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 MARCH 31, 1999 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
(Address of principal executive offices) (Zip code)
(408) 747-7120
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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 May 7, 1999: 18,113,791
----------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
---------- --------
<S> <C> <C>
Net sales $ 5,953 $ 7,238
Costs and expenses:
Cost of goods sold 3,604 6,941
Research and development 1,203 3,332
Selling, general and administrative 1,865 4,223
---------- --------
Income (loss) from operations (719) (7,258)
Other, net 108 (156)
---------- --------
Net Income (loss) (611) (7,414)
Deemed dividends on preferred stock 0 (1,829)
---------- --------
Net income (loss) available to common shareholders $ (611) $(9,243)
========== ========
Basic and diluted net loss available to common
shareholders per common share (0.03) (0.54)
========== ========
Shares used in per share calculation 17,865 17,125
========== ========
Comprehensive income (loss) $ (592) $(7,225)
========== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 1999 DECEMBER 31, 1998
---------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,258 $ 8,125
Accounts receivable (net of allowance for doubtful
accounts of $499 in 1999 and $500 in 1998) 9,470 13,008
Inventories 5,199 5,338
Other current assets 262 379
---------------- ---------------
Total current assets 22,189 26,850
Property and equipment, net 4,462 4,659
Other assets, net 332 318
---------------- ---------------
Total assets $ 26,983 $ 31,827
================ ===============
LIABILITIES
Current liabilities:
Short-term bank borrowings $ 0 $ 4,000
Accounts payable 2,821 2,193
Accrued expenses 3,935 4,794
Current portion of long-term debt and
capital lease obligations 52 64
---------------- ---------------
Total current liabilities 6,808 11,051
Long-term debt and capital lease obligations,
less current portion 41 50
---------------- ---------------
Total liabilities 6,849 11,101
---------------- ---------------
Redeemable Series B Convertible Preferred
Stock, no par value:
Authorized 28,000 shares;
Issued and outstanding, none (1999) and
16,000 shares (1998), liquidation preference,
none (1999) and $50 per share (1998) 0 773
---------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding 18,113,791 shares at
March 31, 1999 and 17,361,162 shares at
December 31, 1998 100,622 99,849
Accumulated deficit (78,866) (78,255)
Accumulated other comprehensive loss (1,622) (1,641)
---------------- ---------------
Total shareholders' equity 20,134 19,953
---------------- ---------------
Total liabilities, redeemable preferred stock,
and shareholders' equity $ 26,983 $ 31,827
================ ===============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (611) $(7,414)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 371 1,261
Provision for doubtful accounts (1) 6
Changes in assets and liabilities:
Accounts receivable 3,538 7,663
Inventories 139 (5,340)
Accounts payable 628 879
Accrued expenses (859) (1,540)
Other, net 103 (237)
-------- --------
Net cash used in operating activities 3,308 (4,722)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (174) (373)
-------- --------
Net cash used in investing activities (174) (373)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 0 16
Proceeds from issuance of preferred stock and warrants, net 0 4,815
Payments of short-term bank borrowings (4,000) (4,400)
Payments of long-term debt (21) (413)
-------- --------
Net cash provided by financing activities (4,021) 18
-------- --------
Effect of exchange rate changes on cash 20 60
-------- --------
Net decrease in cash and cash equivalents (867) (5,017)
Cash and cash equivalents, beginning of period 8,125 8,700
-------- --------
Cash and cash equivalents, end of period $ 7,258 $ 3,683
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (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 1998 Annual
Report on Form 10-K.
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>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Numerator-basic:
Net income (loss) $ (611) $(7,414)
Deemed dividends on preferred stock 0 (1,829)
-------- --------
Net income (loss) available to common shareholders $ (611) $(9,243)
======== ========
Denominator-basic:
Weighted average common shares outstanding 17,865 17,125
======== ========
Basic net income (loss) per share $ (0.03) $ (0.54)
======== ========
Numerator-diluted:
Net income (loss) $ (611) $(7,414)
Deemed dividends on preferred stock 0 (1,829)
-------- --------
Net income (loss) available to common shareholders $ (611) $(9,243)
======== ========
Denominator-diluted:
Weighted average common shares outstanding 17,865 17,125
Effect of dilutive securities: stock options 0 0
-------- --------
17,865 17,125
======== ========
Diluted net income (loss) per share $ (0.03) $ (0.54)
======== ========
</TABLE>
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
Stock options to purchase approximately 2,284,690 shares of common stock were
outstanding during the three months ended March 31, 1999 but were not included
in the computation of diluted loss per share because the Company has a net loss
for the three months ended March 31, 1999.
Stock options to purchase approximately 2,462,988 shares of common stock were
outstanding during the three months ended March 31, 1998 but were not included
in the computation of diluted loss per share because the Company has a net loss
for the three months ended March 31, 1998.
The outstanding warrants of 400,000 shares of common stock were outstanding
during the three months ended March 31, 1999 but were not included in the
computation of diluted loss per share because the Company has a net loss for the
three months ended March 31, 1999.
<TABLE>
<CAPTION>
Statement of Cash Flow Information
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 2 $ 82
Income taxes 0 1
Non-cash financing activities:
Deemed dividends on preferred stock related
to beneficial conversion feature $ 0 $ 1,792
Net assets held for sale 0 30,500
Conversion of 16,000 shares of convertible preferred
stock to 640,000 shares of common stock 773 0
</TABLE>
Line of Credit
The Company secured an Accounts Receivable Purchase Agreement with a bank on
September 30, 1998. This agreement allows the Company to sell qualified
receivables to the bank for a transaction fee of .1875%, and pay interest at the
rate of 1% per month on the average outstanding balance. The bank will advance
80% of the qualified receivables ($4,000,000 maximum outstanding at any one
time). This agreement expires September 30, 1999. At March 31, 1999, the Company
had no outstanding borrowings under the Accounts Receivable Purchase Agreement.
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
INVENTORIES
Inventories comprise the following: (AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
---------- -------------
<S> <C> <C>
Raw materials and parts $ 4,316 $ 4,796
Work in process 584 244
Finished goods 299 298
---------- -------------
$ 5,199 $ 5,338
========== =============
</TABLE>
<TABLE>
<CAPTION>
ACCRUED EXPENSES
Accrued expenses comprise the following: (AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
---------- -------------
<S> <C> <C>
System installation and warranty $ 684 $ 583
Accrued commissions and incentives 209 538
Accrued payroll and related items 575 536
Restructuring reserves 733 1,240
Income taxes 456 456
Other 1,278 1,441
---------- -------------
$ 3,935 $ 4,794
========== =============
</TABLE>
In 1998, the Company recorded a special charge of approximately $12,707.
Included in this special charge are personnel charges of $1,746 associated with
the Company's reduction in workforce as well as $5,400 in inventory write-downs,
and $1,113 in leasehold improvement write-offs. In addition, this charge
included $1,402 for expenses associated with the closing of several sales
offices and transaction losses as a result of the sale of the ion implant
products to Varian Associates, Inc. ("Varian") and $1,053 for legal, accounting,
and banking fees associated with the Varian transaction. Finally, the special
charge included a $1,993 write-off of ion implant inventory that is currently a
matter of dispute with Varian in connection with the Asset Sale. The Company and
Varian are in the process of resolving the dispute through arbitration to
determine whether the Company or Varian has rights to the one ion implant sale
and related inventory. 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 from the end customer of the amount in question is probable. The
Company is not conceding any rights to the disputed sale.
During the first quarter of 1999, $507 of transaction costs associated with
investment banker fees were charged against the restructuring reserve.
At March 31, 1999, the following cash components of the special charge remain
unpaid: $300 in payroll costs associated with the reduction in force, $220 in
foreign subsidiary closing costs, and $213 in transaction costs. The Company
expects these amounts to be paid by the end of the third quarter of 1999.
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
ISSUANCE OF PREFERRED STOCK AND WARRANTS
Private Placement of Convertible Preferred Stock
In February 1999, the 16,000 shares of outstanding Series B Convertible
Preferred Stock ("Series B Stock") was completely converted to 640,000 shares of
common stock.
Warrants
In connection with the issuance of the Series A Convertible Preferred Stock
("Series A Stock"), the Company issued warrants for 400,000 shares of the
Company's common stock to the holders of the Series A Stock. The warrants are
exercisable at any time until February 2001 for 300,000 shares of common stock
at a price of $3.67 per share and for 100,000 shares at a price of $4.50 per
share.
<PAGE>
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 quarter ended March 31, 1999 were $6 million, an 18% decrease
compared to net sales of $7.2 million for the corresponding period in 1998 when
Genus was a two-product line company, and an increase of 17% over the $5.1
million recorded in the fourth quarter of 1998. The Company recognized revenue
on two systems from one customer in the first quarter of 1999 compared with one
system in the first quarter of 1998 and two systems in the fourth quarter of
1998.
Gross margin for the quarter ended March 31, 1999 was 39% compared to 4% for the
same period in 1998. In 1998, the Company was structured to support much higher
revenue levels than were achieved. This resulted in a severe underabsorption of
fixed operations and service overhead expenses. During the second quarter of
1998, the Company implemented cost reduction measures which significantly
decreased these fixed overhead expenses. The Company believes that the current
organization is more properly sized to achieve reasonable gross margins going
forward, assuming revenue targets are met. Variable manufacturing costs
including materials, warranty and installation were in line with the prior two
quarters. In the fourth quarter of 1998, the Company's gross margin, exclusive
of the inventory and warranty reserve reversals, was 36%. This was primarily
related to the shipment of an older generation system, which carries a lower
selling price and gross margin than the current generation systems.
For the first quarter of 1999, research and development expenses ("R&D") were
$1.2 million, or 20% of sales, a decrease of $2.1 million compared to the $3.3
million reported in the first quarter of 1998. This decrease was partially
attributed to R&D costs of $1.7 million for the ion implant product line. R&D
expenses for the fourth quarter of 1998 were $1.1 million, or 22% of sales. The
Company expects spending levels to remain in the 17-20% range for 1999 as it
continues to invest in bringing innovative technology to the marketplace.
Selling, General and Administrative expenses ("SG&A") were $1.9 million for the
first quarter of 1999, or 31% of sales, a decrease of $2.3 million from the $4.2
million of SG&A for the first quarter of 1998. The reduction was primarily
related to costs associated with the ion implant product line. SG&A has been
relatively flat over the past three quarters, in the $1.8 to $1.9 million range.
The Company expects these costs to remain fairly constant throughout 1999.
For the first quarter of 1999, other income was $108,000, compared to other
expense of $156,000 in the first quarter of 1998. Other income in 1999 consisted
mainly of interest income and currency exchange gains, while other expense for
1998 included interest expenses associated with capital leases and short-term
borrowings, and foreign exchange losses.
The net loss for the quarter ended March 31, 1999 was $611,000. This compares
with net loss of $7.4 million for the first quarter of 1998.
<PAGE>
Liquidity and Capital Resources
During the three months ended March 31, 1999, the Company's cash and cash
equivalents decreased to $7.3 million at March 31, 1999 from $8.1 million at
year-end. The decrease is due to the repayment of the short-term borrowing of $4
million offset by a decrease in accounts receivable. Accounts receivable
declined from $13 million at year-end to $9.5 million at March 31, 1999. This
was primarily due to the collection of outstanding receivables on three systems
totaling $7.5 million. Receivables related to another three systems totaling
$6.5 million are expected to be collected in the second quarter of 1999. In
addition, the remaining Series B Convertible Preferred Stock ("Series B Stock")
valued at $773,000 at December 31, 1998 was completely converted into 640,000
shares of common stock.
The Company believes that its existing working capital and cash generated from
operations will be sufficient to satisfy its cash needs through the end of
fiscal 1999. Currently, cash not required for operating purposes is invested in
short-term money market funds. There can be no assurance that any required
additional funding, if needed, will be available on terms attractive to the
Company, which could have a material adverse effect on the Company's business,
financial condition, and results of operations. Any additional equity financing
may be dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants.
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 has experienced losses of $29.5 million,
$19.3 million, and $9.2 million for the years ended December 31, 1998, 1997 and
1996, respectively. In addition, the Company experienced a net loss of $611,000
in the first quarter of 1999. As a result of the Company's volatile 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 International Sales. Export sales accounted for approximately 56%,
74% and 84% of total net sales in the years ended 1998, 1997 and 1996,
respectively. In addition, net sales to South Korean customers accounted for
approximately 34%, 50% and 59%, respectively, of total net sales during the same
periods. During the first quarter of 1999, export sales to South Korea accounted
for approximately 98% of total net sales. The Company anticipates that sales to
one customer in 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.
<PAGE>
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. 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 are 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, DRAM prices have fallen dramatically and may continue to do so as
some Asian 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. Such developments could have a material adverse effect on the
Company's business, financial condition and results of operations.
Reliance on a Small Number of Customers and Concentration of Credit Risk.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. In 1998, three customers, Samsung
Electronics Company, Ltd., M/A Com and SGS Thomson, accounted for 68%, 8% and
5%, respectively, of the Company's thin films net sales. During the first
quarter of 1999, one customer accounted for 91% of the Company's thin films net
sales. Additionally, one customer accounted for an aggregate of 90% of thin
films accounts receivable at December 31, 1998. 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.
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's ability to reduce expenses. Accordingly, there is no assurance that
the Company will be able to attain profitability in the future.
<PAGE>
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 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 thin film products similar to
those sold by the Company, it would materially adversely effect 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 Chemical Vapor Deposition
("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 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
effect 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 effect 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 effect 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.
<PAGE>
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 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 thin film products through direct sales and customer support organizations
in the U.S., Western Europe and South Korea and through seven exclusive,
independent sales representatives and distributors in the U.S., Europe, Japan,
South Korea, Taiwan, China and Malaysia. 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 effect 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.
<PAGE>
The Company is currently completing the planning process for its Year 2000
readiness project, although many mission critical issues have already been
addressed. The director of operations and facilities chairs the project team and
it includes project managers from the finance, information technology,
facilities, engineering, and customer support organizations. The team is meeting
weekly, and has conducted a thorough analysis to identify systems that will
possibly be impacted by the Year 2000 problem. These systems have been
classified into four major segments: facilities, mission critical business
operations systems, non-mission critical business operations systems and general
office equipment. The project team has assigned one of its members to be the
project manager for each segment, and each of these segment project managers is
in the process of identifying an implementation manager for each system
identified as part of their segment. Each implementation manager is responsible
for developing a detailed plan that includes an assessment of Year 2000
compliance, followed by phases to define a contingency plan, evaluate
alternatives, select a solution, design and implement the solution and, finally,
to test and verify compliance. Some of the critical systems already addressed
are discussed in the following paragraphs.
End Products. The control systems for each of the Company's products are
computer driven. Thorough testing of these products was completed during 1998.
Testing addressed not only the Company designed elements of the system, but also
the embedded controls in manufactured components integrated into the end
products. Each product requires a software upgrade, and the oldest systems in
the product line require a control system computer replacement as well. The
Company is charging a nominal amount for these upgrades on the older generation
systems, while upgrades for the current Lynx2 products are supplied at no
charge. The design and testing of each of these product upgrades have been
completed, and the upgrades have been shipped and installed at some of the
Company's customer's sites worldwide. The Company has contacted and offered this
upgrade to all of its customers, but some customers have decided not to upgrade
their systems.
Enterprise Resources Program. During 1997, the Company started implementation of
a new business system. One criterion for the selection of the enterprise
software was compliance with Year 2000 issues. The system was installed and
implemented at the Company's Newburyport, MA facility in September 1997, but
implementation at the Sunnyvale, CA headquarters was postponed during 1998 due
to the Asset Sale. The system hardware and software was recently returned to
Sunnyvale, and cutover from the existing system to the new system is scheduled
for August 1, 1999. Year 2000 compliance on the new system was tested on the
system while it was installed in Newburyport. The system is considered to be the
most critical internal Company resource at risk to the Year 2000 problem, so
timely implementation is essential.
Supplier Readiness. Each implementation manager is responsible for assessing the
readiness of the suppliers who support their system to ensure there will be no
lapses in service that may interrupt operations. This is in addition to
addressing readiness of the hardware and software products provided by these
suppliers. Suppliers of inventory material for the Company's products will be
surveyed during the second quarter of 1999. This is one of the projects under
the mission critical business operations systems segment. Readiness of the
supplier's products has already been established under the end product project,
but disruption of the supply pipeline due to supplier business readiness still
needs to be addressed. Preliminary discussions with some of the Company's
critical suppliers indicate that most are ahead of the Company in establishing
their own readiness.
<PAGE>
The Company's estimated expenses incurred through December 31, 1998 are
$300,000. The 1999 projected costs are $115,000. The single largest risk element
is the business system, and implementation of the new system is adequately
budgeted in 1999. The Company believes that costs to fix the Company's products
have already been fully incurred. Several capital investments have already been
made in 1999 to replace aging equipment, and Year 2000 compliant systems were
purchased in all cases. This includes new network and electronic mail file
servers. The Company's voicemail system is not Year 2000 compliant, and
replacement is already budgeted as a 1999 capital improvement. There are a
number of hardware and software systems, both mission critical and non-mission
critical, which may require upgrades at the Company's expense over the next few
quarters, but preliminary estimates indicate these expenses will not be
material. There can be no assurance that the Company's current estimated costs
associated with the Year 2000 issue, or 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.
The Company has not yet identified any specific contingency plans in the event
that projects are not completed in time or if planned fixes fail to operate as
expected. Each implementation project manager is responsible for completing
contingency plans for assigned projects as part of the planning process.
At this time, the Company does not plan to use any outside agencies to provide
independent verification of readiness, although individual implementation
project managers may decide to include independent verification as part of their
project plans. The independent verification requirement will be based on the
risk associated with failure of the particular project/system.
<PAGE>
PART II. OTHER INFORMATION
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 February 19, 1999 to
disclose the Company's financial results for the fourth quarter and year ended
December 31, 1998.
<PAGE>
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: May 14, 1999 GENUS, INC.
/s/ William W.R. Elder
----------------------------------------
William W.R. Elder, President,
Chief Executive Officer and Chairman
/s/ Kenneth Schwanda
----------------------------------------
Kenneth Schwanda
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
<PAGE>
GENUS, INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------ -----------
27.1 Financial Data Schedule
<PAGE>
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<NAME> GENUS, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<COMMON> 100623
0
0
<OTHER-SE> (80489)
<TOTAL-LIABILITY-AND-EQUITY> 26983
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<CHANGES> 0
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