SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER 0-17139
GENUS, INC.
(Exact name of registrant as specified in its charter)
California 94-279080
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1139 Karlstad Drive, Sunnyvale, California 94089
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(Address of principal executive offices) (Zip code)
(408) 747-7120
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares outstanding at November 6, 1998: 17,361,162
----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ------------ ------------ ------------
Net sales $ 9,804 $ 24,375 $ 27,312 $ 63,407
Costs and expenses:
Cost of goods sold 5,889 16,024 22,554 39,877
Research and development 1,517 3,066 7,788 9,315
Selling, general and administrative 2,347 4,358 12,253 12,414
Special charge -- -- 13,216 --
----------- ------------ ------------ ------------
Income (loss) from operations 51 927 (28,499) 1,801
Other, net (11) (94) (404) (191)
----------- ------------ ------------ ------------
Income (loss) before income taxes 40 833 (28,903) 1,610
Provision for income taxes -- 321 -- 621
----------- ------------ ------------ ------------
Net income (loss) 40 512 (28,903) 989
Deemed dividends on preferred stock -- -- (1,903) --
----------- ------------ ------------ ------------
Net income (loss) available to common
shareholders $ 40 $ 512 $(30,806) $ 989
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net income (loss) available to common
shareholders per common share and per common
share assuming dilution -- $ 0.03 $ (1.79) $ 0.06
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Comprehensive income (loss) $ (42) $ 432 $ (28,551) $ 822
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED AUDITED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,408 $ 8,700
Restricted cash 1,000 --
Accounts receivable (net of allowance for doubtful
accounts of $245 in 1998 and $1,097 in 1997) 10,499 19,469
Inventories 4,685 28,986
Other current assets 308 1,029
------------------ ------------------
Total current assets 22,900 58,184
Property and equipment, net 4,465 15,276
Other assets, net 470 3,278
------------------ ------------------
Total assets $ 27,835 $ 76,738
------------------ ------------------
------------------ ------------------
LIABILITIES
Current liabilities:
Short term bank borrowings $ -- $ 7,200
Accounts payable 1,383 8,723
Accrued expenses 6,430 10,613
Current portion of long-term debt -- 874
------------------ ------------------
Total current liabilities 7,813 27,410
Long-term debt, less current portion 10 971
------------------ ------------------
Total liabilities 7,823 28,381
------------------ ------------------
Redeemable Preferred stock, no par value:
Authorized, 2,000,000 shares;
Issued and outstanding 28,000 shares at
September 30, 1998 and none at December 31, 1997 1,324 --
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000,000 shares; Issued and outstanding 17,361,162
shares at September 30, 1998 and 17,120,628 shares at
December 31, 1997 99,778 99,149
Accumulated deficit (79,513) (48,863)
Cumulative translation adjustment (1,577) (1,929)
------------------ ------------------
Total shareholders' equity 18,688 48,357
------------------ ------------------
Total liabilities, redeemable preferred stock, and
shareholders' equity $ 27,835 $ 76,738
------------------ ------------------
------------------ ------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
------------ -------------
Cash flows from operating activities:
Net income (loss) $ (28,903) $ 989
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 2,315 3,651
Special Charge 13,216 --
Changes in assets and liabilities:
Accounts receivable 9,027 (13,832)
Inventories (1,721) 625
Other current assets 721 (946)
Accounts payable (7,340) 3,379
Accrued expenses (3,966) 143
Other, net (643) 63
------------ -------------
Net cash used in operating activities (17,294) (5,928)
------------ -------------
Cash flows from investing activities:
Acquisition of property and equipment (442) (565)
Sales of Ion Technology Products 23,150 --
------------ -------------
Net cash used in investing activities 22,708 (565)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 120 782
Proceeds from issuance of preferred stock and warrants, net 4,816 --
Redemption of preferred stock (4,725) --
Proceeds from short-term bank borrowings -- 15,896
Payments of short-term bank borrowings (7,200) (8,416)
Payments of long-term debt (870) (1,071)
------------ -------------
Net cash provided by financing activities (7,859) 7,191
------------ -------------
Effect of exchange rate changes on cash 153 (65)
Net increase (decrease) in cash and cash equivalents (2,292) 633
Cash and cash equivalents, beginning of period 8,700 11,827
------------ -------------
------------ -------------
Cash and cash equivalents, end of period $ 6,408 $ 12,460
------------ -------------
------------ -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with SEC requirements for interim financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K/A.
The information furnished reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary for the fair statement of financial position, results of operations
and cash flows for the interim periods. The results of operations for the
interim periods presented are not necessarily indicative of results to be
expected for the full year.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed by dividing income (loss) available to common shareholders, adjusted
for convertible preferred dividends and after-tax interest expense on
convertible debt, if any, by the sum of the weighted average number of common
shares outstanding and potential common shares (when dilutive).
A reconciliation of the numerator and denominator of basic and diluted
net income (loss) per share is as follows:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Numerator-basic:
Net income (loss) $ 40 $ 512 $ (28,903) $ 989
Deemed dividends on preferred stock -- -- (1,903) --
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ 40 $ 512 $ (30,806) $ 989
------------ ------------ ------------ ------------
Denominator-basic:
Weighted average common shares outstanding 17,361 16,954 17,216 16,824
------------ ------------ ------------ ------------
Basic net income (loss) per share available to common
shareholders $ -- $ 0.03 $ (1.79) $ 0.06
------------ ------------ ------------ ------------
Numerator-diluted:
Net income (loss) $ 40 $ 512 $ (28,903) $ 989
Deemed dividends on preferred stock -- -- (1,903) --
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ 40 $ 512 $ (30,806) $ 989
------------ ------------ ------------ ------------
Denominator-diluted:
Weighted average common shares outstanding 17,361 16,954 17,216 16,824
Effect of dilutive securities: stock options 52 106 -- 99
------------ ------------ ------------ ------------
17,413 17,060 17,216 16,923
------------ ------------ ------------ ------------
Diluted net income (loss) per share available to common
shareholders $ -- $ 0.03 $ (1.79) $ 0.06
------------ ------------ ------------ ------------
5
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
Stock options to purchase approximately 1,856,043 weighted average
shares of common stock were outstanding during the nine months ended
September 30, 1998 but were not included in the computation of diluted loss
per share because the Company has a net loss for the nine months ended
September 30, 1998.
Stock options to purchase approximately 1,634,918 weighted average
shares of common stock were outstanding during the nine months ended
September 30, 1997 but were not included in the computation of diluted income
per share because the exercise price was greater than the average market
value of the common shares.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). Effective January 1, 1998, the Company adopted SFAS 130, which
establishes standards for reporting comprehensive income and its components.
Comparative financial statements for earlier periods have been reclassified
to reflect the adoption of SFAS 130. The Company's other comprehensive income
consists of foreign currency translation adjustments.
STATEMENT OF CASH FLOW INFORMATION
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
------------ -------------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 183 $ 298
Income taxes 1 2
Non-cash investing activities:
Purchase of property and equipment under long-term debt
obligations $ -- $ 753
Non-cash financing activities:
Deemed dividends on preferred stock related to beneficial
conversion feature $ 1,792 $ --
Conversion of Series A Convertible Preferred Stock to
common stock 124 --
LINE OF CREDIT
The Company secured a $5 million Accounts Receivable Purchase Agreement
with a bank, and is currently negotiating an additional $5 million revolving
line of credit with the same bank. At September 30, 1998, the Company had no
outstanding borrowings under the Accounts Receivable Purchase Agreement.
6
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
INVENTORIES
INVENTORIES COMPRISE THE FOLLOWING:
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
Raw materials and parts $ 3,029 $ 15,210
Work in progress 1,277 6,879
Finished goods 379 6,897
------------------ ------------------
$ 4,685 $ 28,986
------------------ ------------------
ACCRUED EXPENSES
INVENTORIES COMPRISE THE FOLLOWING:
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
System installation and warranty $ 855 $ 3,741
Accrued commissions and incentives 945 2,062
Accrued payroll and related items 561 1,264
Other 4,069 3,546
------------------ ------------------
$ 6,430 $ 10,613
------------------ ------------------
ASSET SALE TRANSACTION
In July 1998, the Company completed the ion implant product line sale to
Varian Associates, Inc. ("Varian") for approximately $25 million, plus
additional payments if certain revenue targets are achieved ("Asset Sale").
The net assets and liabilities transferred to Varian included inventory of
$18.9 million, capital equipment and other assets of $9.7 million, and
warranty and installation liabilities of $3.6 million. The Company used a
portion of the net proceeds of the Asset Sale for repayment of certain
outstanding indebtedness and the redemption of 70,000 shares of Series A
Convertible Preferred Stock ("Series A Stock"), with the remaining proceeds
to be used for working capital and general corporate purposes, including
investment in R&D of thin film products.
REDEMPTION AND EXCHANGE OF SERIES A CONVERTIBLE PREFERRED STOCK
In February 1998, the Company issued equity securities through a private
placement of Series A Stock for gross proceeds of $5 million. On July 29,
1998 the Company redeemed 70,000 shares of the outstanding Series A Stock for
$4.7 million. In addition, the remaining 28,000 shares of Series A Stock were
exchanged for 28,000 shares of Series B Stock which has a fixed conversion
price of $1.25 per share.
ARBITRATION WITH VARIAN ASSOCIATES, INC.
The Company and Varian are in the process of resolving a dispute through
arbitration as defined in the Asset Purchase Agreement. This dispute is in
regard to whether Genus or Varian has rights to one ion implant sale and
inventory. In accordance with generally accepted accounting principles, if
and when the Company prevails in the arbitration, any adjustments to the
Company's financial statements as a result of this gain contingency will be
made in the quarter in which the decision is rendered and the collection of
the amount in question is probable. The Company is not conceding any rights
to the disputed sale and believes that it will prevail in the arbitration.
7
RESTRUCTURING RESERVE BALANCE
In the second quarter of 1998, the Company set up a reserve account of
$13.2 million for costs associated with restructuring the Company and the
closing of the Varian Asset Sale. To date, $12.8 million has or is expected
to be charged against this reserve, including inventory of $5.4 million,
leasehold improvements of $1.1 million, reduction in workforce costs of $1.7
million, costs associated with closing of foreign offices of $1.4 million,
Varian transaction costs of $1.2 million, and the disputed ion implant system
contingency of $2.0 million. Any legal costs associated with the pending
arbitration with Varian will be charged against the remaining balance of
approximately $400,000.
SUBSEQUENT EVENT
REDEMPTION SERIES B CONVERTIBLE PREFERRED STOCK
On July 29, 1998, the Company exchanged 28,000 shares of Series A Stock
for 28,000 shares of Series B Stock, which has a fixed conversion price of
$1.25 per share. On October 16, the Company redeemed 12,000 shares of its
outstanding Series B Stock for $600,000, leaving 16,000 shares of Series B
Stock outstanding. The Series B Stock holders may require the Company at any
time to redeem all of its shares outstanding at a redemption price equal to
the stated value per share. The Series B stock may be redeemed at the option
of the Company on or after July 30, 2003 at a redemption price equal to the
product of (i) the average of the closing bid prices for the five trading
days immediately preceding (a) July 30, 2003, or (b) the date of payment by
the Company of the redemption price, whichever is greater, and (ii) the
conversion ratio applicable to the Series B Stock calculated on July 30, 2003.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENTS IN THIS REPORT WHICH EXPRESS "BELIEF", ANTICIPATION" OR
"EXPECTATION" AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS" IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN OR INCORPORATED BY
REFERENCE INTO THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED IN THIS REPORT.
RESULTS OF OPERATIONS
On July 28, 1998, the Company completed the sale transaction of its ion
implant product line to Varian, Inc. During the period of time from July 1
through July 28, all transactions related to the ion implant product line
were included in the Company's third quarter operating results. As a result
of not incurring two months of ion implant expenses, all expense categories
below compare favorably to the prior year.
Net sales for the three and nine months ended September 30, 1998 were
$9.8 million and $27.3 million, respectively, compared to net sales of $24.4
million and $63.4 million for the corresponding periods in 1997. The decline
is attributable to lower unit sales of systems, lower revenue from spares and
service largely as a result of the Asian financial crisis which began for the
Company during the fourth quarter of 1997, and only partial contribution from
the ion implant product line. During the fourth quarter of 1997, the
Company's sales fell from the immediate-prior quarter, and weakness among the
Company's Asian customers continued during the first three quarters of 1998.
Gross margin for the three and nine months ended September 30, 1998 was
40% and 17%, respectively, compared to 34% and 37%, respectively, for the
same periods in 1997. Gross margin for the third quarter of 1998 increased
due to lower fixed manufacturing and service expenses as a percentage of
sales, reflecting cost containment measures implemented during the second
quarter of 1998 and lower ion implant product line expenses absorbed by the
Company. The gross margin for the first three quarters of 1998 was negatively
impacted by the depressed level of sales resulting in underabsorption of
fixed manufacturing and service costs and lower average selling prices. Even
at relatively constant higher levels of sales, the Company's gross margins
have historically been affected by variations in average selling prices,
changes in the mix of product sales, unit shipment levels, the level of
foreign sales, and competitive pricing pressures.
For the third quarter of 1998, research and development expenses ("R&D")
were $1.5 million, or 15% of sales, compared to $3.1 million, or 13% of
sales, for the third quarter of 1997. R&D spending for the first three
quarters of 1998 was $7.8 million, compared to $9.3 million for the first
three quarters of 1997. These reductions were almost entirely attributed to
lower ion implant expenses incurred during the third quarter of 1998. Despite
the general industry slowdown and the near term outlook for sales, the
Company continues to invest in R&D to position itself for the fourth quarter
of 1998 and beyond. The Company continually evaluates its R&D investment in
view of evolving competition and market conditions and expects that R&D
spending may increase over the next few quarters.
Selling, general and administrative expenses ("SG&A") for the three and
nine month periods ending September 30, 1998 were $2.3 million and $12.3
million, compared to $4.4 million and $12.4 million, respectively, for the
prior year. SG&A spending for the third quarter of 1998 was lower due to the
cost containment measures implemented in the second quarter of 1998 and lower
ion implant related expenses absorbed by the Company. SG&A spending for the
nine months ending September 30, 1998 was relatively flat with the prior
year's nine month total, due to the $1.4 million net charge for the write-off
of an account receivable from Innotech Corporation in the second quarter of
1998.
Net income for the quarter ended September 30, 1998 was $40,000. This
compares with net income of $512,000 for the third quarter of 1997. The net
loss for the nine-month period was $28.9 million, compared to net income of
$989,000 for the first nine months of 1997.
9
In February 1998, the Company issued $5 million of Series A Convertible
Preferred Stock ("Series A Stock") in a private placement. Warrants were also
issued as part of the transaction. During the first quarter, the Company
recorded deemed dividends on preferred stock of $1.8 million to reflect the
difference between the proceeds allocated to the Series A Stock and the fair
value of the Series A Stock (assuming immediate conversion) upon issuance.
For the second quarter, the Company recorded dividends of $74,000. These
charges resulted in a net loss available to common shareholders of $30.8
million or $1.79 per share for the first nine months of 1998. In July 1998,
the Company redeemed 70,000 shares of the Series A Stock and exchanged the
remaining 28,000 shares of Series A Stock for 28,000 shares of Series B
Convertible Preferred Stock ("Series B Stock").
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents, including restricted cash held in
escrow, decreased to $7.4 million at September 30, 1998 from $8.7 million at
year-end. In July, the Company received $23.2 million from the asset sale to
Varian, with an additional $1 million held in escrow pending resolution of a
Massachusetts tax audit lien and expiration of change of control agreements
with former ion implant employees currently working for Varian. The Company
used the funds to pay off existing accounts payable obligations of $16.0
million, the outstanding line of credit obligation of $2.8 million, and to
redeem 70,000 shares of Series A Stock at $4.7 million. Accounts receivable
declined from $19.5 million at year-end to $10.5 million at September 30,
1998. The decline in accounts receivable is due to lower sales levels. The
Company's primary source of funds at September 30, 1998 consisted of $6.4
million in cash. The Company had a $10.0 million revolving line of credit,
secured by substantially all of the assets of the Company which expired in
July 1998. In September, the Company secured a $5 million Accounts Receivable
Purchase Agreement with a bank, and is currently negotiating an additional $5
million revolving line of credit with the same bank. The Company incurred
operating losses during each of the two years in the period ended December
31, 1997 and incurred additional operating losses in the first and second
quarters of 1998. However, with the completion of the Asset Sale, the Company
believes that its existing cash resources, collection of its accounts
receivable, and borrowing capabilities will be sufficient to fund the
Company's expected working capital requirements for at least the next 12
months. While the Company feels that its existing cash resources will be
sufficient to implement the Company's operating strategy and meet the
Company's other working capital requirements, if the industry downturn
persists, the Company may be required to seek additional equity or debt
financing. There can be no assurance that the Company would be able to obtain
additional debt or equity financing, if and when needed, on terms that the
Company finds acceptable. Any additional equity or debt financing may involve
substantial dilution to the Company's shareholders, restrictive covenants or
high interest costs.
REDEMPTION SERIES B CONVERTIBLE PREFERRED STOCK
On July 29, 1998, the Company exchanged 28,000 shares of Series A Stock
for 28,000 shares of Series B Stock, which has a fixed conversion price of
$1.25 per share. On October 16, the Company redeemed 12,000 shares of its
outstanding Series B Stock for $600,000, leaving 16,000 shares of Series B
Stock outstanding. The Series B Stock holders may require the Company at any
time to redeem all of its shares outstanding at a redemption price equal to
the stated value per share. The Series B stock may be redeemed at the option
of the Company on or after July 30, 2003 at a redemption price equal to the
product of (i) the average of the closing bid prices for the five trading
days immediately preceding (a) July 30, 2003, or (b) the date of payment by
the Company of the redemption price, whichever is greater, and (ii) the
conversion ratio applicable to the Series B Stock calculated on July 30, 2003.
10
RISK FACTORS
CERTAIN SECTIONS OF MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS
SET FORTH ABOVE IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THIS RISK FACTORS
SECTION. THE DISCUSSION OF THESE FACTORS IS INCORPORATED BY THIS REFERENCE AS
IF SAID DISCUSSION WAS FULLY SET FORTH IN MANAGEMENT'S DISCUSSION AND
ANALYSIS.
HISTORICAL PERFORMANCE. The Company experienced losses of $19.3 million
and $9.2 million for the years ended December 31, 1997 and 1996,
respectively. In addition, the Company experienced an operating loss of $28.9
million in the first three quarters of 1998. As a result of the Company's
inconsistent sales and operating results in recent years, there can be no
assurance that the Company will be able to attain or sustain consistent
future revenue growth on a quarterly or annual basis, or that the Company
will be able to attain or maintain consistent profitability on a quarterly or
annual basis.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS AND CONCENTRATION OF CREDIT
RISK. The Company continued its efforts to expand its customer base in 1997
and was successful, with new customers in Taiwan and North America.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. In 1997, two customers, Samsung
Electronics Company, Ltd. and Innotech Corporation accounted for 47% and 17%,
respectively, of the Company's net sales. In 1996, these same two customers
accounted for 53% and 18%, respectively, of the Company's net sales. With the
sale of its ion implantation business in July 1998, the Company's main
customer for its current generation product is Samsung Electronics Company,
Ltd., which accounted for over 90% of the Company's net sales of thin film
products in 1997 and 1996. Because the semiconductor manufacturing industry
is concentrated in a limited number of generally larger companies, the
Company expects that a significant portion of its future product sales will
be concentrated within a limited number of customers. None of these customers
has entered into a long-term agreement requiring it to purchase the Company's
products. Furthermore, sales to certain of these customers may decrease in
the future when those customers complete their current semiconductor
equipment purchasing requirements for new or expanded fabrication facilities.
The loss of a significant customer or any reduction in orders from a
significant customer, including reductions due to customer departures from
recent buying patterns, market, economic or competitive conditions in the
semiconductor industry or in the industries that manufacture products
utilizing ICs, could have a material adverse affect on the Company's
business, financial condition and results of operations.
The Company is dependent on a small number of customers. Accordingly,
the Company is subject to concentration of credit risk. If a major customer
were to encounter financial difficulties and become unable to meet its
obligations, the Company would be adversely impacted.
RELIANCE ON INTERNATIONAL SALES. Export sales accounted for
approximately 74%, 84% and 88% of total net sales in the years ended 1997,
1996 and 1995, respectively. In addition, net sales to South Korean customers
accounted for approximately 50%, 59% and 63%, respectively, of total net
sales during the same periods. During the first three quarters of 1998, the
Company sold six systems, three of which were sold to domestic customers,
thereby decreasing export sales to approximately 49% of total net sales.
Nonetheless, the Company anticipates that international sales, including
sales to South Korea, will continue to account for a significant portion of
net sales. As a result, a significant portion of the Company's sales will be
subject to certain risks, including unexpected changes in regulatory
requirements, tariffs and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing
foreign subsidiary operations and potentially adverse tax consequences.
Although the Company's foreign system sales are primarily denominated in U.S.
dollars and the Company does not engage in hedging transactions, the
Company's foreign sales are subject to the risks associated with unexpected
changes in exchange rates, which could have the effect of making the
Company's products more or less expensive. There can be no assurance that any
of these factors will not have a material adverse affect on the Company's
business, financial condition and results of operations.
Further, the Company has a wholly owned South Korean subsidiary
providing service and support to the installed base of customers and whose
functional currency is the won. As a result of the devaluation of the won in
the fourth quarter of 1997, the Company incurred a foreign exchange loss of
$1.1 million. There can be no
11
assurance that the Company will not incur currency losses or gains in future
quarters as the currency fluctuates.
A substantial portion of the Company's sales is in Asia. Recent turmoil
in the Asian financial markets has resulted in dramatic currency
devaluations, stock market declines, restriction of available credit and
general financial weakness. In addition, Dynamic Random Access Memory
("DRAM") prices have fallen dramatically and may continue to do so as some
Asian integrated circuit ("IC") manufacturers may be selling DRAMs at less
than cost in order to raise cash. These developments may affect the Company
in several ways. Currency devaluation may make dollar-denominated goods, such
as the Company's, more expensive for Asian clients. Asian manufacturers may
limit capital spending. Furthermore, the uncertainty of the DRAM market may
cause manufacturers everywhere to delay capital spending plans. These
circumstances may also affect the ability of Company customers to meet their
payment obligations, resulting in the cancellations or deferrals of existing
orders and the limitation of additional orders. Some of the Company's South
Korean customers have rescheduled their required delivery dates for orders
previously placed and have announced delays in the facilitization of their
new manufacturing areas. In addition, some portion of IC fabrication plant
construction has been subsidized by Asian governments. Financial turmoil may
weaken these governments' willingness to continue such subsidies. Such
developments could have a material adverse affect on the Company's business,
financial condition and results of operations.
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY. The Company's business
depends upon the capital expenditures of semiconductor manufacturers, which
in turn depend on the current and anticipated market demand for ICs and
products utilizing ICs. The semiconductor industry is cyclical and
experiences periodic downturns, which have an adverse affect on the
semiconductor industry's demand for semiconductor manufacturing capital
equipment. Semiconductor industry downturns have adversely affected the
Company's revenues, operating margins and results of operations. There can be
no assurance that the Company's revenues and operating results will not
continue to be materially and adversely affected by future downturns in the
semiconductor industry. In addition, the need for continued investment in
R&D, substantial capital equipment requirements and extensive ongoing
worldwide customer service and support capability limits the Company' ability
to reduce expenses. Accordingly, there is no assurance that the Company will
be able to attain profitability in the future.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenue and
operating results may fluctuate significantly from quarter to quarter. The
Company derives its revenue primarily from the sale of a relatively small
number of high-priced systems, many of which may be ordered and shipped
during the same quarter. The Company's results of operations for a particular
quarter could be adversely affected if anticipated orders, for even a small
number of systems, were not received in time to enable shipment during the
quarter, anticipated shipments were delayed or canceled by one or more
customers or shipments were delayed due to manufacturing difficulties. The
Company's revenue and operating results may also fluctuate due to the mix of
products sold and the channel of distribution.
COMPETITION. The semiconductor manufacturing capital equipment industry
is highly competitive. Genus faces substantial competition throughout the
world. The Company believes that to remain competitive, it will require
significant financial resources in order to offer a broader range of
products, to maintain customer service and support centers worldwide and to
invest in product and process R&D. Many of the Company's existing and
potential competitors have substantially greater financial resources, more
extensive engineering, manufacturing, marketing and customer service and
support capabilities, as well as greater name recognition than the Company.
The Company expects its competitors to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics.
If the Company's competitors enter into strategic relationships with leading
semiconductor manufacturers covering chemical vapor deposition ("CVD")
products similar to those sold by the Company, it would materially adversely
affect the Company's ability to sell its products to these manufacturers.
There can be no assurance that the Company will continue to compete
successfully in the United States or worldwide. The Company faces direct
competition in CVD tungsten silicide ("WSiX") from Applied Materials, Inc.
and Tokyo Electron, Ltd. There can be no assurance that these or other
competitors will not succeed in developing new technologies, offering
products at lower prices than those of the Company or obtaining market
acceptance for products more rapidly than the Company.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES. The Company believes that its
future performance will depend in part upon its ability to continue to
enhance its existing products and their process capabilities and to
12
develop and manufacture new products with improved process capabilities. As a
result, the Company expects to continue to invest in R&D. The Company also
must manage product transitions successfully, as introductions of new
products could adversely affect sales of existing products. There can be no
assurance that the market will accept the Company's new products or that the
Company will be able to develop and introduce new products or enhancements to
its existing products and processes in a timely manner to satisfy customer
needs or achieve market acceptance. The failure to do so could have a
material adverse affect on the Company's business, financial condition and
results of operations. Furthermore, if the Company is not successful in the
development of advanced processes or equipment for manufacturers with whom it
has formed strategic alliances, its ability to sell its products to those
manufacturers would be adversely affected.
PRODUCT CONCENTRATION; RAPID TECHNOLOGICAL CHANGE. Semiconductor
manufacturing equipment and processes are subject to rapid technological
change. The Company derives its revenue primarily from the sale of its WSiX
CVD systems. The Company estimates that the life cycle for these systems is
generally three to five years. The Company believes that its future prospects
will depend in part upon its ability to continue to enhance its existing
products and their process capabilities and to develop and manufacture new
products with improved process capabilities. As a result, the Company expects
to continue to make significant investments in R&D. The Company also must
manage product transitions successfully, as introductions of new products
could adversely affect sales of existing products. There can be no assurance
that future technologies, processes or product developments will not render
the Company's product offerings obsolete or that the Company will be able to
develop and introduce new products or enhancements to its existing and future
processes in a timely manner to satisfy customer needs or achieve market
acceptance. The failure to do so could adversely affect the Company's
business, financial condition and results of operations. Furthermore, if the
Company is not successful in the development of advanced processes or
equipment for manufacturers with whom it currently does business, its ability
to sell its products to those manufacturers would be adversely affected.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company's success
depends in part on its proprietary technology. While the Company attempts to
protect its proprietary technology through patents, copyrights and trade
secret protection, it believes that the success of the Company will depend on
more technological expertise, continuing the development of new systems,
market penetration and growth of its installed base and the ability to
provide comprehensive support and service to customers. There can be no
assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. The
Company currently has a number of United States and foreign patents and
patent applications. There can be no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
From time-to-time, the Company has received notices from third parties
alleging infringement of such parties' patent rights by the Company's
products. In such cases, it is the policy of the Company to defend against
the claims or negotiate licenses on commercially reasonable terms where
considered appropriate. However, no assurance can be given that the Company
will be able to negotiate necessary licenses on commercially reasonable
terms, or at all, or that any litigation resulting from such claims would not
have a material adverse affect on the Company's business and financial
results.
DEPENDENCE ON KEY SUPPLIERS. Certain of the components and
sub-assemblies included in the Company's products are obtained from a single
supplier or a limited group of suppliers. Disruption or termination of these
sources could have a temporary adverse affect on the Company's operations.
The Company believes that alternative sources could be obtained and qualified
to supply these products, if necessary. Nevertheless, a prolonged inability
to obtain certain components could have a material adverse affect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON INDEPENDENT DISTRIBUTORS. The Company currently sells and
supports its CVD products through direct sales and customer support
organizations in the U.S. and South Korea, and through eight exclusive,
independent sales representatives and distributors in the U.S., Europe, South
Korea, Japan, Taiwan, Hong Kong, Mainland China, Malaysia, and Singapore. The
Company does not have any long-term contracts with its sales representatives
and distributors. Although the Company believes that alternative sources of
distribution are available, the disruption or termination of its existing
distributor relationships could have a temporary adverse affect on the
Company's business, financial condition and results of operations.
13
NASDAQ NATIONAL MARKET LISTING REQUIREMENTS. On October 20, the Company
was notified by the National Association of Securities Dealers that it does
not meet the Nasdaq National Market listing requirements because the stock
failed to maintain a closing bid price of greater than or equal to $1.00 for
the prior thirty consecutive trading days, in accordance with Marketplace
Rule 4450(a)(5). The Company has ninety calendar days in which to regain
compliance, which is defined as the Company's stock price having a closing
bid price of equal to or greater than $1.00 for ten consecutive trading days.
If the Company is unable to achieve compliance during this time, a request
for a hearing before the Nasdaq review panel and a stay of delisting will be
initiated prior to the deadline of January 18, 1999. The Company will present
to Nasdaq a plan to remedy the situation at that time. If the Company's stock
is delisted from the Nasdaq National Market, it will trade on the Nasdaq
Small Cap Market. If this occurs, the Company's stock may be subject to
reduced liquidity and reduced analyst coverage, which may have an adverse
effect on the market price of the Company's common stock. Additionally, this
may inhibit the Company's ability to raise capital in the future. Such
developments could have a material adverse affect on the Company's business,
financial condition and results of operations
VOLATILITY OF STOCK PRICE. The Company's Common Stock has experienced
substantial price volatility, particularly as a result of quarter-to-quarter
variations in the actual or anticipated financial results of, or
announcements by, the Company, its competitors or its customers,
announcements of technological innovations or new products by the Company or
its competitors, changes in earnings estimates by securities analysts and
other events or factors. Also, the stock market has experienced extreme price
and volume fluctuations which have affected the market price of many
technology companies, in particular, and which have often been unrelated to
the operating performance of these companies. These broad market
fluctuations, as well as general economic and political conditions in the
United States and the countries in which the Company does business, may
adversely affect the market price of the Company's Common Stock. In addition,
the occurrence of any of the events described in these "Risk Factors" could
have a material adverse affect on such market price.
READINESS FOR YEAR 2000. Many existing computer systems and
applications, and other control devices, use only two digits to identify a
year in the date field, without considering the impact of the upcoming change
in the century. These computer systems and applications could fail or create
erroneous results unless corrected so that they can process data related to
the year 2000. The Company relies on its systems, applications and devices in
operating and monitoring all major aspects of its business, including
financial systems (such as general ledger, accounts payable and payroll
modules), customer service, infrastructure, embedded computer chips, networks
and telecommunications equipment and end products. The Company also relies on
external systems of business enterprises such as customers, suppliers,
creditors, financial organizations, and of governments both domestically and
globally, directly for accurate exchange of data and indirectly. During 1997,
the Company started the implementation of a new business system. One criteria
for the selection of the enterprise software was compliance with Year 2000
issues. Accordingly, the Company's current estimate is that the costs
associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
affect on the result of operations or financial position of the Company in
any given year. However, despite the Company's efforts to address the Year
2000 impact on its internal systems, there can be no assurance that the
Company has fully identified such impact or that it can resolve it without
disruption of its business and without incurring significant expense. In
addition, even if the internal systems of the Company are not materially
affected by the Year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts. The Company has not contacted the entities with which it interacts
to determine whether such entities are addressing the Year 2000 issue.
14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Subsequent Events discussion regarding redemption and exchange of
Series A Convertible Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on July 24 in Palo
Alto, California. Proxies for the meeting were solicited pursuant to
Regulation 14A. At the Company's Annual Meeting, the shareholders approved
the following resolutions:
(1) Election of the following persons as directors.
Director In Favor Withheld
-------- -------- --------
William W.R. Elder 14,071,772 632,995
Todd S. Myhre 14,094,216 610,551
G. Frederick Forsyth 14,068,042 638,725
Mario M. Rosati 14,096,242 608,525
(2) Approval of the Asset Purchase Agreement to sell the ion implant
product line to Varian.
For: 9,338,689
Against: 458,170
Abstain: 120,610
Broker Non-Vote: 4,787,298
(3) Approval of the conversion of securities exceeding 20% of the
outstanding common stock.
For: 8,774,549
Against: 833,751
Abstain: 309,169
Broker Non-Vote: 4,787,298
(4) Amendment of the 1989 Employee Stock Purchase Plan to increase the
number of shares reserved for issuance thereunder by 300,000 shares.
For: 13,226,215
Against: 1,210,025
Abstain: 268,527
(5) Ratification and appointment of PricewaterhouseCoopers LLP as
independent accountants.
For: 14,346,629
Against: 196,127
Abstain: 162,011
15
ITEM 5. OTHER INFORMATION
In the fourth quarter of 1998, the Board of Directors of the Company
amended the Company's Bylaws to (i) adopt a provision providing for an
advance notice requirement of shareholder business to be brought before a
meeting of the shareholders, (ii) amend a provision to provide that a
special meeting of the shareholders may be called by the Board of
Directors, the Chairman of the Board and the President only and (iii) make
other necessary conforming changes.
With respect to shareholder proposals not included in the Company's proxy
statement for the 1999 Annual Meeting of Shareholders, the persons named in
management's proxy for the 1999 Annual Meeting of Shareholders will be
entitled to exercise the discretionary voting power conferred by such proxy
under the circumstances specified in Rule 14a-4(c) of the Securities
Exchange Act of 1934, as amended, and under Section 2.5 of the Company's
Bylaws, including with respect to proposals received by the Company not
later than one hundred and twenty (120) days prior to the first anniversary
of the date of mailing of the proxy statement for the prior year's Annual
Meeting of Shareholders. Proposals of shareholders of the Company that are
intended to be presented by such shareholders at the Company's 1999 Annual
Meeting must be received by the Company no later than March 1, 1999. If
such shareholder fails to comply with the foregoing notice provision, the
proxy holders will be allowed to use their discretionary voting authority
when the proposal is raised at the 1999 Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
(b) Report on Form 8-K
The Company filed a Current Report on Form 8-K dated July 29, 1998 to
describe the closing of the sale to Varian Associates, Inc. of the ion
implant equipment product line.
16
GENUS, INC.
SIGNATURES
Pursuant to the requirements 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.
Date: November 16, 1998 GENUS, INC.
/s/ William W.R. Elder
----------------------------------
William W.R. Elder
Chairman and Chief Executive Officer
/s/ Kenneth Schwanda
----------------------------------
Kenneth Schwanda
Vice President, Finance
(Principal Accounting Officer)
17
GENUS, INC.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------
3.2 By-laws of Registrant, as amended
4.5 Certificate of Determination of Rights, Preferences and
Privileges of Series B Convertible Preferred Stock (1)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among
the Registrant and the Investors (1)
27.1 Financial Data Schedule
- -------------------------------------------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated July 29, 1998.
18