-27, "Application Issue No. 98-5 to
Certain Convertible Instruments".
The $2.2 million difference between the $7.8 million face value of the
notes and the $5.6 million original carrying value, representing the value of
the warrants and the beneficial conversion feature, has been recorded as equity
and 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 warrants with a fair value of $54,000. The
warrants to purchase 79,000 shares of common stock at $1.42 per share was
subsequently net exercised for 38,631 shares of common stock. Issuance costs are
included with other assets and are 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.
The carrying value of the convertible note and deferred issuance costs at
December 31, 2003 is as follows (in thousands):
Convertible Other Asset,
Note Issuance Costs
------------- ---------------
Balance at issuance, August 15, 2002 $ 5,560 ($868)
Conversions (675) -
Accretion and amortization 416 104
------------- ---------------
Balance at December 31, 2002 5,301 (764)
Conversions (150) -
Accretion and amortization 655 288
------------- ---------------
Balance at December 31, 2003 $ 5,806 ($476)
============= ===============
The Company recorded interest costs related to the convertible notes and
warrants of $1.4 million and $735,000 for the years ended December 31, 2003 and
2002, respectively.
54
NOTE 9. 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 additional shares of common stock for net
proceeds of approximately $7.9 million.
On November 7, 2003, the Company completed a private placement of
approximately $33.6 million for 6.4 million shares of its common stock at a per
share price of $5.25. The offering resulted in net proceeds to the company of
approximately $31.8 million. The purchase price for the shares represented
approximately a 5 percent discount to the average closing price for 10 days
prior to the close on November 7, 2003. No warrants were issued in this
transaction.
Warrants
Shares subject to warrants to purchase common stock (in thousands, except
per share amounts):
NO OF SHARES OF COMMON NUMBER OF SHARES OF
STOCK UNDERLYING COMMON STOCK
EXERCISE WARRANTS UPON UNDERLYING WARRANTS ON
DATE ISSUED PRICE DATE OF ISSUANCE REASON DECEMBER 31, 2003
- ------------- --------- ----------------------- --------------------------------- ----------------------
November 1999 $ 2.39 25(1) Credit facility costs -
May 2001 $ 3.50 1,271(1) Warrants issued to investors -
May 2001 $ 3.00 69 Placement agent (financing costs) 8
May 2001 $ 5.24 121 Placement agent (financing costs) 110
January 2002 $ 2.19 760(1) Warrants issued to investors -
January 2002 $ 3.23 581 Warrants issued to investors 115
August 2002 $ 1.42 2,641(1) Warrants issued to notes holder -
August 2002 $ 1.25 120 (1) Warrants issued to notes holder -
August 2002 $ 1.42 79 (1) Placement agent (financing costs) -
----------------------- ----------------------
Totals 5,667 233
======================= ======================
<FN>
(1) Exercised in full prior to December 31, 2003.
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 hade terms providing for an
adjustment of the number of shares underlying the warrants in the event that the
Company issued
55
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 118,449 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 August 2002, the Company issued a convertible note with a
face value of $7.8 million and warrants to purchase 2,760,669 shares of common
stock with exercise prices ranging from $1.25 to $1.42 to the note holders. In
connection with the issuance of convertible notes in August 2002, the Company
adjusted the January 2002 warrant to be exercisable for an additional 86,979
shares of common stock. Additionally the exercise price of the January 2002
warrants was adjusted to $2.48. As of December 31, 2003, with the exception of
certain warrants exercisable for 114,979 shares of common stock, the warrants
issued in January 2002, as amended in August 2002, have been exercised in full.
Shares reserved for future issuance
A summary of shares reserved for future issuance by the Company as of
December 31, 2003 is as follows:
Exercise of warrants 233,000
Conversion of convertible notes 4,912,000
Stock options outstanding 3,654,000
Employee Stock Purchase Plan 456,000
Stock options available for grants 215,000
---------
9,470,000
=========
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,
-------------------------------
2003 2002 2001
-------- --------- ----------
Loss attributable to common shareholders:
Numerator-Basic and diluted:
Net loss attributable to common shareholders. . . . . . . . . $(3,519) $(11,620) $ (6,666)
======== ========= ==========
Denominator-Basic and diluted:
Weighted average common stock outstanding . . . . . . . . . . 31,303 26,934 21,163
======== ========= ==========
Basic and diluted net loss per share. . . . . . . . . . . . . $ (0.11) $ (0.43) $ (0.31)
======== ========= ==========
56
Stock options to purchase 3,654,226 shares of common stock with a weighted
average exercise price of $3.78 were outstanding on December 31, 2003, but were
not included in the computation of diluted loss per share because the Company
has a net loss for 2003. Warrants for the purchase of 233,428 shares of common
stock with a weighted average exercise price of $3.80 were outstanding at
December 31, 2003 but were not included in the computation of diluted loss per
share because the Company has a net loss for 2003.
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 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. In October 2003, the Board of
Directors changed the vesting for future grants to vest over a four-year period
and expire in ten years from the date of grant for all new grants. At December
31, 2003, the Company had registered 7,503,000 shares of common stock for
issuance under the 2000 Incentive Stock Option Plan, which included 700,000
1,000,000 and 1,000,000 shares added to the plan in 2001, 2002 and 2003,
respectively. At December 31, 2003, a total of 215,000 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 31, 2001 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
57
Expired (336) - - - - -
Terminated 706 (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
Granted (1,146) 1,146 2.09 to 6.55 4,556 3.97
Exercised - (1,143) 0.88 to 5.34 (1,887) 1.65
Expired (340) - - - - -
Terminated 491 (491) 1.29 to 15.75 (1,500) 3.06
Authorized 1,000 - - - - -
---------- -------- ---------------------- -------- ---------
Balance, December 31, 2003 215 3,654 $ 1.07 to $15.75 $13,804 $ 3.78
========== ======== ====================== ======== =========
Options outstanding and currently exercisable by exercise price under the
option plan at December 31, 2003 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED AVG.
RANGE OF NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ---------------- --------------- ----------- ---------------
1.07 - $ 1.07 3,000 3.79 $ 1.07 1,167 $ 1.07
1.29 - 1.29 517,200 3.82 1.29 183,837 1.29
1.59 - 2.44 495,396 2.67 2.28 301,784 2.24
2.47 - 2.56 472,675 3.42 2.56 209,647 2.56
2.57 - 3.09 460,622 2.69 2.80 327,123 2.86
3.13 - 3.88 42,333 3.11 3.59 35,306 3.60
4.08 - 4.08 978,000 9.81 4.08 - -
4.34 - 6.25 382,500 2.08 5.48 355,611 5.49
6.30 - 11.69 204,000 2.07 8.40 185,667 8.59
15.75- 15.75 98,500 1.19 15.75 98,500 15.75
- ---------------- ----------- ---------------- --------------- ----------- ---------------
1.07 - $15.75 3,654,226 4.72 $ 3.78 1,698,642 $ 4.48
================ ----------- ---------------- =============== ----------- ===============
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. As of December 31, 2003, the total amount outstanding related to the
promissory note was $187,000, which included interest of $36,000.
Employee Stock Purchase Plan
The Company has reserved a total of 3,550,000 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 of 2003 and 2002. 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, 2003, 3,094,000 shares have been
issued under the plan. The Company has issued 175,936, 200,247, and 261,177
shares in 2003, 2002 and 2001, respectively. At December 31, 2003, 456,000
shares were available for purchase under this plan.
Share Purchase Rights Plan
58
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
The Company recorded $28,000 of stock compensation in 2001 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. The Company did not record any stock
compensation charge during 2002 and 2003 related to the ESPP plan since the plan
had adequate shares reserved for issuance under the ESPP plan in both these
years.
During 2001, the Company recorded $34,000 of stock compensation in
connection with the accelerated vesting of options granted to a terminated
employee. There was no acceleration of vesting of options during 2002 and 2003.
NOTE 10. EMPLOYEE BENEFIT PLAN
- ----------------------------------
During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit
Plan") to provide retirement and incidental benefits for eligible employees. The
Benefit Plan provides for Company contributions as determined by the Board of
Directors that may not exceed 6% of the annual aggregate salaries of those
employees eligible for participation. In 2003, 2002 and 2001, the Company
contributed $174,000, $170,000, and $101,000, respectively, to the Benefit Plan.
NOTE 11. OTHER INCOME (EXPENSE), NET
- -----------------------------------------
Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
---------- --------- ---------
Foreign exchange, net. 111 98 (27)
Other, net . . . . . (9) (18) 112
---------- --------- ---------
$ 102 $ 80 $ 85
========== ========= =========
59
NOTE 12. INCOME TAXES
- ------------------------
The provision for income tax expense for the years ended December 31, 2003,
2002 and 2001 was $228,000, $538,000, and $70,000, respectively.
The components of income (loss) before income taxes were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
---------- ---------- ---------
Domestic loss before taxes. . . . . . . . . . . . . $ (2,823) $ (11,407) $ (6,905)
Foreign income (loss) before taxes. . . . . . . . . (468) 325 309
---------- ---------- ---------
Loss before taxes . . . . . . . . . . . . . . . . $ (3,291) $ (11,082) $ (6,596)
========== ========== =========
The income tax expense for 2003, 2002 and 2001, respectively, was due to
current foreign taxes.
The Company's effective tax rate for the years ended December 31, 2003, 2002
and 2001 differs from the U.S. federal statutory income tax rate as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
---------- ---------- ---------
Federal income tax at statutory rate. . . . . . . (35.0%) (35.0%) (35.0%)
Foreign income taxes . . . . . . . . . . . . . . . 6.9 4.9 1.1
Net operating loss not benefited . . . . . . . . . 35.0 35.0 35.0
---------- ---------- ---------
6.9% 4.9% 1.1%
========== ========== =========
Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31,
----------------------
2003 2002
----------- ---------
Deferred tax assets
Depreciation and amortization . . . . . . . . . . $ 3,069 $ 2,511
Inventory, accounts receivable and other related
allowances. . . . . . . . . . . . . . . . . . . 2,293 2,092
Tax credits . . . . . . . . . . . . . . . . . . . 2,322 2,267
Net operating loss. . . . . . . . . . . . . . . . 36,051 34,554
Deferred revenue. . . . . . . . . . . . . . . . . 1,087 1,563
Non-Deductible accruals . . . . . . . . . . . . . 601 1,236
----------- ---------
45,423 44,223
Deferred tax asset valuation allowance. . . . . . . ( 45,423) (44,223)
----------- ---------
Net deferred tax assets . . . . . . . . . . . . . . $ - $ -
=========== =========
The deferred tax assets valuation allowance at December 31, 2003 and 2002
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these tax
60
assets such that a full valuation allowance is necessary. These factors include
the lack of a significant history of consistent profits and 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.
As of December 31, 2003, the Company has a net operating loss carryforward
of approximately $100 million for federal purposes and $10 million for state tax
purposes. If not utilized, these carryforwards will begin to expire beginning in
2015 for federal purposes and 2005 for state purposes.
The Company has research credit carryforwards of approximately $1.1 million
and $1.7 million for federal and state income tax purposes, respectively. If
not utilized, the federal carryforward will expire in various amounts beginning
in 2013. The California credit can be carried forward indefinitely.
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 limitations may
result in the expiration of net operating loss carry-forwards and credits before
utilization.
NOTE 13. 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, 2003, 2002, and
2001 were as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- --------- ---------
United States . . . $ 12,833 $ 11,199 $ 3,200
South Korea . . . . 38,502 22,430 35,767
Japan . . . . . . . 1,887 2,758 3,089
Europe. . . . . . . 3,112 3,295 2,706
Taiwan. . . . . . . 0 85 2,300
Rest of world . . . 527 0 1,677
-------- --------- ---------
$ 56,861 $ 39,767 $ 48,739
======== ========= =========
The Company did not hold any material long-lived assets in countries other
than the United States at December 31, 2003 and December 31, 2002.
61
Major Customers
In 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies,
Inc., HGST (formerly IBM), and Western Digital (formerly Read-Rite Corporation)
accounted for 69%, 8%, 7%, 7%, and 4% of revenues, respectively. 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.
NOTE 14. RELATED PARTY TRANSACTIONS
- ---------------------------------------
Mario Rosati, a director of the Company, is also a partner of Wilson
Sonsini Goodrich & Rosati, the general counsel of the Company. In 2003, 2002 and
2001, the Company incurred $259,000, $630,000 and $781,000 in legal costs,
respectively, and paid approximately $490,000, $1.1 million and $57,000,
respectively, to Wilson Sonsini Goodrich & Rosati. At December 31, 2003, the
Company owed approximately $67,000 to Wilson Sonsini Goodrich & Rosati.
62
ITEM 15 (A) 2. FINANCIAL STATEMENT SCHEDULE
- -------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 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 March 11, 2004 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
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PricewaterhouseCoopers LLP
San Jose, California
March 11, 2004
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Schedule II "Valuation and Qualifying Accounts"
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Description Balance at Additions Deductions Balance at
Beginning of Charged to Charged to end
Period costs/exp Other of period
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2003
Allowance for doubtful accounts. $ 69 $ 83 $ 152 $ 0
Allowance for excess and
obsolete inventory . . . . . . . 4,305 629 163 4,771
Deferred tax valuation allowance 44,223 1,200 0 45,423
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
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GENUS, INC.
ANNUAL REPORT ON FORM 10-K
Year ended December 31, 2003
INDEX TO EXHIBITS
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
September 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)
4.11 Stock Purchase and Registration Agreement dated November 7, 2003
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)
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)
65
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)
14.1 Genus Code of Conduct
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of 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 September 30, 1992.
(7) Incorporated by reference to the exhibit filed with the Registrant's Report
on Form 8-K dated September 12, 1992.
(8) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 21, 1992.
(9) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(10) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 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.
66
(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 September 30, 1998.
(19) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000.
(20) Incorporated by reference to the exhibit filed 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.
67
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 12th day of March 2004
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
Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his 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 12, 2004
- ----------------------- and Chief Executive Officer
William W.R. Elder (principal executive officer)
/s/ SHUM MUKHERJEE Executive Vice President, Finance March 12, 2004
- ------------------------ Chief Financial Officer
Shum Mukherjee (principal financial officer and
principal accounting officer)
/s/ G. Frederick Forsyth Director March 12, 2004
- ------------------------
G. Frederick Forsyth
/s/ Todd S. Myhre Director March 12, 2004
- ------------------------
Todd S. Myhre
/s/ Mario M. Rosati Director March 12, 2004
- ------------------------
Mario M. Rosati
/s/ Robert J. Richardson Director March 12, 2004
- ------------------------
Robert J. Richardson
68