UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2001 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 8, 2001: 19,431,323
------------
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2001 2000
------------------- ---------
Net sales . . . . . . . . . . . . . . . . . . . . $ 14,309 $ 3,826
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . 8,603 2,844
Research and development. . . . . . . . . . . . 3,004 1,760
Selling, general and administrative . . . . . . 2,518 2,825
------------------- ---------
Income (loss) from operations . . . . . . . . . . 184 (3,603)
Other income (expenses), net. . . . . . . . . . . 2 286
------------------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle. . . . 186 (3,317)
Provision for income taxes. . . . . . . . . . . . 55 250
------------------- ---------
Income (loss) before cumulative effect of
change in accounting principle. . . . . . . . . 131 (3,567)
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . . -- (6,770)
------------------- ---------
Net income (loss) . . . . . . . . . . . . . . . . $ 131 $(10,337)
=================== =========
Income (loss) per share before
cumulative effect of change in
accounting principle:
Basic . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.19)
Diluted . . . . . . . . . . . . . . . . . . . . 0.01 (0.19)
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . 0.01 (0.56)
Diluted . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.56)
Shares used in per share calculation - basic. . . 19,379 18,569
=================== =========
Shares used in per share calculation - diluted. . 19,926 18,569
=================== =========
The accompanying notes are an integral part of the consolidated financial
statements.
2
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 3,092 $ 3,136
Accounts receivable (net of allowance for doubtful
accounts of $363 in 2001 and $363 in 2000). . . . 5,034 8,479
Inventories . . . . . . . . . . . . . . . . . . . . 19,143 21,849
Other current assets. . . . . . . . . . . . . . . . 689 675
----------- --------------
Total current assets. . . . . . . . . . . . . . . 27,958 34,139
Equipment, furniture and fixtures, net. . . . . . . 13,279 10,207
Other assets, net . . . . . . . . . . . . . . . . . 183 189
----------- --------------
Total assets. . . . . . . . . . . . . . . . . . . $ 41,420 $ 44,535
=========== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings. . . . . . . . . . . . . $ 2,789 $ 2,719
Accounts payable. . . . . . . . . . . . . . . . . . 9,379 8,647
Accrued expenses. . . . . . . . . . . . . . . . . . 3,031 3,315
Deferred revenue and customer deposits. . . . . . . 14,673 18,562
----------- --------------
Total current liabilities . . . . . . . . . . . . 29,872 33,243
----------- --------------
Contingencies (see notes)
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding 19,426,656 shares at
March 31, 2001 and 19,319,000 shares at
December 31, 2000 . . . . . . . . . . . . . . . . 102,996 102,837
Accumulated deficit . . . . . . . . . . . . . . . . (89,392) (89,523)
Accumulated other comprehensive loss. . . . . . . . (2,056) (2,022)
----------- --------------
Total shareholders' equity. . . . . . . . . . . . 11,548 11,292
----------- --------------
Total liabilities and shareholders' equity. . . . $ 41,420 $ 44,535
=========== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
3
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2001 2000
-------- ---------
Cash flows from operating activities:
Net income (loss) $ 131 $(10,337)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Cumulative effect of change in accounting principle. . -- 6,770
Depreciation . . . . . . . . . . . . . . . . . . . . . 534 414
Stock-based compensation . . . . . . . . . . . . . . . 36 82
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . 3,445 (3,633)
Inventories. . . . . . . . . . . . . . . . . . . . . 2,706 (4,125)
Other assets . . . . . . . . . . . . . . . . . . . . (8) (105)
Accounts payable . . . . . . . . . . . . . . . . . . 732 1,745
Accrued expenses . . . . . . . . . . . . . . . . . . (284) 351
Deferred revenue and customer deposits . . . . . . . (3,889) 6,835
----------- --------
Net cash provided by (used in) operating activities. 3,403 (2,003)
----------- --------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures . . . . (3,606) (769)
----------- --------
Net cash used in investing activities. . . . . . . . (3,606) (769)
----------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . 123 665
Proceeds from short-term bank borrowings . . . . . . . . 70 4,000
----------- --------
Net cash provided by financing activities. . . . . . 193 4,665
----------- --------
Effect of exchange rate changes on cash (34) 21
----------- --------
Net increase (decrease) in cash and cash equivalents (44) 1,914
Cash and cash equivalents, beginning of period 3,136 6,739
----------- --------
Cash and cash equivalents, end of period $ 3,092 $ 8,653
=========== ========
The accompanying notes are an integral part of these financial statements.
4
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (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
2000 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).
Net Income (Loss) Per Share
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share is as follows (in thousands, except per share data):
THREE MONTHS
ENDED MARCH 31,
2001 2000*
---------------- ---------
Basic:
Net income (loss) $ 131 $(10,337)
================ =========
Weighted average common shares
outstanding. . . . . . . . . . . 19,379 18,569
================ =========
Basic net income (loss) per share $ 0.01 $ (0.56)
================ =========
Diluted:
Net income (loss) $ 131 $(10,337)
================ =========
Weighted average common shares
outstanding. . . . . . . . . . . 19,379 18,569
Effect of dilutive stock options . 544 0
Effect of dilutive warrants. . . . 3 0
---------------- ---------
19,926 18,569
================ =========
Diluted net income (loss) per share $ 0.01 $ (0.56)
================ =========
*Restated to reflect change in accounting principle.
5
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED)
Stock options to purchase approximately 1,893,304 weighted shares of common
stock were excluded from the computation of diluted net income per share for the
quarter ended March 31, 2001, because the exercise price of the options exceeded
the average fair market value of the stock for the three months ended March 31,
2001.
Stock options to purchase approximately 2,242,375 shares of common stock
were outstanding during the three months ended March 31, 2000 but were not
included in the computation of diluted loss per share because the Company had a
net loss for the three months ended March 31, 2000.
Warrants to purchase 400,000 shares of common stock were outstanding during
the three months ended March 31, 2000 but were not included in the computation
of diluted loss per share because the Company had a net loss for the three
months ended March 31, 2000.
Statement of Cash Flow Information (amounts in thousands):
THREE MONTHS ENDED
MARCH 31,
2001 2000
------ ------
Supplemental cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . $ 60 $ 0
Income taxes. . . . . . . . . . $ 273 $ 68
Line of Credit. On March 28, 2001, we converted our existing $10 million
Venture Bank line of credit to an asset-based line of credit. Amounts available
under the line are based on 80% of eligible accounts receivable, and borrowings
under the line are secured by all corporate assets and bear interest at 9.6% per
annum and an administrative fee of a quarter of one percent on all advances.
This line does not have accounts receivable customer concentration limitations,
does allow borrowing against foreign receivables, and has no financial
covenants. It will expire in March, 2002. There is an outstanding balance of
$2,789,000 against this line of credit.
INVENTORIES
Inventories comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
---------- -------------
Raw materials and purchased parts $ 6,411 $ 6,081
Work in process . . . . . . . . . 4,022 5,624
Finished goods. . . . . . . . . . 956 647
Inventory at customers' locations 7,754 9,497
---------- -------------
$ 19,143 $ 21,849
========== =============
6
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED)
ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
---------- -------------
System warranty . . . . . . . . . . . . $ 730 $ 757
Accrued commissions and incentives. . . 146 242
Accrued compensation and related items. 738 615
Federal, state and foreign income taxes 589 828
Other . . . . . . . . . . . . . . . . . 828 873
---------- ----------
$ 3,031 $ 3,315
========== ==========
LEGAL PROCEEDINGS
In July 1999, we were named as a co-defendant in a claim filed at the
Superior Court of the state of California for the county of Santa Clara,
involving an automobile accident by one of our former employees which resulted
in the death of an individual. Significant general, punitive and exemplary
damages are being sought by the plaintiffs. Recently, a demand was placed by
the plaintiff that is within our insurance policy limits. While we believe we
are not at fault in this matter, we have instructed our insurance carrier to pay
the demand in an effort to avoid the costs associated with going to trial.
Although the outcome of this matter is not presently determinable, we do not
believe that resolution of this matter will have a material adverse effect on
our financial position or results of operations.
COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components.
The following are the components of comprehensive income (loss) (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2001 2000*
----------- ---------
Net income (loss). . . . . . . . . . . . $ 131 $(10,337)
Foreign currency translation adjustment. (34) 21
----------- ---------
Comprehensive income (loss). . . . . . $ 97 $(10,316)
=========== =========
*Restated to reflect change in accounting principle.
7
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED)
The components of accumulated other comprehensive income, are as follows
(in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- --------------
Cumulative translation adjustments $ (2,056) $ (2,022)
=========== ==============
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Boards ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133" which deferred the effective date until the first fiscal
year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of SFAS 133." SFAS No. 138 amends certain
terms and conditions of SFAS 133. SFAS 133 requires that all derivative
instruments be recognized at fair value as either assets or liabilities in the
statement of the financial position. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and further,
on the type of hedging relationship. We adopted SFAS No. 133, as amended, on
January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on
the Company's consolidated financial statements.
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
NET SALES. Net sales for the quarter ended March 31, 2001 were $14.3
compared to net sales of $3.8 million for the corresponding period in 2000.
First quarter revenue consisted of two systems and a significant number of
system upgrades that were accepted by the customer. Under SAB 101, we believe
customer acceptance is required for revenue recognition purposes on orders where
Genus is required to provide installation services. In the first quarter of
2000, only one system was accepted by the customer.
COST OF GOODS SOLD. Cost of goods sold for the quarter ended March 31, 2001
was $8.6 million compared to $2.8 million for the same period in 2000. Gross
profit as a percentage of net sales for the quarter ended March 31, 2001 was 40%
compared to 26% in the first quarter of 2000. The primary reason for the
increase in gross margin percent was the higher production volumes that allowed
for better absorption of our fixed operations expenses. Our gross profits have
historically been affected by variations in average selling prices,
configuration differences, changes in the mix of product sales, unit shipment
levels, the level of foreign sales and competitive pricing pressures.
RESEARCH AND DEVELOPMENT. Research and development expenses for the quarter
ended March 31, 2001 were $3.0 million, representing 21% of net sales, compared
with $1.8 million or 47% of net sales for the same period in 2000. These
spending increases are primarily associated with the acceleration of our 300mm
development program that began in the middle of last year. This is in addition
to our continued investments in our ALD technology, particularly new films and
applications, productivity improvements, and new tungsten products. We continue
to pursue non-semiconductor applications for ALD, including magnetic disk
drives, telecommunications, and inkjet printers. We expect our research and
development spending levels to continue to increase throughout 2001.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $2.5 million, or 18% of sales, for the first quarter of 2001,
compared with $2.8 million, or 74% of sales, for the first quarter of 2000.
This was primarily due to lower commission and bonus accruals. General and
administrative headcount and spending remain frozen until there is better
visibility in the business outlook.
OTHER INCOME (EXPENSE), NET. Other income for the first quarter of 2001 was
$2,000 compared to other income of $286,000 for the same period in 2000. This
was due to higher interest income and foreign currency exchange gains reported
last year.
PROVISION FOR INCOME TAXES. Income taxes for the quarter ended March 31,
2001 were $55,000 compared to $250,000 in the same 2000 period. Income taxes are
related to the profit generated from our South Korean subsidiary.
9
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, our cash and cash equivalents were $3.1 million, a
decrease of $44,000 from December 31, 2000. Accounts receivable was $5 million,
a decrease of $3.4 million from December 31, 2000. This decrease was due to a
delay in the shipment of a system to allow the customer time to address
facilities issues, and for additional time to test and source inspect the
system.
Cash provided by operating activities totaled $3.4 million for the quarter
ended March 31, 2001, and consisted primarily of net income of $131,000,
decreases in accounts receivable of $3.4 million and inventory of $2.7 million,
and an increase in accounts payable of 732,000, offset by a decrease in deferred
revenue of $3.9 million. The decrease in accounts receivable was due to the
system delay. Inventory reductions were primarily related to lower inventory at
customer sites due to system and upgrade acceptances by customers, which allowed
revenue to be recognized under SAB 101. For the same reason deferred revenue
decreased, as the net value of systems accepted by customers exceeded the value
of shipments that were deferred during the quarter. Accounts payable increased
as we continue to manage cash very tightly.
Financing activities provided cash of $193,000 for quarter ended March 31,
2001, from the issuance of common stock from our incentive stock option plan and
an increase in short term bank borrowings.
We made capital expenditures of $3.6 million for the quarter ended March
31, 2001. These expenditures were primarily related to the continuing program of
upgrading existing equipment in our development and applications laboratories to
meet our most advanced system capabilities and specifications, especially for
our ALD processes. This will improve our product and film development
capabilities, and increase our customer demonstration capabilities, which is
critical in the sales process. We anticipate making additional capital
investments during the remainder of 2001, but will be looking to vendors or
third parties to finance some of these purchases, with the remainder funded
through working capital.
Our primary source of funds at March 31, 2001 consisted of $3.1 million in
cash and cash equivalents, and $5.0 million of accounts receivable, most of
which we expect to collect or to have been collected during 2001.
On March 28, 2001, we converted our existing $10 million Venture Bank line
of credit to an asset-based line of credit. Amounts available under the line
are based on 80% of eligible accounts receivable, and borrowings under the line
are secured by all corporate assets and bear interest at 9.6% per annum and an
administrative fee of a quarter of one percent on all advances. This line does
not have accounts receivable customer concentration limitations, does allow
borrowing against foreign receivables, and has no financial covenants. It will
expire in March, 2002.
10
On April 9, 2001, we announced plans for a private placement of common
stock to raise additional working capital, strengthen our cash position and meet
our growth expectations for 2001. We expect to close this deal by the end of
May, 2001. The terms of the private placement will be announced in a company
press release at the time of the closing.
We believe that our existing working capital and our $10 million line of
credit will be sufficient to satisfy our cash needs for the next 12 months.
There can be no assurance that any required additional funding, if needed, will
be available on terms attractive to us, which could have a material adverse
affect on our business, financial condition and results of operations. Any
additional equity financing may be dilutive to shareholders, and any additional
debt financing, if available, may involve restrictive covenants.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments
be recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains
or losses) of a derivative instrument depends on whether is has been designated
and qualifies as part of a hedging relationship and further, on the type of
hedging relationship. We adopted SFAS No. 133, as amended, on January 1, 2001.
The adoption of SFAS No. 133 did not have a material impact on our financial
statements.
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.
WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO
ACHIEVE OR SUSTAIN PROFITABILITY
We have experienced losses of $9.6 million, $1.6 million and $29.5 million
for 2000, 1999 and 1998, respectively.
We may not be able to attain or sustain consistent future revenue growth on
a quarterly or annual basis, or achieve and maintain consistent profitability on
a quarterly or annual basis. As a result, our business could be materially
harmed.
11
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
Historically, we have relied on a small number of customers for a
substantial portion of our net sales. For example, Samsung Electronics Company,
Ltd. and Micron Technology, Inc. accounted for 91% and 5% of our net sales in
2000. Samsung Electronics Company, Ltd. and Infineon Technologies accounted for
90% and 6% of total shipments made in 2000, which would have been recorded as
revenue under the historical accounting method. Samsung Electronics Company,
Ltd accounted for 95% of our net sales during the first quarter of 2001. In
addition, Samsung Electronics Company, Ltd., and Infineon Technologies
represented 92% of accounts receivable at December 31, 2000. Samsung Electronics
Company, Ltd represented 88% of accounts receivable at March 31, 2001. The
semiconductor manufacturing industry generally consists of a limited number of
larger companies. We consequently expect that a significant portion of our
future product sales will be concentrated within a limited number of customers.
None of our customers has entered into a long-term agreement with us
requiring them to purchase our products. In addition, sales to these customers
may decrease in the future when they complete their current semiconductor
equipment purchasing requirements. If any of our customers were to encounter
financial difficulties or become unable to continue to do business with us at or
near current levels, our business, results of operations and financial condition
would be materially adversely affected. Customers may delay or cancel orders or
may stop doing business with us for a number of reasons including:
- - customer departures from historical buying patterns;
- - general market conditions;
- - economic conditions; or
- - competitive conditions in the semiconductor industry or in the industries
that manufacture products utilizing integrated circuits.
OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE SIGNIFICANTLY AND MAY FALL SHORT OF
ANTICIPATED LEVELS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
Our net sales and operating results may fluctuate significantly from
quarter to quarter. We derive our 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. Our results of operations for a particular
quarter could be materially 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. At our current
revenue level, each sale, or failure to make a sale, could have a material
effect on us. Our lengthy sales cycle, coupled with our customers' competing
capital budget considerations, make the timing of customer orders uneven and
difficult to predict. In addition, our backlog at the beginning of a quarter
typically does not include all orders required to achieve our sales objectives
for that quarter. As a result, our net sales and operating results for a quarter
depend on us shipping orders as scheduled during that quarter as well as
obtaining new orders for systems to be shipped in that same quarter. Any delay
in scheduled shipments or in shipments from new orders would materially and
adversely affect our operating results for that quarter, which could cause our
stock price to decline.
OUR FINANCIAL REPORTING ACTIVITIES WILL CONTINUE TO BE IMPACTED BY SAB 101 RULES
FOR REVENUE RECOGNITION.
12
In December 1999, the SEC issued Staff Accounting Bulletin No. 101. SAB 101
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Prior to
SAB 101, we generally recognized revenue upon shipment of a system. Applying the
requirements of SAB 101 to the selling arrangements we had used for the sale of
semiconductor production equipment required a change in our accounting policy
for revenue recognition and deferral of the recognition of revenue from such
equipment sales until installation is complete and accepted by the customer. The
effect of such a change had to be recognized as a cumulative effect of a change
in accounting no later than the quarter ending December 31, 2000. Although SAB
101 applies to every company within our industry, there are risks that our stock
price may be materially and adversely impacted by SAB 101 going forward. Since
revenue is no longer recognized when a system ships but when installation is
complete and customer acceptance occurs, any delays in acceptance, either by the
customer or by Genus, may have a material adverse effect on our results of
operations. In addition, the adoption of SAB 101 and its impact on our
historical and projected financial performance may not be fully understood by
our investors and analysts, and this may have a material adverse effect on the
price of our stock.
WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT
ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES.
Export sales accounted for approximately 98%, 86% and 56% of our total net
sales in 2000, 1999 and 1998, respectively, and accounted for 98% of our net
sales during the first quarter of 2001. Net sales to our South Korean-based
customers accounted for approximately 92%, 84% and 30% of total net sales,
respectively during the same year-end periods, and accounted for 95% of our net
sales in the first quarter of 2001. We anticipate that international sales,
including sales to South Korea, will continue to account for a significant
portion of our net sales. As a result, a significant portion of our net sales
will be subject to certain risks, including:
- - unexpected changes in law or regulatory requirements;
- - exchange rate volatility;
- - tariffs and other barriers;
- - political and economic instability;
- - difficulties in accounts receivable collection;
- - extended payment terms;
- - difficulties in managing distributors or representatives;
- - difficulties in staffing our subsidiaries;
- - difficulties in managing foreign subsidiary operations; and
- - potentially adverse tax consequences.
Our foreign sales are primarily denominated in U.S. dollars and we do not
engage in hedging transactions. As a result, our foreign sales are subject to
the risks associated with unexpected changes in exchange rates, which could
affect the price of our products.
In the past, turmoil in the Asian financial markets resulted in dramatic
currency devaluations, stock market declines, restriction of available credit
and general financial weakness. For example, prices fell dramatically in 1998 as
some integrated circuit manufacturers sold DRAMs at less than cost in order to
generate cash. Currency devaluations make dollar-denominated goods, such as
ours, more expensive for international customers. In addition, difficult
economic conditions may limit capital spending by our customers. These
circumstances may also affect the ability of our customers to meet their payment
obligations, resulting in the cancellations or deferrals of existing orders and
the limitation of additional
13
orders. As a result of any or all these factors, our business, financial
condition and results of operations may be materially harmed.
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. Although we
are marketing our ALD technology to non-semiconductor markets such as magnetic
thin film heads, flat panel displays, MEMS and inkjet printers, we are still
very dependent on the semiconductor market. The semiconductor industry is
cyclical and experiences periodic downturns both of which reduce the
semiconductor industry's demand for semiconductor manufacturing capital
equipment. Semiconductor industry downturns have significantly decreased our
revenues, operating margins and results of operations in the past. There is a
risk that our revenues and operating results will be materially harmed by any
future downturn in the semiconductor industry.
OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW THIN FILMS AND MARKET
ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE THIN FILMS
We believe that our future growth will depend in large part upon the
acceptance of our new thin films and processes, especially ALD. As a result, we
expect to continue to invest in research and development in these new thin films
and the systems that use these films. There can be no assurance that the market
will accept our new products or that we will be able to develop and introduce
new products or enhancements to our existing products and processes in a timely
manner to satisfy customer needs or achieve market acceptance. The failure to do
so could have a material adverse effect on our business, financial condition and
results of operations.
In addition, we must manage product transitions successfully, as
introductions of new products could harm sales of existing products. We derive
our revenue primarily from the sale of our tungsten silicide CVD systems. We
estimate that the life cycle for these systems is three-to-five years. There is
a risk that future technologies, processes or product developments may render
our product offerings obsolete and we may not be able to develop and introduce
new products or enhancements to our existing products in a timely manner.
WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES
The semiconductor manufacturing capital equipment industry is highly
competitive. We face substantial competition throughout the world. We believe
that to remain competitive, we will require significant financial resources in
order to develop new products, offer a broader range of products, establish and
maintain customer service centers and invest in research and development.
Many of our existing and potential competitors have substantially greater
financial resources, more extensive engineering, manufacturing, marketing,
customer service capabilities and greater name recognition. We expect our
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with improved
price and performance characteristics.
If our competitors enter into strategic relationships with leading
semiconductor manufacturers covering thin film products similar to those sold by
us, it would materially adversely affect our ability to sell our products to
such manufacturers. In addition, to expand our sales we must often replace the
systems of our competitors or sell new systems to customers of our competitors.
Our competitors may develop new or enhanced competitive products that will offer
price or performance features that are
14
superior to our systems. Our competitors may also be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
product lines. We may not be able to maintain or expand our sales if competition
increases and we are not able to respond effectively.
WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR
OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND
PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility and
proven financial performance.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. In addition, the semiconductor manufacturer frequently will attempt
to consolidate its other capital equipment requirements with the same vendor.
Accordingly, we may face narrow windows of opportunity to be selected as the
"vendor of choice" by potential new customers. It may be difficult for us to
sell to a particular customer for a significant period of time once that
customer selects a competitor's product, and we may not be successful in
obtaining broader acceptance of our systems and technology. If we are not able
to achieve broader market acceptance of our systems and technology, we may be
unable to grow our business and our operating results and financial condition
will be materially adversely affected.
OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF
OUR REVENUE
Sales of our systems depend upon the decision of a prospective customer to
increase manufacturing capacity. That decision typically involves a significant
capital commitment by our customers. Accordingly, the purchase of our systems
typically involves time-consuming internal procedures associated with the
evaluation, testing, implementation and introduction of new technologies into
our customers' manufacturing facilities. For many potential customers, an
evaluation as to whether new semiconductor manufacturing equipment is needed
typically occurs infrequently. Following an evaluation by the customer as to
whether our systems meet its qualification criteria, we have experienced in the
past and expect to experience in the future delays in finalizing system sales
while the customer evaluates and receives approval for the purchase of our
systems and constructs a new facility or expands an existing facility.
Due to these factors, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort. The time
between our first contact with a customer and the customer placing its first
order typically lasts from nine to twelve months and is often even longer. This
lengthy sales cycle makes it difficult to accurately forecast future sales and
may cause our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected.
WE ARE DEPENDENT ON OUR INTELLECTUAL PROPERTY AND RISK LOSS OF A VALUABLE ASSET,
REDUCED MARKET SHARE AND LITIGATION EXPENSE IF WE CANNOT ADEQUATELY PROTECT IT
Our success depends in part on our proprietary technology. There can be no
assurance that we will be able to protect our technology or that competitors
will not be able to develop similar technology independently. We currently have
a number of United States and foreign patents and patent applications.
15
There can be no assurance that any patents issued to us will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us with competitive advantages.
From time to time, we have received notices from third parties alleging
infringement of such parties' patent rights by our products. In such cases, it
is our policy to defend against the claims or negotiate licenses on commercially
reasonable terms where appropriate. However, no assurance can be given that we
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 our business and financial results.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel
or other key employees could limit or delay our ability to develop new products
and adapt existing products to our customers' evolving requirements and would
also result in lost sales and diversion of management resources. None of our
executive officers are bound by a written employment agreement, and the
relationships with our officers are at will.
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
and process engineers. Competition for such personnel is intense, particularly
in the San Francisco Bay Area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop and
market our products and perform services for our customers. As a result, our
growth could be limited due to our lack of capacity to develop and market our
products to customers, or fail to meet delivery commitments or experience
deterioration in service levels or decreased customer satisfaction.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations. If we fail to
comply with present or future regulations, we could be subject to substantial
liability for clean up efforts, property damage, personal injury and fines or
suspension or cessation of our operations. Restrictions on our ability to expand
or continue to operate our present locations could be imposed upon us or we
could be required to acquire costly remediation equipment or incur other
significant expenses.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN MANUFACTURE AND SALE OF OUR PRODUCTS
Certain of the components and sub-assemblies included in our products are
obtained from a single supplier or a limited group of suppliers. Disruption or
termination of these sources could have an adverse effect on our operations. We
believe that alternative sources could be obtained and qualified to supply
16
these products, if necessary. Nevertheless, a prolonged inability to obtain
certain components could have a material adverse effect on our business,
financial condition and results of operations.
WE DEPEND UPON SIX REPRESENTATIVES FOR THE SALE OF OUR PRODUCTS AND ANY
DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US
We currently sell and support our thin film products through direct sales
and customer support organizations in the U.S., Europe, South Korea and Japan
and through six independent sales representatives and distributors in the U.S.,
Europe, Taiwan, Singapore, China and Malaysia. We do not have any long-term
contracts with our sales representatives and distributors. Any disruption or
termination of our existing distributor relationships could have an adverse
effect on our business, financial condition and results of operations.
WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN
EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE
We terminated our relationship with our distributor, Innotech Corp. in
Japan in 1998. In 2000, we invested significant resources in Japan by
establishing a direct sales organization, Genus-Japan, Inc. Although we
continue to invest significant resources in our Japan office, we may not be able
to attract sufficient new customers in the Japanese marketplace, and as a
result, we may fail to yield a profit or return on our investment in Japan.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR
TO SECURITIES LITIGATION
Our common stock has experienced substantial price volatility, particularly
as a result of quarter-to-quarter variations in our, our competitors or our
customers actual or anticipated financial results, our competitors or our
customers announcements of technological innovations, revenue recognition
policies, changes in earnings estimates by securities analysts and other events
or factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which we do
business, may adversely effect the market price of our common stock.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation, if filed against us, could result in substantial costs
and divert our management's attention and resources.
17
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A
disaster could severely damage our ability to deliver our products to our
customers. Our products depend on our ability to maintain and protect our
operating equipment and computer systems, which are primarily located in or near
our principal headquarters in Sunnyvale, California. Sunnyvale exists near a
known earthquake fault zone. Although our facilities are designed to be fault
tolerant, the systems are susceptible to damage from fire, floods, earthquakes,
power loss, telecommunications failures, and similar events. Further, our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power. In the
event these blackouts continue or increase in severity, they could disrupt the
operations of our affected facilities. Although we maintain general business
insurance against fires, floods and some general business interruptions, there
can be no assurance that the amount of coverage will be adequate in any
particular case.
FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q and in any
documents that are incorporated by reference, including the risk factors,
contains forward-looking statements that involve risks and uncertainties. These
statements relate to future events or our future financial performance. In many
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of these terms and other
comparable terminology. These statements are only predictions. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including the risks faced by us
described above and elsewhere in this Quarterly Report on Form 10-Q.
We believe it is important to communicate our expectations to our
shareholders. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this Quarterly Report on Form 10-Q,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We face exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as our business practices evolve and could
seriously harm our financial results. All of our international sales, except
spare parts and service sales made by our subsidiary in South Korea, are
currently denominated in U.S. dollars. All spare parts and service sales made by
the South Korean subsidiary are won denominated. An increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and, therefore, reduce the demand for our products. Reduced demand for
our products could materially adversely affect our business, results of
operations and financial condition.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, we were named as a co-defendant in a claim filed at the
Superior Court of the state of California for the county of Santa Clara,
involving an automobile accident by one of our former employees which resulted
in the death of an individual. Significant general, punitive and exemplary
damages are being sought by the plaintiffs. Recently, a demand was placed by
the plaintiff that is within our insurance policy limits. While we believe we
are not at fault in this matter, we have instructed our insurance carrier to pay
the demand in an effort to avoid the costs associated with going to trial.
Although the outcome of this matter is not presently determinable, we do not
believe that resolution of this matter will have a material adverse effect on
our financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Report on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2001.
19
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 15, 2001 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 Officer,
and Principal Accounting Officer)