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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 September 30, 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 November 8, 2001: 22,271,895
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- -------- -------- -------
Net sales . . . . . . . . . . . . . . . . . . . $ 15,094 $14,543 $ 43,062 $ 24,955
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . 10,300 8,044 27,523 15,063
Research and development. . . . . . . . . . . 2,592 2,034 8,838 5,762
Selling, general and administrative . . . . . 2,739 2,820 7,971 8,043
-------- --------- -------- --------
Income/(loss) from operations . . . . . . . . . (537) 1,645 (1,270) (3,913)
Other income (expenses), net. . . . . . . . . . (207) 101 (127) 383
-------- --------- -------- --------
Loss before income taxes and cumulative
effect of change in accounting principle. . . (744) 1,746 (1,397) (3,530)
Provision for income taxes. . . . . . . . . . . -- 100 69 450
-------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle. . . . . . . . (744) 1,646 (1,466) (3,980)
Cumulative effect of change in
accounting principle. . . . . . . . . . . . . -- -- -- (6,770)
--------- --------- -------- --------
Net income/(loss) . . . . . . . . . . . . . . . $ (744) $ 1,646 $ (1,466) $ (10,750)
========= ======== ======== ========
Net income (loss) per share before
cumulative effect of change in
accounting principle:
Basic . . . . . . . . . . . . . . . . . . . . $ (0.03) $ 0.09 $ (0.07) $ (0.21)
Diluted . . . . . . . . . . . . . . . . . . . (0.03) 0.08 (0.07) (0.21)
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . (0.03) 0.09 (0.07) (0.57)
Diluted . . . . . . . . . . . . . . . . . . . $ (0.03) $ 0.08 $ (0.07) $ (0.57)
Shares used in per share calculation - basic. . 22,268 19,126 20,793 18,845
========= ========= ======== ========
Shares used in per share calculation - diluted. 22,268 20,593 20,793 18,845
========= ========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 5,514 $ 3,136
Accounts receivable (net of allowance for doubtful
accounts of $335 in 2001 and $363 in 2000). . . . 5,041 8,479
Inventories . . . . . . . . . . . . . . . . . . . . 11,956 21,849
Other current assets. . . . . . . . . . . . . . . . 763 675
--------------- --------------
Total current assets. . . . . . . . . . . . . . . 23,274 34,139
Equipment, furniture and fixtures, net. . . . . . . 15,940 10,207
Other assets, net . . . . . . . . . . . . . . . . . 250 189
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . $ 39,464 $ 44,535
=============== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings. . . . . . . . . . . . . $ 5,567 $ 2,719
Accounts payable. . . . . . . . . . . . . . . . . . 9,104 8,647
Accrued expenses. . . . . . . . . . . . . . . . . . 3,066 3,315
Deferred revenue and customer deposits. . . . . . . 4,390 18,562
--------------- --------------
Total current liabilities . . . . . . . . . . . . 22,127 33,243
--------------- --------------
Contingencies (see notes)
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding 22,272,000 shares at
September 30, 2001 and 19,319,000 shares at
December 31, 2000 . . . . . . . . . . . . . . . . 110,411 102,837
Accumulated deficit . . . . . . . . . . . . . . . . (90,989) (89,523)
Accumulated other comprehensive loss. . . . . . . . (2,085) (2,022)
--------------- --------------
Total shareholders' equity. . . . . . . . . . . . 17,337 11,292
--------------- --------------
Total liabilities and shareholders' equity. . . . $ 39,464 $ 44,535
=============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (1,466) $ (10,750)
Adjustments to reconcile net loss to net cash
from operating activities:
Cumulative effect of change in accounting principle . -- 6,770
Depreciation. . . . . . . . . . . . . . . . . . . . . 2,004 1,080
Stock-based compensation. . . . . . . . . . . . . . . 44 490
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 3,438 1,943
Inventories . . . . . . . . . . . . . . . . . . . . 9,893 ( 9,979)
Other assets. . . . . . . . . . . . . . . . . . . . (149) (232)
Accounts payable. . . . . . . . . . . . . . . . . . 457 3,540
Accrued expenses. . . . . . . . . . . . . . . . . . (249) (40)
Deferred revenue and customer deposits. . . . . . . (14,172) 11,618
-------------- ---------
Net cash provided by (used in) operating activities (200) 4,520
-------------- ---------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures. . . . (7,737) (3,325)
-------------- ---------
Net cash used in investing activities . . . . . . . (7,737) (3,325)
-------------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . 7,530 1,150
Proceeds from short-term bank borrowings. . . . . . . . 5,567 4,000
Payments of short-term bank borrowings. . . . . . . . . (2,719) (4,000)
-------------- ---------
Net cash provided by financing activities . . . . . 10,378 1,150
-------------- ---------
Effect of exchange rate changes on cash (63) 21
-------------- ---------
Net increase in cash and cash equivalents 2,378 2,366
Cash and cash equivalents, beginning of period 3,136 6,739
-------------- ---------
Cash and cash equivalents, end of period $ 5,514 $ 9,105
============== =========
Supplemental cash flow information
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 287 $ 118
Income taxes. . . . . . . . . . . . . . . . . . . . . . $ 473 $ 152
5
The accompanying notes are an integral part of these consolidated financial
statements.
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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/A2.
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.
LIQUIDITY
The Company has incurred losses from continuing operations for the year ended
December 31, 2000 of approximately $9.7 million, after taking into account the
cumulative adverse effect of the change in accounting principle of $6.8 million,
and for the three- and nine-month periods ended September 30, 2001 of
approximately $744,000 and $1.5 million, respectively. The Company is actively
marketing its existing and new products, which it believes will ultimately lead
to profitable operations. However, no assurance can be given that the currently
available funds will meet the Company's cash requirements in the future.
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 loss
per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-------------------------------------------------------
Basic:
Net income (loss). . . . . . . . . . $ (744) $ 1,646 $ (1,466) $(10,750)
============ ============= ======== =========
Weighted average common shares
outstanding. . . . . . . . . . . . 22,268 19,126 20,793 18,845
============ ============ ======== =========
Basic net income (loss) per share. $ (0.03) $ 0.09 $ (0.07) $ (0.57)
============ ============ ======== =========
Diluted:
Net income (loss). . . . . . . . . $ (744) $ 1,646 $ (1,466) $(10,750)
============ =========== ======== =========
Weighted average common shares
outstanding. . . . . . . . . . . . 22,268 20,593 20,793 18,845
============ ============ ======== =========
Diluted net income (loss) per share. $ (0.03) $ 0.08 $ (0.07) $ (0.57)
============ ============= ======== =========
Stock options and warrants to purchase approximately 3,899,000 weighted shares
of common stock were outstanding during the nine months ended September 30,
2001, but were not included in the computation of diluted net loss per share
because the Company had a net loss for the nine months ended September 30, 2001.
Stock options and warrants to purchase approximately 3,079,000 weighted shares
of common stock were outstanding during the nine months ended September 30, 2000
but were not included in the computation of diluted net loss per share because
the Company had a net loss for the nine months ended September 30, 2000.
Stock options and warrants to purchase 4,590,000 weighted shares of common stock
were outstanding during the three months ended September 30, 2001 but were not
included in the computation of diluted net loss per share because the Company
had a net loss for the three months ended September 30, 2001.
Stock options to purchase 550,000 weighted shares of common stock were excluded
in the computation of diluted net income per share for the three months ended
September 30, 2000, because these shares would have been anti-dilutive.
LINES OF CREDIT
On March 28, 2001, we converted our then existing $10 million Venture Bank line
of credit to an asset-based line of credit. Amounts available under the line are
based on 80 percent of eligible accounts receivable, and borrowings under the
line are secured by all corporate assets and bear interest at 9.6 percent 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. As of September 30, 2001, there was an
outstanding balance of $2.6 million on this line of credit.
On July 15, 2001, our 100 percent owned subsidiary in Japan, Genus-Japan Inc.,
negotiated a $3.0 million line of credit secured by customer receivables with
Aozora Bank, Ltd. in Tokyo. As of September 30, 2001, there was an outstanding
balance of $3.0 million under this line of credit.
INVENTORIES
Inventories comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
Raw materials and purchased parts $ 5,194 $ 6,081
Work in process . . . . . . . . . 2,475 5,624
Finished goods. . . . . . . . . . 78 647
Inventory at customers' locations 4,209 9,497
-------------- -------------
$ 11,956 $ 21,849
============== =============
Inventory at customers' locations represent the cost of systems shipped to
customers for which we are awaiting customer acceptance.
ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- ------------
System warranty $ 1,058 $ 757
Accrued commissions and incentives 155 242
Accrued compensation and related items 767 615
Federal, state and foreign income taxes 715 828
Other 371 873
----------- ----------
$ 3,066 $ 3,315
========== =========
COMMON STOCK
On May 17, 2001, we sold in a private transaction 2,541,785 shares of our common
stock, and warrants to purchase up to 1,270,891 of additional shares of common
stock, for aggregate proceeds of approximately $7.6 million. Additional
warrants were issued to Burnham Securities and Wells Fargo Van Kasper, for their
services as placement agents in the transaction, for an additional 190,634
shares of our common stock. The warrants issued to the purchasers in the
private placement are exercisable for $3.50 per share. The placement agents
have an aggregate of 69,375 shares underlying their warrants that are
exercisable for $3.00 per share and an aggregate of 121,259 shares underlying
their warrants that are exercisable for $5.24 per share. The warrants expire on
May 13, 2006.
STOCK COMPENSATION
In 1998 and 1999, the Company granted options to outside consultants to purchase
23,000 and 5,000 shares of common stock, respectively. These options have
exercise prices between $0.875 and $3.03 per share. The options vest over three
years and expire between February 2001 and March 2002. The work is to be
conducted over a three-year period coinciding with the vesting of the options.
Unvested options are to be forfeited if the consultants cease performing their
work. The Company accounts for consultants' options in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In
accordance with this standard, changes in the estimated fair value of these
options will be recognized as compensation expense in the period of the change.
The Company recorded $16,000 and $232,000 for the nine months ended September
30, 2001 and 2000, respectively.
In addition, the Company recorded $28,000 and $194,000 for the nine months
ending September 30, 2001 and 2000 respectively, resulting from a shortfall in
shares approved for the ESPP. Aggregate compensation resulting from the
shortfall of approximately $400,000 is being amortized through December 2001.
The calculation and recording of expense was made in accordance with EITF 97-12,
"Accounting for Increased Share Authorizations in an IRS Section 423 Employee
Stock Purchase Plan under APB Opinion No. 25." In accordance with this
consensus, a compensation charge is calculated for the amount by which the
quoted stock price on the date of shareholder approval, less a 15 percent
discount, exceeds the price at which options were granted under the ESPP. The
compensation charge so determined is amortized over the term of the options
issued under the ESPP that remains after shareholder approval of additional
shares.
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 were being
sought by the plaintiffs. In June, 2001, the plaintiffs settled with our
insurance carrier for an amount within our insurance policy limits.
On June 6, 2001, ASM America, Inc. filed suit against us in the U.S. District
Court for the Northern District of California asserting that our atomic layer
products infringe claims of U.S. Patent Nos. 6,015,590 and 5,916,365. The
complaint sought unspecified monetary damages and equitable relief.
On August 1, 2001, we filed our response in the patent infringement case
initiated by ASM denying ASM's allegation that Genus infringes patents that ASM
claims to have acquired. In our response, we deny ASM's allegations and
maintain that ASM's claims based on these patents are improper. Additionally,
we filed a counterclaim against ASM International N.V., charging ASM with
infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective Etching
Native Oxide," and with committing antitrust violations designed to harm the
atomic layer deposition market.
ASM has filed a motion asking the court to dismiss our claim that ASM committed
inequitable conduct in obtaining its patents, to dismiss our antitrust claim,
and to sever and stay our antitrust claim if not dismissed. A hearing on ASM's
motion is scheduled for December 11, 2001. In addition, claims construction
hearings have been scheduled for June 2002 on all of the patents in suit.
COMPREHENSIVE 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 loss (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------------------------------------------------------
Net income (loss). . . . . . . . . . . . $ (744) $ 1,646 $ (1,466) $ (10,750)
Foreign currency translation adjustment. (59) 1 (63) 21
----------- ----------- -------- ---------
Comprehensive income (loss). . . . . . $ (803) $ 1,647 $ (1,529) $ (10,729)
=========== =========== ========= =========
The components of accumulated other comprehensive loss is as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------- -------
Cumulative translation adjustments $ (2,085) $ (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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
We believe the adoption of SFAS No. 141 will not have a significant impact on
our financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We
believe the adoption of SFAS No. 142 will not have a significant impact on our
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and provides further guidance regarding the accounting and
disclosure of long-lived assets. The Company is required to adopt SFAS 144
effective January 1, 2002, and has not yet determined the impact, if any, of
adoption.
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 three and nine months ended September 30, 2001 were
$15.1 and $43.1 million, which represented increases of 4 percent and 73 percent
compared to the net sales of $14.5 million and $25.0 million for the
corresponding periods in 2000. Five systems were accepted by our customers
during the third quarter of 2001, compared to four systems during the third
quarter of 2000. Three of these systems were our new atomic level deposition
(ALD) product while the other two were our current generation chemical vapor
deposition (CVD) products. During the nine months ended September 30, 2001,
eleven systems and five upgrades were accepted, compared to seven systems and
two upgrade kits in the first nine months of 2000.
COST OF GOODS SOLD. Cost of goods sold for three and nine months ended September
30, 2001 was $10.3 million and $27.5 million, compared to $8.0 million and $15.1
million for the same period in 2000. Gross profit as a percentage of revenues
was 32 percent for the quarter compared to 45 percent in the prior year quarter.
In absolute dollars, gross profit was down $1.7 million from the prior year
quarter and was adversely impacted by three factors:
- - First, inventory write-offs and other one-time adjustments of approximately
$500,000;
- - Second, unfavorable manufacturing variances of approximately $1.1 million
(in June, we initiated a number of initiatives in our plant to improve
workflow, reduce inventories, and significantly increase production
capacity in our new multi-product, multi-film, multi-customer environment
and, although these actions helped us reduce inventories by $8 million and
increase our shop floor capacity to produce 15 systems a quarter, they also
resulted in higher manufacturing variances); and
- - Third, service costs were $150,000 higher than in the third quarter of 2000
due to our investment in service centers in Japan and Korea.
These three factors more than offset the favorable impact of earning a higher
proportion of revenues from ALD systems which enjoy higher margins than CVD
systems.
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 (R&D) expenses for the
quarter ended September 30, 2001 were $2.6 million, or 17 percent of net sales,
compared with $2.0 million or 14 percent of net sales for the same period in
2000. For the nine months ended September 30, 2001, expenses were $8.8 million,
or 21 percent of sales, compared to $5.8 million, or 23 percent of sales for the
same period in 2000. The increases in both quarter and year-to-date expenses
were primarily associated with the development costs of our 300-millimeter
product, the Lynx3, which shipped in the third quarter of 2001. Over the past
six quarters, we have made significant investments in our ALD technology,
particularly in new films and productivity improvements, and new CVD products,
including tungsten films. We have also invested in semiconductor applications
for ALD, and additionally for magnetic disk drives, telecommunications, and
inkjet printers. We believe these investments will enable us compete effectively
in the marketplace over the next 12 to 18 months. In August we started scaling
back on our R&D expenses by eliminating a number of contract positions and
implementing salary cuts of up to 20 percent for our entire workforce in order
to respond to the downturn in the industry. In October, we took additional
cost-cutting actions by implementing a restructuring program in which we further
reduced contractor positions.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A)
expenses were $2.7 million, or 18 percent of sales, for the quarter ended
September 30, 2001, compared with $2.8 million or 19 percent of sales for the
second quarter of 2000. Although headcount related to SG&A activities was 15
percent higher than in the prior year quarter, overall SG&A expenses were kept
lower due to salary cuts, temporary plant shutdowns and stricter cost controls.
Also, we received approximately $200,000 from our sub-lessee for early lease
termination that was recorded as an offset to SG&A expenses in the September
2001 quarter. Year-to-date expenses were $8.0 million, slightly below the level
recorded in the nine months ended September 2000. As a percentage of sales,
year-to-date SG&A expenses in 2001 was 19 percent of sales, lower than last
year's 32 percent of sales due to the increased sales volumes.
OTHER INCOME (EXPENSE), NET. Other expenses for the third quarter of 2001 were
$207,000, primarily reflecting interest charges on bank loans, compared to other
income of $101,000, reflecting interest income from cash deposits, for the same
period in 2000. During the nine months ended September 30, 2001, other expenses
were $127,000, compared to income of $383,000 which was primarily due to
interest received from Samsung and foreign currency exchange gains recorded
during the first half of 2000.
PROVISION FOR INCOME TAXES. We did not record any provision for income taxes for
the three months ended September 30, 2001 as we recorded losses in our U.S and
foreign subsidiaries. We provide for a full valuation allowance against the tax
benefit associated with these losses. In the three months ended September 30,
2000 we recorded income tax expenses of $100,000 related to profits generated in
our South Korean subsidiary. For the nine months ended September 30, we recorded
a provision of $69,000 compared to $450,000 in the corresponding prior year
period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, our cash and cash equivalents were $5.5 million, an
increase of $2.4 million over cash and cash equivalents of $3.1 million held as
of December 31, 2000. Accounts receivable was $5.0 million, a decrease of $3.4
million from $8.4 million as of December 31, 2000, as we were able to collect on
most of our overdue receivables. Cash used by operating activities totaled
$200,000 for the nine months ended September 30, 2001, and consisted primarily
of net loss of $1.5 million and decreases in deferred revenues of $14.2 million,
partially offset by depreciation of $2.0 million and reductions in working
capital, primarily receivables of $3.4 million and inventories of $9.9 million.
Inventory reductions were primarily related to improved supply chain management,
decreases in inventory held at customer sites from $9.5 million to $4.2 million.
Financing activities provided cash of $10.4 million for the nine months ended
September 30, 2001. In May, we received approximately $7.5 million of proceeds
from a private placement and from issuance of common stock under the stock
option plans of 2.5 million shares of our common stock. Additionally, we
increased our net short-term borrowings by $2.8 million.
We made capital expenditures of $7.7 million for the nine months ended September
30, 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 has improved our product and film development
capabilities, and increased our customer demonstration capabilities, which is
critical in the sales process.
Our primary source of funds at September 30, 2001 consisted of $5.5 million in
cash and cash equivalents, and $5.0 million of accounts receivable, some of
which has been collected and most of which we expect will have been collected
during the three months ending December 31, 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 percent of eligible accounts receivable, including funds owed by
customers for shipments that have not yet been accepted. Borrowings under the
line are secured by all corporate assets and bear interest at 9.6 percent 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. Borrowings under this line were $2.6
million as of September 30, 2001.
On July 15, 2001, our 100 percent owned subsidiary in Japan, Genus Japan Inc.,
negotiated a $3.0 million line of credit, secured by customer receivables, with
Aozora Bank, Ltd. in Tokyo. As of September 30, 2001, there was an outstanding
balance of $3.0 million under this line of credit.
We are actively marketing our existing and new products, which we believe will
ultimately lead to profitable operations. However, there can be no assurance
the currently available funds will meet the company's cash requirements in the
future, or, that any required additional funding will be available on terms
attractive to us, 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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
believe the adoption of SFAS No. 141 will not have a significant impact on our
financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We
believe the adopting of SFAS 142 will not have a significant impact on our
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and provides further guidance regarding the accounting and
disclosure of long-lived assets. The Company is required to adopt SFAS 144
effective January 1, 2002, and has not yet determined the impact, if any, of
adoption.
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 $2.9 million, $3.2 million and $26.0 million for
2000, 1999 and 1998, respectively. These numbers have been restated to reflect
the retroactive application of the change in accounting principle under SAB 101.
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.
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
Infineon Technologies accounted for approximately 91 percent and 5 percent of
our net sales in 2000. In the first nine months of 2001, Samsung Electronics
Company, Ltd., Read-Rite and Infineon Technologies accounted for approximately
72 percent, 8 percent and 6 percent, respectively, of our net sales. Samsung
Electronics and Read-Rite represented approximately 34 percent of accounts
receivables at September 30, 2001. The semiconductor manufacturing industry
generally consists of a limited number of larger companies. Consequently, we
expect that a significant portion of our future product sales will continue to
be concentrated within a limited number of customers, even though we are making
progress in reducing the concentration of our reliance on customers through our
strategy of product and customer diversification
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 harmed. Customers may delay or cancel orders or may stop
doing business with us for a number of reasons including:
- customer departures from historical buying patterns;
- general market conditions;
- economic conditions; or
- competitive conditions in the semiconductor industry or in the industries
that manufacture products utilizing integrated circuits.
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. For example, in the year 2000, our quarterly revenues ranged from $3.8
million to $15.7 million with the bottom line ranging from a loss of $10.3
million to a profit of $1.6 million.
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, makes the timing of customer orders uneven and difficult to
predict. 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 harm our operating results for
that quarter, which could cause our stock price to decline.
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 percent, 86 percent and 56 percent
of our total net sales in 2000, 1999 and 1998, respectively, and accounted for
92 percent of our total net sales during the first nine months of 2001. Net
sales to our South Korean-based customers accounted for approximately 92
percent, 84 percent and 30 percent of total net sales in 2000, 1999, and 1998,
respectively, and accounted for 72 percent of our total net sales in the first
nine months 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
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
because integrated circuit manufacturers sold dynamic random access memory
chips, called DRAMs, at less than cost in order to generate cash. The cash
shortfall caused Asian semiconductor companies to defer or cancel investments
in new production facilities, thereby reducing our anticipated sales of our
semiconductor manufacturing equipment in Asia in 1998.
Also during this time, the value of the WON, the currency of South Korea,
declined significantly against the U.S. dollar. As a result, purchases of U.S.
manufactured products became very costly. Since most of our sales were made to
South Korean customers, these circumstances adversely impacted our customers'
ability to invest in new facilities and equipment that reduced our shipments
and profitability in 1998.
Wherever currency devaluations occur abroad, our goods become more expensive for
our customers in that region. Difficult economic conditions may limit capital
spending by our customers. These circumstances may also affect the ability of
our customers to meet their payment obligations, resulting in the cancellations
or deferrals of existing orders and the limitation of additional orders.
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. Although we
are marketing our atomic layer deposition technology to non-semiconductor
markets such as markets in magnetic thin film heads, flat panel displays,
micro-electromechanical systems and inkjet printers, we are still dependent on
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. During the industry
downturn in 1998, several of our customers delayed or cancelled investments in
new manufacturing facilities and equipment due to declining DRAM prices, the
Asian economic downturn, and general softening of the semiconductor market.
This caused our sales in 1998 to be significantly lower than in the prior three
years.
After the dramatic industry boom for semiconductor equipment that peaked early
in the year 2000, another cyclical downturn that is extraordinarily deep is
presently occurring. Industry reports anticipate a fall of 45 percent in 2001
compared to 2000. This sharp and severe industry downturn is the largest in the
industry's history and it is occurring with a slowdown of the U.S. economy
overall. Almost all previous downturns have been solely due to pricing declines.
The current downturn in the industry marks a corresponding decline in unit
production. Genus recently reported a loss for our third quarter 2001 financial
results. There is a risk that our revenues and operating results will continue
to be further impacted by the continued downturn in the semiconductor industry
and global economy.
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 our atomic layer deposition
technology. 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 harm our business, financial
condition and results of operations.
We must manage product transitions successfully, as introductions of new
products could harm sales of existing products. We derive our revenue primarily
from the sale of equipment used to chemically deposit tungsten silicide in the
manufacture of memory chips. We estimate that the life cycle for these tungsten
silicide deposition systems is three-to-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 superior to our systems. Our competitors
may also be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their product lines. We may not be able to
maintain or expand our sales if our resources do not allow us to respond
effectively to such competitive forces.
WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR
OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND
PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE
Because semiconductor manufacturers must make a substantial investment to
install and integrate capital equipment into a semiconductor fabrication
facility, these manufacturers will tend to choose semiconductor equipment
manufacturers based on established relationships, product compatibility and
proven 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. To do otherwise creates risk for the manufacturer because the
manufacture of a semiconductor requires many process steps and a fabrication
facility will contain many different types of machines that must work cohesively
to produce products that meet the customers' specifications. If any piece of
equipment fails to perform as expected, the customer could incur significant
costs related to defective products, production line downtime, or low production
yields.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we
have observed that once a particular piece of equipment is selected from a
vendor, the customer is likely to continue purchasing that same piece of
equipment from the vendor for similar applications in the future. Our customer
list, though limited, has expanded in recent months. Yet our broadening market
share remains at risk to choices made by customers that continue to be
influenced by pre-existing installed bases by competing vendors.
A semiconductor manufacturer frequently will attempt to consolidate its other
capital equipment requirements with the same vendor. Accordingly, we may face
narrow windows of opportunity to be selected as the "vendor of choice" by
potential new customers. It may be difficult for us to sell to a particular
customer for a significant period of time once that customer selects a
competitor's product, and we may not be successful in obtaining broader
acceptance of our systems and technology. If we are not able to achieve broader
market acceptance of our systems and technology, we may be unable to grow our
business and our operating results and financial condition will be harmed.
OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF
OUR REVENUE
Sales of our systems depend upon the decision of a prospective customer to
increase manufacturing capacity. That decision typically involves a significant
capital commitment by our customers. Accordingly, the purchase of our systems
typically involves time-consuming internal procedures associated with the
evaluation, testing, implementation and introduction of new technologies into
our customers' manufacturing facilities. For many potential customers, an
evaluation as to whether new semiconductor manufacturing equipment is needed
typically occurs infrequently. Following an evaluation by the customer as to
whether our systems meet its qualification criteria, we have experienced in the
past and expect to experience in the future delays in finalizing system sales
while the customer evaluates and receives approval for the purchase of our
systems and constructs a new facility or expands an existing facility.
Due to these factors, our systems typically have a lengthy sales cycle during
which we may expend substantial funds and management effort. The time between
our first contact with a customer and the customer placing its first order
typically lasts from nine to twelve months and is often longer. This lengthy
sales cycle makes it difficult to accurately forecast future sales and may cause
our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected for that period.
OUR INTELLECTUAL PROPERTY IS IMPORTANT TO US AND WE RISK LOSS OF A VALUABLE
ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSES 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.
On August 1, 2001, we filed a counterclaim against ASM International N.V.,
charging ASM with infringing Genus' U.S. Patent 5,294,568, entitled "Method of
Selective Etching Native Oxide," and with committing antitrust violations
designed to harm the atomic layer deposition market. ASM has filed a motion
asking the court to dismiss our claim that ASM committed inequitable conduct in
obtaining its patents, to dismiss our antitrust claim, and to sever and stay our
antitrust claim if not dismissed. A hearing on ASM's motion is scheduled for
December 11, 2001. In addition, claims construction hearings have been
scheduled for June 2002 on all of the patents in suit.
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.
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
appropriate. However, no assurance can be given that we will be able to
negotiate 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.
On June 6, 2001, ASM America, Inc. filed suit against us in the U.S. District
Court for the Northern District of California asserting that our atomic layer
products infringe claims of U.S. Patent Nos. 6,015,590 and 5,916,365. The
complaint sought unspecified monetary damages and equitable relief.
On August 1, 2001, we filed our response in the patent infringement case
initiated by ASM denying ASM's allegation that Genus infringes patents that ASM
claims to have acquired. In our response, we deny ASM's and maintain that ASM's
claims based on these patents are improper.
We intend to defend our position vigorously. The outcome of any litigation is
uncertain, however, and we may not prevail. Should we be found to infringe any
of the patents asserted, in addition to potential monetary damages and any
injunctive relief granted, we would need either to obtain a license from ASM to
commercialize our products or redesign our products so they do not infringe any
of these patents. If we were unable to obtain a license or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale of our atomic layer products. In this case our business
may not develop as planned, and our results could materially suffer.
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.
We use the following regulated gases at our manufacturing facility in Sunnyvale:
tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen. We also
use regulated liquids such as hydrofluoric acid and sulfuric acid. The city of
Sunnyvale, California, imposes high environmental standards to businesses
operating within the city. Genus has met the city's stringent requirements and
has received an operating license from Sunnyvale. Presently, our compliance
record indicates that our methods and practices successfully meet standards.
Moving forward, if we fail to continuously maintain high standards to prevent
the leakage of any toxins from our facilities into the environment, restrictions
on our ability to expand or continue to operate our present locations could be
imposed upon us or we could be required to acquire costly remediation equipment
or incur other significant expenses.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS
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 these products, if
necessary. Nevertheless, a prolonged inability to obtain components could have
a material adverse effect on our operating results.
WE DEPEND UPON SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR
PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US
We currently sell and support our thin film products through direct sales and
customer support organizations in the U.S., Europe, South Korea and Japan and
through six independent sales representatives and distributors in the U.S.,
Europe, South Korea, Taiwan, 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 negatively impact
sales and revenue.
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 and have received orders from two new
Japanese customers in 2001, we may not be able to attract new customers in the
Japanese semiconductor industry, and as a result, we may fail to yield a profit
or return on our investment in 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.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure, acts of political terrorists 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 could be subject to
electrical blackouts as a consequence of a shortage of available electrical
power. If such blackouts were to occur, they could disrupt the operations of
our affected facilities. Although we maintain general business insurance
against interruptions such as fires and floods, there can be no assurance that
the amount of coverage will be adequate in any particular case.
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR
CAUSE OUR STOCK PRICE TO DROP.
As of September 30, 2001 we have a total of 4,606,568 shares of common stock
underlying warrants and outstanding employee stock options. Of the stock
options, 1,869,519 shares are currently exercisable. All of the shares
underlying the warrants are currently exercisable.
There are 1,461,525 shares of our common stock underlying the warrants issued to
the shareholders. Of these shares, 1,270,891 have an exercise price of $3.50;
69,375 have an exercise price of $3.00; and 121,259 have an exercise price of
$5.24. In addition, Venture Banking Group, a division of Cupertino National
Bank, holds a warrant, issued October 14, 1999, to purchase 25,000 shares of our
common stock at an exercise price of $2.39. The warrants have terms providing
for an adjustment of the number of shares underlying the warrants in the event
that we issue new shares at a price lower than the exercise price of the
warrants, where we make a distribution of common stock to our shareholders or
effect a reclassification.
If all of the shares underlying the exercisable options and warrants were
exercised and sold in the public market, the value of your current holdings in
Genus may decline as a result of dilution to your percentage ownership in Genus
or as a result of a reduction in the per share value of our stock resulting from
the increase in the number of Genus shares available on the market, if such
availability were to exceed the demand for our stock.
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
Our Preferred Stock Rights Agreement is our primary anti-takeover device.
Pursuant to the agreement, our board of directors has declared a dividend of one
right for each share of our common stock that was outstanding as of October 13,
2000. The rights trade with the certificates for the common stock until a
person or group acquires beneficial ownership of 15 percent or more of our
common stock. After such an event, we will mail rights certificates to our
shareholders and the rights will become transferable apart from the common
stock. At that time, each right, other than rights owned by an acquiror or its
affiliates, will entitle the holder to acquire, for the exercise price, a number
of shares of common stock having a then-current market value of twice the
exercise price.
In the event that circumstances trigger the transferability and exercisability
of rights granted in our preferred stock rights agreement, your current holdings
in Genus may decline as a result of dilution to your percentage ownership in
Genus or as a result of a reduction in the per share value of our stock
resulting from the increase in the number of outstanding shares available.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this report that may not prove to be
accurate. This report contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding, among other items, our business
strategy, growth strategy and anticipated trends in our business. We may make
additional written or oral forward-looking statements from time to time in
filings with the Securities and Exchange Commission or otherwise. When we use
the words "believe," "expect," "anticipate," "project" and similar expressions,
this should alert you that this is a forward-looking statement.
We base these forward-looking statements on our expectations. They are subject
to a number of risks and uncertainties that cannot be predicted, quantified or
controlled. Future events and actual results could differ materially from those
set forth in, contemplated by, or underlying the forward-looking statements.
Statements in this report, and in documents incorporated into this report,
including those set forth above in "Risk Factors," describe factors, among
others, that could contribute to or cause these differences. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this report will in fact transpire or prove to be
accurate. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this section.
ITEM 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.
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 were being
sought by the plaintiffs. In June, 2001, the plaintiffs settled with our
insurance carrier for an amount within our insurance policy limits.
On June 6, 2001, ASM America, Inc. filed suit against us in the U.S. District
Court for the Northern District of California asserting that our atomic layer
products infringe claims of U.S. Patent Nos. 6,015,590 and 5,916,365. The
complaint sought unspecified monetary damages and equitable relief.
On August 1, 2001, we filed our response in the patent infringement case
initiated by ASM denying ASM's allegation that Genus infringes patents that ASM
claims to have acquired. In our response, we deny ASM's allegations and
maintain that ASM's claims based on these patents are improper. Additionally,
we filed a counterclaim against ASM International N.V., charging ASM with
infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective Etching
Native Oxide," and with committing antitrust violations designed to harm the
atomic layer deposition market. ASM has filed a motion asking the court to
dismiss our claim that ASM committed inequitable conduct in obtaining its
patents, to dismiss our antitrust claim, and to sever and stay our antitrust
claim if not dismissed. A hearing on ASM's motion is scheduled for December 11,
2001. In addition, claims construction hearings have been scheduled for June
2002 on all of the patents in suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 17, 2001, we sold in a private transaction 2,541,785 shares of our common
stock, and warrants to purchase up to 1,270,891 of additional shares of common
stock, for aggregate proceeds of approximately $7.6 million. We also issued an
aggregate of 190,634 warrants to Burnham Securities, Inc. and Wells Fargo Van
Kasper as partial compensation for their services as placement agents in the
transaction. The warrants issued to the purchasers in the private placement are
exercisable for $3.50 per share. The placement agents have an aggregate of
69,375 shares underlying their warrants that are exercisable for $3.00 per share
and an aggregate of 121,259 shares underlying their warrants that are
exercisable for $5.24 per share. Each warrant is exercisable to purchase one
share of our common stock at any time until May 13, 2006. The warrants include
a net exercise provision permitting the holders to pay the exercise price by
cancellation of a number of shares with a fair market value equal to the price
of the warrants.
We may request the holders of the warrants issued to the purchasers in the
private placement to exercise them if the closing price per share of our common
stock is greater than $5.25 for each of the ten trading days immediately
preceding the date we give notice to the holders of our decision to effect the
exercise. Under the terms of this mandatory exercise provision, a holder can
choose not to exercise his or her warrants, although such holder would then
forfeit rights, title and interest under the warrants to the extent that he or
she fails to exercise within thirty calendar days of receiving our notice.
The warrants issued to the purchasers in the private placement include
antidilution provisions under section 5, including provisions that call for
adjustments in the number of shares of stock issued upon exercise of the
warrants to prevent dilution to the holders of the warrants because of (i)
dividends or distributions in common stock; (ii) reclassifications of the common
stock; or (iii) the issuance of new stock at less than the exercise price of the
warrants.
The warrants issued to the placement agents differ from the warrants issued to
the investors in the private placement in that the warrants issued to the
placement agents (i) have no mandatory exercise provision; and (ii) require a
more relaxed adjustment, called a broad-based adjustment, which requires fewer
additional shares to be issued to the shareholders to prevent dilution if Genus
issues new stock at less than the exercise price of the warrant.
If all the warrants are exercised for cash and converted to common stock, the
additional net proceeds would total $5.0 million. The net proceeds from the
private placement are being used to fund inventory, sales and sales support to
address new customers, working capital and general corporate matters.
We entered into a registration rights agreement with the purchasers in
connection with the private transaction that required us register the securities
for resale under the Securities Act of 1933 by filing a registration statement a
Form S-3. Accordingly, we made such a filing and Amendment 4 to the Genus, Inc.
S-3 Registration Statement became effective with the Securities and Exchange
Commission on August 17, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Report on Form 8-K
The company filed a Current Report on Forms 8-K, on August 16,
2001.
GENUS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001 GENUS, INC.
/s/ William W.R. Elder
--------------------------------
William W.R. Elder, President,
Chief Executive Officer and Chairman
/s/ Shum Mukherjee
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Shum Mukherjee
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)