<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
- -------------------------------------------------------------------------------
(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 August 7, 1998: 17,361,162
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 12,970 $ 19,351 $ 20,208 $ 39,032
Costs and expenses:
Cost of goods sold 11,718 11,540 18,659 23,853
Research and development 2,939 3,058 6,271 6,249
Selling, general and administrative 5,683 4,189 9,906 8,056
Special charge 11,222 - 11,222 -
-------- -------- -------- --------
Income (loss) from operations (18,592) 564 (25,850) 874
Other, net (237) (82) (393) (97)
-------- -------- -------- --------
Income (loss) before income taxes (18,829) 482 (26,243) 777
Provision for income taxes - 186 - 300
-------- -------- -------- --------
Net income (loss) (18,829) 296 (26,243) 477
Deemed dividends on preferred stock (74) - (1,903) -
-------- -------- -------- --------
Net income (loss) available to
common shareholders $(18,903) $ 296 $(28,146) $ 477
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) available to common
shareholders per common share and per
common share assuming dilution $ (1.10) $ 0.02 $ (1.64) $ 0.03
-------- -------- -------- --------
-------- -------- -------- --------
Comprehensive income (loss) $(18,656) $ 321 $(25,809) $ 390
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
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GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,754 $ 8,700
Accounts receivable (net of allowance for doubtful
accounts of $497 in 1998 and $1,097 in 1997) 11,855 19,469
Inventories 5,173 28,986
Net assets held for sale 25,130 -
Other current assets 778 1,029
-------- --------
Total current assets 46,690 58,184
Property and equipment, net 4,628 15,276
Other assets, net 734 3,278
-------- --------
Total assets $ 52,052 $ 76,738
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Short term bank borrowings $ 2,800 $ 7,200
Accounts payable 11,527 8,723
Accrued expenses 10,205 10,613
Current portion of long-term debt - 874
-------- --------
Total current liabilities 24,532 27,410
Long-term debt, less current portion 36 971
-------- --------
Total liabilities 24,568 28,381
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized, 2,000,000 shares;
Issued and outstanding 98,000 shares at June 30, 1998
and none at December 31, 1997 6,098 -
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding 17,314,141 shares at
June 30, 1998 and 17,120,628 shares at
December 31, 1997 99,779 99,149
Accumulated deficit (76,898) (48,863)
Cumulative translation adjustment (1,495) (1,929)
-------- --------
Total shareholders' equity 27,484 48,357
-------- --------
Total liabilities and shareholders' equity $ 52,052 $ 76,738
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(26,243) $ 477
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 1,863 2,420
Special Charge 11,222 -
Changes in assets and liabilities:
Accounts receivable 7,702 (9,973)
Inventories (662) 1,629
Other current assets 251 (222)
Accounts payable 2,804 1,630
Accrued expenses (620) (764)
Other, net (817) 113
-------- --------
Net cash used in operating activities (4,500) (4,690)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (373) (390)
-------- --------
Net cash used in investing activities (373) (390)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 121 715
Proceeds from issuance of preferred stock and
warrants, net 4,815 -
Proceeds from short-term bank borrowings - 10,346
Payments of short-term bank borrowings (4,400) (5,500)
Payments of long-term debt (739) (814)
-------- --------
Net cash provided by financing activities (203) 4,747
-------- --------
Effect of exchange rate changes on cash 130 (14)
Net decrease in cash and cash equivalents (4,946) (347)
Cash and cash equivalents, beginning of period 8,700 11,827
-------- --------
Cash and cash equivalents, end of period $ 3,754 $ 11,480
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator-basic:
Net income (loss) $(18,829) $ 296 $(26,243) $ 477
Deemed dividends on preferred stock (74) - (1,903) -
-------- -------- -------- --------
Net income (loss) available to common shareholders $(18,903) $ 296 $(28,146) $ 477
-------- -------- -------- --------
-------- -------- -------- --------
Denominator-basic:
Weighted average common shares outstanding 17,160 16,782 17,143 16,760
-------- -------- -------- --------
-------- -------- -------- --------
Basic net income (loss) per share available to
common shareholders $ (1.10) $ 0.02 $ (1.64) $ 0.03
-------- -------- -------- --------
-------- -------- -------- --------
Numerator-diluted:
Net income (loss) $(18,829) $ 296 $(26,243) $ 477
Deemed dividends on preferred stock (74) - (1,903) -
-------- -------- -------- --------
Net income (loss) available to common shareholders $(18,903) $ 296 $(28,146) $ 477
-------- -------- -------- --------
-------- -------- -------- --------
Denominator-diluted:
Weighted average common shares outstanding 17,160 16,782 17,143 16,760
Effect of dilutive securities: stock options - 72 - 95
-------- -------- -------- --------
17,160 16,854 17,143 16,855
-------- -------- -------- --------
-------- -------- -------- --------
Diluted net income (loss) per share available to
common shareholders $ (1.10) $ 0.02 $ (1.64) $ 0.03
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
5
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GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
Stock options to purchase approximately 2,502,000 weighted average
shares of common stock were outstanding during the six months ended June 30,
1998 but were not included in the computation of diluted loss per share
because the Company has a net loss for the six months ended June 30, 1998.
Stock options to purchase approximately 1,685,000 weighted average
shares of common stock were outstanding during the six months ended June 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
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
------ ------
<S> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 177 $ 188
Income taxes - 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 $ -
Net assets held for sale 25,130 -
Conversion of Series A Convertible Preferred Stock to
common stock 124 -
</TABLE>
LINE OF CREDIT
The Company had a revolving line of credit agreement with a bank that
provided for maximum borrowings of $10 million which expired in July 1998.
At June 30, 1998, the Company had $2.8 million in borrowings outstanding
under the line of credit which were paid off in July 1998 with proceeds from
the Asset Sale, as defined below. See "Asset Sale."
6
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GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
INVENTORIES
Inventories comprise the following: (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Raw materials and parts $ 2,702 $ 15,210
Work in progress 2,092 6,879
Finished goods 379 6,897
-------- --------
$ 5,173 $ 28,986
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
ACCRUED EXPENSES
Accrued expenses comprise the following: (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
System installation and warranty $ 879 $ 3,741
Accrued commissions and incentives 631 2,062
Accrued payroll and related items 435 1,264
Other 8,260 3,546
-------- --------
$ 10,205 $ 10,613
-------- --------
-------- --------
</TABLE>
ASSET SALE
In April 1998, the Company entered into an agreement with Varian
Associates, Inc. ("Varian") to sell selected assets and transfer selected
liabilities related to the millions of electron volts ("MeV") ion
implantation equipment product line for approximately $25 million plus
additional payments if certain revenue targets are achieved ("Asset Sale").
The completion of the Asset Sale which was subject to approval by the
Company's shareholders as well as to expiration of the applicable waiting
periods under federal Hart-Scott-Rodino premerger notification requirements
occured in July 1998. As a result of the Asset Sale, the Company will no
longer engage in the ion implant business and will refocus its efforts on
thin film deposition. 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. In connection with the Asset Sale and the refocusing of the
Company's business on thin film products, the Company significantly reduced
the workforce at several of its locations during the second quarter,
resulting in the special charge.
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 Convertible Preferred Stock
("Series B Stock"), which has a fixed conversion price of $1.25 per share.
SPECIAL CHARGE
During the second quarter of 1998, the Company incurred a special charge
of $11.2 million. Included in this charge are personnel charges of $1.9
million associated with the Company's reduction in workforce as well as $5.4
million in inventory write-downs, and $1.2 million in property and equipment
write-downs. In addition, the Company has provided $1.5 million for expenses
associated with the closing of several sales offices and transaction losses
as a result of the sale of the ion implant equipment product line to Varian.
Also included in the special charge are $1.2 million in legal, accounting
and banking fees associated with the Varian transaction.
7
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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
Net sales for the three and six months ended June 30, 1998 were $13.0
million and $20.2 million, respectively, compared to net sales of $19.4
million and $39.0 million for the corresponding periods in 1997. The decline
is attributable to lower unit sales of systems as well as 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. After modest sales
growth for the first nine months of 1997 compared to 1996, 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
half of 1998.
Gross margin for the three and six months ended June 30, 1998 was 10%
and 8%, respectively, compared to 40% and 39%, respectively, for the same
periods in 1997. The gross margin for the first half 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 second quarter of 1998, research and development expenses
("R&D") were $2.9 million, or 22% of sales, compared to $3.1 million, or 16%
of sales, for the second quarter of 1997. R&D spending for the first half of
1998 of $6.3 million remained essentially flat relative to the comparable
period in 1997. 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 latter half 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 during the second half of 1998.
Selling, general and administrative expenses ("SG&A") were $5.7 million
for the second quarter of 1998. Included in this amount is a $1.4 million
net charge for the write-off of an account receivable from Innotech
Corporation, the Company's Japanese distributor. Absent this write-off, SG&A
increased slightly relative to the second quarter of 1997.
During the second quarter of 1998, the Company incurred a special charge
of $11.2 million. Included in this charge are personnel charges of $1.9
million associated with the Company's reduction in workforce as well as $5.4
million in inventory write-downs, and $1.2 million in property and equipment
write-downs. In addition, the Company has provided $1.5 million for expenses
associated with the closing of several sales offices and transaction losses
as a result of the sale of the ion implant equipment product line to Varian
Associates, Inc. ("Varian"). Also included in the special charge are $1.2
million in legal, accounting and banking fees associated with the Varian
transaction.
The net loss for the quarter ended June 30, 1998 was $18.8 million.
This compares with net income of $296,000 for the second quarter of 1997.
The net loss for the six month period was $26.2 million, compared to net
income of $477,000 for the first six months of 1997.
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
8
<PAGE>
(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 $18.9 million, or $1.10 per share for the
second quarter of 1998 and a net loss available to common shareholders of
$28.1 million or $1.64 per share for the first half 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"). See "Subsequent Events -
Redemption and Exchange of Series A Convertible Preferred Stock".
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $3.8 million at
June 30, 1998 from $8.7 million at year-end. Accounts receivable declined
from $19.5 million at year-end to $11.9 million at June 30, 1998. The
decline in accounts receivable is due to the lower sales level as well as
collections during the quarter, and the $3.0 million write-off of an account
receivable from Innotech Corporation. The Company's primary source of funds
at June 30, 1998 consisted of $3.8 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. At June 30, 1998, the Company had
$2.8 million of borrowings outstanding under the line of credit, which were
paid off with proceeds from the Asset Sale, as defined below. See
"Subsequent Events - Asset Sale to Varian".
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. Additionally, the Company's bank
line of credit expired in July 1998. However, with the completion of the
Asset Sale, the Company believes that its existing cash resources will be
sufficient to fund the Company's expected working capital requirements for at
least the next 12 months. In addition, the Company is in discussions with
financial institutions to secure a line of credit. 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.
SUBSEQUENT EVENTS
ASSET SALE TO VARIAN
In April 1998, the Company entered into an agreement with Varian to sell
selected assets and transfer selected liabilities related to the millions of
electron volts ("MeV") ion implantation equipment product line for
approximately $25 million plus additional payments if certain revenue targets
are achieved ("Asset Sale"). The completion of the Asset Sale which was
subject to approval by the Company's shareholders as well as to expiration of
the applicable waiting periods under federal Hart-Scott-Rodino premerger
notification requirements occurred in July 1998. As a result of the Asset
Sale, the Company will no longer engage in the ion implant business and will
refocus its efforts on thin film deposition. 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 Stock, with the
remaining proceeds to be used for working capital and general corporate
purposes, including investment in R&D of thin film products. In connection
with the Asset Sale and the refocusing of the Company's business on thin film
products, the Company significantly reduced the workforce at several of its
locations during the second quarter, resulting in the special charge.
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.
9
<PAGE>
RISK FACTORS
CERTAIN SECTIONS OF MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE
FACTORS SET FORTH ABOVE IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THIS RISK
FACTORS SECTION. THE DISCUSSION OF THESE FACTORS IS INCORPORATED BY THIS
REFERENCE AS IF SAID DISCUSSION WAS FULLY SET FORTH IN MANAGEMENT'S
DISCUSSION AND ANALYSIS.
HISTORICAL PERFORMANCE. Although the Company had net income of $19.3
million and $4.2 million in the years ended December 31, 1995 and 1994, the
Company experienced losses of $19.3 million, $9.2 million, and $6.9 million
for the years ended December 31, 1997, 1996 and 1993, respectively. In
addition, the Company experienced an additional operating loss of $26.2
million in the first half 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 effect 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 half of 1998, the
Company sold four systems, two of which were sold to domestic customers,
thereby decreasing export sales to 60% 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 effect on the Company's business, financial condition
and results of operations.
10
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Further, the Company has a wholly owned South Korean subsidiary
providing service and support to the installed base of customers and whose
functional currency is the won. As a result of the devaluation of the won in
the fourth quarter of 1997, the Company incurred a foreign exchange loss of
$1.1 million. There can be no assurance that the Company will not incur
currency losses or gains in future quarters as the currency fluctuates.
A substantial portion of the Company's sales 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 effect on the Company's business,
financial condition and results of operations.
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY. The Company's business
depends upon the capital expenditures of semiconductor manufacturers, which
in turn depend on the current and anticipated market demand for ICs and
products utilizing ICs. The semiconductor industry is cyclical and
experiences periodic downturns, which have an adverse effect on the
semiconductor industry's demand for semiconductor manufacturing capital
equipment. Semiconductor industry downturns have adversely affected the
Company's revenues, operating margins and results of operations. There can
be no assurance that the Company's revenues and operating results will not
continue to be materially and adversely affected by future downturns in the
semiconductor industry. In addition, the need for continued investment in
R&D, substantial capital equipment requirements and extensive ongoing
worldwide customer service and support capability limits the Company' 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
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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 develop
and manufacture new products with improved process capabilities. As a
result, the Company expects to continue to invest in R&D. The Company also
must manage product transitions successfully, as introductions of new
products could adversely affect sales of existing products. There can be no
assurance that the market will accept the Company's new products or that the
Company will be able to develop and introduce new products or enhancements to
its existing products and processes in a timely manner to satisfy customer
needs or achieve market acceptance. The failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, if the Company is not successful in the
development of advanced processes or equipment for manufacturers with whom it
has formed strategic alliances, its ability to sell its products to those
manufacturers would be adversely affected.
PRODUCT CONCENTRATION; RAPID TECHNOLOGICAL CHANGE. Semiconductor
manufacturing equipment and processes are subject to rapid technological
change. The Company derives its revenue primarily from the sale of its 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 effect 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 effect on the Company's operations.
The Company believes that alternative sources could be obtained and qualified
to supply these products, if
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necessary. Nevertheless, a prolonged inability to obtain certain components
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON INDEPENDENT DISTRIBUTORS. The Company currently sells and
supports its CVD products through direct sales and customer support
organizations in the U.S., South Korea and through seven exclusive,
independent sales representatives and distributors in the U.S., Europe, South
Korea, Taiwan, Hong Kong 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 effect 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 effect on such market price.
READINESS FOR YEAR 2000. Many existing computer systems and
applications, and other control devices, use only two digits to identify a
year in the date field, without considering the impact of the upcoming change
in the century. These computer systems and applications could fail or create
erroneous results unless corrected so that they can process data related to
the year 2000. The Company relies on its systems, applications and devices
in operating and monitoring all major aspects of its business, including
financial systems (such as general ledger, accounts payable and payroll
modules), customer service, infrastructure, embedded computer chips, networks
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 effect 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.
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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 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 April 24, 1998 to
describe the sale to Varian Associates, Inc. of the ion implant
equipment product line.
The Company filed a Current Report on Form 8-K/A dated May 7, 1998.
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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: October 20, 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)
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GENUS, INC.
INDEX TO EXHIBITS
Exhibit Description
- ------- ---------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian
Associates, Inc. and Registrant and exhibits thereto (2)
4.2 Convertible Preferred Stock Purchase Agreement, dated February 2,
1998, among the Registrant and the Investors (1)
4.3 Registration Rights Agreement, dated February 2, 1998, among the
Registrant and the Investors (1)
4.4 Certificate of Determination of Rights, Preferences and Privileges of
Series A Convertible Preferred Stock (1)
4.5 Certificate of Determination of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock (4)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the
Registrant and the Investors (4)
10.17 Settlement Agreement and Mutual Release, dated April 20, 1998, between
Registrant and James T. Healy (3)
10.18 Form of Change of Control Severance Agreement (3)
10.19 Settlement Agreement and Mutual Release, dated June 30, 1998, between
Registrant and John Aldeborgh (5)
10.20 Settlement Agreement and Mutual Release, dated July 15, 1998, between
Registrant and Mary Bobel (5)
27.1 Financial Data Schedule (5)
- -------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated February 12, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated April 15, 1998.
(3) 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.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated July 29, 1998.
(5) Previously Filed
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