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, 2002 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 April 30, 2002: 26,407,952
----------
================================================================================
GENUS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2001 and March 31, 2002. . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of March 31, 2001
and March 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and March 31, 2002. . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 22
PART II. OTHER INFORMATION
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2: Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . 23
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 23
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- -------
Net sales . . . . . . . . . . . . . . . . . . . $ 9,591 $14,309
Costs and expenses:
Cost of goods sold . . . . . . . . . . . . 7,467 8,603
Research and development . . . . . . . . . 2,185 3,004
Selling, general and administrative. . . . 3,436 2,518
-------- -------
Income (loss) from operations . . . . . . . . . (3,497) 184
Other income (expenses), net. . . . . . . . . . (255) 2
-------- -------
Loss before income taxes. . . . . . . . . . . . (3,752) 186
Provision for income taxes. . . . . . . . . . . - 55
-------- -------
Net income/(loss) . . . . . . . . . . . . . . . $(3,752) $ 131
======== =======
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . $ (0.15) $ 0.01
Diluted. . . . . . . . . . . . . . . . . . $ (0.15) $ 0.01
Shares used in per share calculation - basic. . 25,249 19,379
======== =======
Shares used in per share calculation - diluted. 25,249 19,926
======== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 9,456 $ 3,043
Accounts receivable (net of allowance for doubtful
accounts of $69 in 2002 and $69 in 2001) . . . . 3,203 4,262
Inventories . . . . . . . . . . . . . . . . . . . . 8,675 12,648
Other current assets. . . . . . . . . . . . . . . . 825 1,221
----------- --------------
Total current assets . . . . . . . . . . . . . . 22,159 21,174
Equipment, furniture and fixtures, net. . . . . . . 13,953 14,573
Other assets, net . . . . . . . . . . . . . . . . . 336 155
----------- --------------
Total assets . . . . . . . . . . . . . . . . . . $ 36,448 $ 35,902
=========== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings. . . . . . . . . . . . . $ 3,848 $ 4,481
Accounts payable. . . . . . . . . . . . . . . . . . 5,609 8,352
Accrued expenses. . . . . . . . . . . . . . . . . . 2,709 3,553
Deferred revenue and customer deposits. . . . . . . 6,914 7,388
Deferred revenue and customer deposits. . . . . . . 536 -
----------- --------------
Total current liabilities. . . . . . . . . . . . 19,616 23,774
Long-term liabilities. . . . . . . . . . . . . . 436 -
----------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . 20,052 23,774
----------- --------------
Contingencies (see note on legal proceeding)
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000 shares;
Issued and outstanding 26,321 shares in
2002 and 22,365 in 2001. . . . . . . . . . . . . 118,724 110,753
Accumulated deficit . . . . . . . . . . . . . . . . (99,941) (96,189)
Note receivable from shareholder. . . . . . . . . . (151) (151)
Accumulated other comprehensive loss. . . . . . . . (2,236) (2,285)
----------- --------------
Total shareholders' equity . . . . . . . . . . . 16,396 12,128
----------- --------------
Total liabilities and shareholders' equity . . . . . . $ 36,448 $ 35,902
=========== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . $(3,752) $ 131
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . 895 534
Stock-based compensation . . . . . . . . . . . . . . . - 36
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . 1,059 3,445
Inventories. . . . . . . . . . . . . . . . . . . . . 3,973 2,706
Other assets . . . . . . . . . . . . . . . . . . . . 215 (8)
Accounts payable . . . . . . . . . . . . . . . . . . (2,743) 732
Accrued expenses . . . . . . . . . . . . . . . . . . (844) (284)
Deferred revenue and customer deposits . . . . . . . (474) (3,889)
-------- --------
Net cash provided by (used in) operating activities. (1,671) 3,403
-------- --------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures . . . . (275) (3,606)
-------- --------
Net cash used in investing activities. . . . . . . . (275) (3,606)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . 7,971 123
Proceeds (payments) from short-term bank borrowings. . . (633) 70
Proceeds from debt . . . . . . . . . . . . . . . . . . . 1,200 -
Payments for debt. . . . . . . . . . . . . . . . . . . . (228) -
-------- --------
Net cash provided by financing activities. . . . . . 8,310 193
-------- --------
Effect of exchange rate changes on cash. . . . . . . . . . 49 (34)
-------- --------
Net increase (decrease) in cash and cash equivalents . . . 6,413 (44)
Cash and cash equivalents, beginning of period . . . . . . 3,043 3,136
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . $ 9,456 $ 3,092
======== ========
Supplemental cash flow information
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 60
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ - $ 273
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
BASIS OF PRESENTATION
The accompanying condensed 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 condensed
consolidated financial statements and notes thereto included in the Company's
2001 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.
LIQUIDITY
During the quarter ended March 31, 2002, the Company is in the process of
executing its business strategy and has plans to eventually achieve profitable
operations. Management believes that existing cash and available financing will
be sufficient to meet projected working capital, capital expenditures and other
cash requirements for the next twelve months. Accordingly, these financial
statements have been prepared on a going concern basis.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net 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 net income (loss) available to common shareholders by the sum of the
weighted average number of common shares outstanding and potential common shares
(when dilutive).
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- -------
Basic:
Net income (loss). . . . . . . . . . $(3,752) $ 131
======== =======
Weighted average common shares
outstanding. . . . . . . . . . . 25,249 19,379
======== =======
Basic net income (loss) per share. $ (0.15) $ 0.01
======== =======
6
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- -------
Diluted:
Net income (loss). . . . . . . . . $(3,752) $ 131
Weighted average common shares
outstanding. . . . . . . . . . . 25,249 19,379
Effect of dilutive stock options . - 544
Effect of dilutive warrants. . . . - 3
-------- -------
25,249 19,926
======== =======
Diluted net income (loss) per share. $ (0.15) $ 0.01
======== =======
Stock options and warrants to purchase approximately 5,678,959 shares of
common stock were outstanding during the three months ended March 31, 2002, 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 March 31, 2002.
Stock options to purchase approximately 1,826,867 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.
SHORT-TERM BANK BORROWINGS
In July 2001, our 100% owned subsidiary in Japan, Genus Japan Inc.,
negotiated a financing arrangement, secured by customer receivables, with Aozora
Bank, Ltd. in Tokyo. The interest rate for borrowings under this agreement was
6.5%. As of March 31, 2002, there was $1.5 million outstanding under this line
of credit. The agreement expired on April 30, 2002, and all amounts outstanding
at that time were repaid.
In December 2001, the Company replaced the $10.0 million line of credit
with Venture bank with a $10.0 million line of credit from Silicon Valley bank.
The Silicon Valley bank agreement includes a domestic revolving line of credit
of $7.5 million, secured against domestic eligible receivables and a foreign
line of credit of $7.5 million, financed by EXIM bank, secured against foreign
eligible receivables and inventory. The initial term of the loan is 12 months
ending December 20, 2002. Total availability under both lines at any given point
in time is limited to $10.0 million. The interest rate for borrowings under
both the domestic and foreign lines is prime plus 1.75% per annum calculated on
the basis of a 360-day year. The loan agreement is collateralized by a first
priority perfected security interest in the Company's assets and has a covenant
requiring the Company to maintain a minimum tangible net worth of $12.0 million
plus 50% of consideration for subsequent equity issuances and 50% of net income
of future quarters. The minimum tangible net worth requirement is reduced by any
losses in a subsequent quarter, but will not be reduced to less than $12.0
million.
On March 27, 2002, we amended our line of credit with Silicon Valley Bank
to increase the funds available under both lines of credit to $15.0 million, to
extend the initial term of the loan to 15 months ending March 19, 2003 and to
reset the covenant to $12.0 million plus 50% of consideration for equity
issuances subsequent to March 8, 2002. As of March 31, 2002, there were $2.3
million outstanding under this credit facility.
7
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
On January 4, 2002, the Company received gross proceeds of $1.2 million
under a secured loan with CitiCapital, a division of Citigroup. The loan is
payable over 36 months, accrues interest of 8.75% per annum and is secured by
two systems in our demonstration lab. As of March 31, 2002, the short-term
portion of this loan was $536,000 and the long-term portion was $436,000.
INVENTORIES
Inventories comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2002 2001
---------- -------------
Raw materials and purchased parts $ 4,206 $ 4,446
Work in process . . . . . . . . . 475 2,499
Finished goods. . . . . . . . . . 530 630
Inventory at customers' locations 3,464 5,073
---------- -------------
$ 8,675 $ 12,648
========== =============
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):
MARCH 31, DECEMBER 31,
2002 2001
---------- -------------
System warranty . . . . . . . . . . . . $ 968 $ 803
Accrued commissions and incentives. . . 46 330
Accrued compensation and related items. 683 723
Federal, state and foreign income taxes 443 444
Other . . . . . . . . . . . . . . . . . 569 1,253
---------- -------------
$ 2,709 $ 3,553
========== =============
COMMON STOCK
On January 25, 2002, the Company sold 3,871,330 shares of our common
stock, and warrants to purchase up to 580,696 of additional shares of common
stock, for aggregate proceeds of approximately $7.8 million. The warrants
issued to the purchasers in the private placement are exercisable for $3.23 per
share and the warrants have a five-year term.
As a result of the January 25, 2002 transaction, the Company adjusted the
warrants issued to certain investors in May 2001 (the "2001 Warrants") to comply
with the anti-dilution component of the 2001 Warrants. The adjustment increased
the total number of shares underlying the 2001 Warrants from 1,270,891 shares to
2,031,094 shares. In addition, the exercise price of the 2001 Warrants was
reduced from $3.50 to $2.19 per share.
8
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
LEGAL PROCEEDINGS
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The Complaint seeks monetary and injunctive relief. Genus
served its Answer to ASMA's complaint on August 1, 2001. Also on August 1,
2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for
(1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled
"Method of Selective Etching Native Oxide"; (2) declaratory judgment that the
'365 and '590 Patents are invalid, unenforceable, and not infringed by Genus;
and (3) antitrust violations. An initial Case Management Conference was held on
October 16, 2001. On January 9, 2002, the Court issued an order granting ASM
leave to amend its complaint to add Dr. Sherman as a party and to add a claim
that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the
"165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed
discovery and trail of Genus' antitrust claims until after the trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's
amended complaint and counterclaimed against ASM for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. The Claim
Construction Hearings regarding these claims are set for June 17, 2002 ( '590
and '365 Patents), June 24, 2002 ( '568 Patent), and September 26, 2002 ('165
Patent).
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 licenses 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.
RELATED PARTY TRANSACTIONS
Mario Rosati, a board member of the Company, is also a partner of Wilson
Sonsini Goodrich and Rosati, the general counsel of the Company. During the
first quarters of 2001 and 2002, the Company paid $21,000 and $108,000,
respectively, to Wilson Sonsini Goodrich and Rosati. At March 31, 2002, the
Company owed approximately $784,000 to Wilson Sonsini Goodrich and Rosati.
9
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)
COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss) (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2002 2001
----------- ------------
Net income (loss). . . . . . . . . . . . $ (3,752) $ 131
Foreign currency translation adjustment. 49 (34)
----------- ------------
Comprehensive income (loss) $ (3,703) $ 97
=========== ============
The components of accumulated other comprehensive loss is as follows (in
thousands):
MARCH 31 DECEMBER 31
2002 2001
---------- -------------
Cumulative translation adjustment $ (2,236) $ (2,285)
========== =============
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of long-lived assets, except for certain
obligations of leases. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our results of operations.
10
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 months ended March 31, 2002 of $9.6 million
represented a decrease of 33% when compared to net sales of $14.3 million for
the same quarter of 2001, but increased 69% sequentially from $5.7 million in
the fourth quarter of 2001. One 300 mm CVD system, one 300 mm ALD system and
one 200 mm CVD system were accepted in the first quarter of 2002. First quarter
of 2001 revenues consisted of two 200 mm CVD systems and a significant number of
upgrades that were accepted by the customer. In the fourth quarter of 2001,
only one 300 mm CVD system and an upgrade were accepted by the customer.
COST OF GOODS SOLD. Cost of goods sold for three months ended March 31,
2002 was $7.5 million, compared to $8.6 million for the same period in 2001.
Cost of goods was $5.0 million in the fourth quarter of 2002. Gross profit as a
percentage of revenues was 22 % in the first quarter of 2002 compared to 40% in
the same period of 2001. Gross profit as a percentage of revenue was 12% in the
fourth quarter of 2001. The lower gross profit percentages in the first quarter
of 2002 and fourth quarter of 2001 were a direct result of lower production
volumes and product mix that resulted in unfavorable manufacturing absorption
compared to the first quarter of 2001. First quarter 2002 cost of sales also
included $368,000 of additional inventory reserves.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the
quarter ended March 31, 2002 was $2.2 million, or 23% of net sales, compared
with $3.0 million or 21% of net sales for the same period in 2001. Research and
development expenses for the fourth quarter of 2001 were $3.3 million. As a
percent of net sales, research and development expenses were 23%, 21% and 58% in
the first quarter of 2002, first quarter of 2001 and fourth quarter of 2001,
respectively. The dollar decrease in the first quarter of 2002 when compared to
2001 was due to less usage of outside consultants. The higher dollar amount in
the fourth quarter of 2001 was due to the reconfiguration of demonstration
equipment. In 2001, we added significant capacity in our demonstration lab and
are now able to turnaround customer requests for demos in 15 to 30 days.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses were $3.4 million in the first quarter of 2002 compared to $2.5
million in the first quarter of 2001 and $2.4 million in the fourth quarter of
2002. As a percent of net sales, selling, general and administrative expenses
were 36%, 18% and 42 % in the first quarter of 2002, first quarter of 2001 and
fourth quarter of 2001, respectively. The increase in selling, general and
administrative expenses in the first quarter of 2002 when compared to the first
quarter of 2001 was due to the delay in receiving a government research grant
($400,000), and delay in subleasing extra factory space ($144,000).
11
OTHER INCOME (EXPENSE), NET. Other expenses for the first quarter of 2002
and fourth quarter of 2001 were $255,000 and $209,000, respectively, primarily
reflecting interest charges on bank loans, compared to other income of $2,000,
reflecting interest income from cash deposits, in the first quarter of 2001.
PROVISION FOR INCOME TAXES. We did not record any provision for income
taxes for the three months ended March 31, 2002 as we recorded losses in the U.S
and Japan and have minimum income in South Korea. We provide for a full
valuation allowance against the tax benefit associated with these losses. In
the three months ended March 31, 2001, we recorded income tax expenses of
$55,000 related to profits generated in our South Korean subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, our cash and cash equivalents were $9.5 million, an
increase of $6.4 million over cash and cash equivalents of $3.0 million held as
of December 31, 2001. Accounts receivable was $3.2 million, a decrease of $1.1
million from $4.3 million as of December 31, 2001. The decrease relates to the
collection of a receivable from a customer of our Japan subsidiary. Cash used by
operating activities totaled $1.7 million for the three months ended March 31,
2002, and consisted primarily of net loss of $3.8 million and decreases in
accounts payables of $2.7 million, partially offset by depreciation of $895,000
and reductions in working capital, primarily receivables of $1.1 million and
inventories of $4.0 million. Inventory reductions were primarily related to
improved supply chain management and decreases in inventory held at customer
sites from $5.1 million to $3.5 million.
Financing activities provided cash of $8.3 million for the three months
ended March 31, 2002. In January 2002, we received approximately $7.8 million
of proceeds from a sale of common stock and warrants to purchase common stock.
We made capital expenditures of $275,000 for the three months ended March
31, 2002. 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 March 31, 2002 consisted of $9.5 million in
cash and cash equivalents, $3.2 million of accounts receivable, and our credit
facilities with Silicon Valley Bank.
A summary of our contractual obligations as of March 31, 2002 is as follows
(in thousands):
Less than After
Total Revolving 1 year 1-3 years 4-5 years 5 years
---------- --------- ---------- ---------- --------- -------
Silicon Valley Bank $ 3,848 $ 3,848 $ - $ - $ - $ -
Citicapital 972 N/A 536 436 - -
Operating Leases 18,838 N/A 1,159 3,257 3,317 11,105
---------- --------- ---------- ---------- --------- -------
$ 23,658 $ 3,848 $ 1,695 $ 3,693 $ 3,317 $11,105
========== ========= ========== ========== ========= =======
12
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.
RELATED PARTY TRANSACTIONS
Mario Rosati, a board member of the Company, is also a partner of Wilson
Sonsini Goodrich and Rosati, the general counsel of the Company. During the
first quarters of 2001 and 2002, the Company paid $21,000 and $108,000,
respectively, to Wilson Sonsini Goodrich and Rosati. At March 31, 2002, the
Company owed approximately $784,000 to Wilson Sonsini Goodrich and Rosati.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement
applies to all entities. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of long-lived assets, except for
certain obligations of leases. As used in this Statement, a legal obligation is
an obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our results of operations.
RISK FACTORS
Certain section 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 and 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 $6.7 million, $9.6 million and $1.6 million
for 2001, 2000 and 1999, 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
an annual basis, or achieve and maintain consistent profitability on an annual
basis.
13
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 revenues. For example, in 2001 Samsung
Electronics Company, Ltd., Read-Rite Corporation, NEC, Infineon and SCS
accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In the first
three months of 2002, Samsung Electronics accounted for 70% of our net revenues
and Selete accounted for 27% of our net revenues.
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.
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 93%, 98% and 86% of our total net
sales in 2001, 2000 and 1999, respectively. 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.
14
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 is presently occurring. The
sharp and severe industry downturn in 2001 was the largest in the industry's
history. Almost all previous downturns have been solely due to pricing declines.
The 2001 downturn in the industry marked a corresponding decline in unit
production. Genus recently reported a loss for our 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.
15
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.
16
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.
There can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented or that the rights granted there under
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.
17
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The Complaint seeks monetary and injunctive relief. Genus
served its Answer to ASMA's complaint on August 1, 2001. Also on August 1,
2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for
(1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled
"Method of Selective Etching Native Oxide"; (2) declaratory judgment that the
'365 and '590 Patents are invalid, unenforceable, and not infringed by Genus;
and (3) antitrust violations. An initial Case Management Conference was held on
October 16, 2001. On January 9, 2002, the Court issued an order granting ASM
leave to amend its complaint to add Dr. Sherman as a party and to add a claim
that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the
"165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed
discovery and trail of Genus' antitrust claims until after the trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's
amended complaint and counterclaimed against ASM for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. The Claim
Construction Hearings regarding these claims are set for June 17, 2002 ( '590
and '365 Patents), June 24, 2002 ( '568 Patent), and September 26, 2002 ('165
Patent).
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.
18
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.
19
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 affect 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 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 is 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. 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 April 30, 2002, we have a total of 6,283,666 shares of common stock
underlying warrants and outstanding employee stock options. Of the stock
options, 2,027,205 shares are exercisable as of April 30, 2002. All of the
shares underlying the warrants are currently exercisable. Some 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
20
Pursuant to a preferred stock rights 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% or
m ore 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 acquirer
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 10-Q report that may not prove
to be accurate.
This 10-Q 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 10-Q report, and in documents incorporated into this
10-Q 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 10-Q 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.
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.
21
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.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASM claims to own or
exclusively license. The Complaint seeks monetary and injunctive relief. Genus
served its Answer to ASMA's complaint on August 1, 2001. Also on August 1,
2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for
(1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled
"Method of Selective Etching Native Oxide"; (2) declaratory judgment that the
'365 and '590 Patents are invalid, unenforceable, and not infringed by Genus;
and (3) antitrust violations. An initial Case Management Conference was held on
October 16, 2001. On January 9, 2002, the Court issued an order granting ASM
leave to amend its complaint to add Dr. Sherman as a party and to add a claim
that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the
"165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed
discovery and trail of Genus' antitrust claims until after the trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's
amended complaint and counterclaimed against ASM for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. The Claim
Construction Hearings regarding these claims are set for June 17, 2002 ( '590
and '365 Patents), June 24, 2002 ( '568 Patent), and September 26, 2002 ('165
Patent).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 25, 2002, the Company sold 3,871,330 shares of common stock, and
warrants to purchase 580,696 shares of common stock, for gross proceeds of
approximately $8.7 million or net aggregate proceeds of $7.8 million.
As a result of the January 25, 2002 transaction, the Company adjusted the
warrants issued to certain investors in May 2001 (the "2001 Warrants") to comply
with the anti-dilution component of the 2001 Warrants. The adjustment increased
the total number of shares underlying the 2001 Warrants from 1,270,891 shares to
2,031,094 shares. In addition, the exercise price of the 2001 Warrants was
reduced from $3.50 to $2.19 per share.
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 January 28, 2002.
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GENUS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2002 GENUS, INC.
/s/ William W.R. Elder
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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)
24