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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, 2003 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 by check mark whether the registrant is an accelerated filer(as defined
in Rule 12b-2 of the Exchange Act). Yes No X
---
As of November 3, 2003, the issuer had 32,416,257 shares of common stock
outstanding.
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GENUS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2003 and September 30, 2002 . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and September 30, 2002 . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . . . . . . 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . 31
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART II. OTHER INFORMATION
Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 5: Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 32
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales. . . . . . . . . . . . . . . . . . . $ 9,107 12,153 $41,541 28,487
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . 7,049 7,826 29,438 20,463
Research and development. . . . . . . . . 1,663 2,127 5,758 6,079
Selling, general and administrative . . . 2,800 3,498 8,842 10,229
------- ------- ------ -------
Loss from operations . . . . . . . . . . . . . (2,405) (1,298) (2,497) (8,284)
Interest expense . . . . . . . . . . . . . . . (411) (160) (1,318) (278)
Other income (expense), net. . . . . . . . . . 35 (46) 84 (215)
------- ------- ------ -------
Loss before income taxes . . . . . . . . . . . (2,781) (1,504) (3,731) (8,777)
Provision for income taxes . . . . . . . . . . 56 71 56 159
------- ------- ------ -------
Net loss . . . . . . . . . . . . . . . . . . . $(2,837) $(1,575) $(3,787) $(8,936)
======= ======= ======= ========
Net loss per share.
Basic . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.06) $ (0.13) $ (0.34)
Diluted . . . . . . . . . . . . . . . . . $ (0.09) $ (0.06) $ (0.13) $ (0.34)
Shares used in per share calculation - basic . 30,628 27,693 29,624 26,572
======== ======== ======== ========
Shares used in per share calculation - diluted 30,628 27,693 29,624 26,572
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 10,470 $ 11,546
Accounts receivable (net of allowance for doubtful
accounts of $0 in 2003 and $69 in 2002) . . . . . . . . . . 3,275 7,505
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,005 11,405
Other current assets . . . . . . . . . . . . . . . . . . . . . . 1,064 1,336
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . 23,814 31,792
Equipment, furniture and fixtures, net. . . . . . . . . . . . . . . . 9,325 8,661
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . 1,270 1,057
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 34,409 $ 41,510
============== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . . . . $ 1,969 $ 7,813
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 3,186 6,498
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,857 3,064
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . 2,576 2,713
Customer advances. . . . . . . . . . . . . . . . . . . . . . . . 1,728 1,809
Loan payable, current portion. . . . . . . . . . . . . . . . . . 266 245
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . 13,582 22,142
Convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,647 5,301
Loan payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 270
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 19,276 27,713
-------------- --------------
Contingencies (see note)
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 100,000 shares on September 30, 2003; and
50,000 shares on December 31, 2002;
Issued and outstanding 32,201 shares at September 30, 2003
and 28,621 shares at December 31, 2002. . . . . . . . . . . 128,862 123,890
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (111,596) (107,809)
Note receivable from shareholder . . . . . . . . . . . . . . . . (151) (151)
Accumulated other comprehensive loss . . . . . . . . . . . . . . (1,982) (2,133)
-------------- --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . 15,133 13,797
-------------- --------------
Total liabilities and shareholders' equity. . . . . . . . . $ 34,409 $ 41,510
============== ==============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS
Nine Months Ended
September 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,787) (8,936)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 2,371 2,816
Write-down for excess and obsolete inventories . . . . . 431 901
Provision for doubtful accounts. . . . . . . . . . . . . 40 -
Amortization of deferred finance costs . . . . . . . . . 712 115
Fixed assets written-off . . . . . . . . . . . . . . . . 140 -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 4,190 (1,675)
Inventories . . . . . . . . . . . . . . . . . . . . 1,758 3,610
Other assets. . . . . . . . . . . . . . . . . . . . (757) 67
Accounts payable. . . . . . . . . . . . . . . . . . (3,312) (3,132)
Accrued expenses and customer advances. . . . . . . 712 87
Deferred revenue. . . . . . . . . . . . . . . . . . (137) (4,450)
--------- ---------
Net cash provided by (used) in operating activities 2,361 (10,597)
--------- ---------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures. . . . . . . (2,364) (402)
--------- ---------
Net cash used in investing activities . . . . . . . (2,364) (402)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . . . . 4,822 9,591
Proceeds from issuance of convertible notes and warrants,
net of cash issuance costs of $814. . . . . . . . . . . - 6,986
Proceeds from short-term bank borrowings. . . . . . . . . . . 25,856 -
Payments for short-term bank borrowings . . . . . . . . . . . (31,700) (242)
Proceeds from loan payable. . . . . . . . . . . . . . . . . . - 1,200
Payments on loan payable. . . . . . . . . . . . . . . . . . . (202) (567)
--------- ---------
Net cash provided by financing activities . . . . . (1,224) 16,968
--------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . 151 124
--------- ---------
Net increase(decrease) in cash and cash equivalents. . . . . . . . (1,076) 6,093
Cash and cash equivalents, beginning of period . . . . . . . . . . 11,546 3,043
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 10,470 $ 9,136
========= =========
Supplemental cash flow information
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 639 $ 198
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . $ 308 $ 7
Non-cash investing and financing activities:
Warrants issued in connection with convertible notes. . . . . $ - $ 54
Transfer of inventory to fixed assets . . . . . . . . . . . . $ 143 $ -
Transfer of other assets to fixed assets. . . . . . . . . . . $ 600 $ -
Conversion of convertible notes to common stock . . . . . . . $ 150 $ -
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements (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
2002 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
The Company has an accumulated deficit of $111.6 million and a net
loss of $3.8 million during the nine months ended September 30, 2003. The
Company is in the process of executing its business strategy and has plans to
eventually achieve profitable operations on an ongoing basis. Management
believes that existing cash, cash generated by operations, and available
financing will be sufficient to meet projected working capital, capital
expenditure and other cash requirements for the next twelve months. Management
cannot provide assurances that its cash and its future cash flows from
operations alone will be sufficient to meet operating requirements and allow the
Company to service debt and repay any underlying indebtedness at maturity. If
the Company does not achieve anticipated cash flows, we may not be able to meet
planned product release schedules and forecast sales objectives. In such event
the Company will require additional financing to fund on-going and planned
operations and may need to implement expense reduction measures. In the event
the Company needs additional financing, there is no assurance that funds would
be available to the Company or, if available, under terms that would be
acceptable to the Company.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing net loss 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
loss per share is as follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Basic and Diluted
Net loss . . . . . . . . . . . . . . . . . . $(2,837) $(1,575) $(3,787) $(8,936)
======== ======== ======== ========
Weighted average common shares outstanding 30,628 27,693 29,624 26,572
======== ======== ======== ========
Basic and diluted net loss per share . . . $ (0.09) $(0.06 ) $ (0.13) $ (0.34)
======== ======== ======== ========
Stock options, warrants and convertible debt to purchase approximately
8,710,000 shares of common stock were outstanding as of September 30, 2003 but
were not included in the computation of diluted net earnings per share because
their effect would be anti-dilutive.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stock options and warrants to purchase approximately 12,675,000 shares of
common stock were outstanding as of September 30, 2002, but were not included in
the computation of diluted net loss per share because their effect would be
anti-dilutive.
Stock Compensation. The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting
Standards Board Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation." Generally, the Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's statements of operations. Pro forma information
regarding net loss and net loss per share as if the Company recorded
compensation expense based on the fair value of stock-based awards have been
presented in accordance with Statement of Financial Accounting Standards No.148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" and is as
follows for the three and nine months ended September 30, 2003 and 2002 (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- ---------
Net loss, as reported . . . . . . . . . . . . . . . . . . . . $(2,837) $(1,575) $(3,787) $ (8,936)
Add: Stock -based employee compensation recorded. . . . . . . - - - -
Deduct: Total stock-based employee compensation
expense, determined using a fair value based method
for all awards, net of related tax effects. . . . . ( 331) (449) (1,445) (1,517)
-------- -------- -------- ---------
Pro forma net loss attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . $(3,168) $(2,024) $(5,232) $(10,453)
======== ======== ======== =========
Earnings per share
Basic - as reported . . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.06) $ (0.13) $ (0.34)
======== ======== ======== =========
Basic - pro forma . . . . . . . . . . . . . . . . . . . . . $ (0.10) $ (0.07) $ (0.18) $ (0.39)
======== ======== ======== =========
Diluted - as reported . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.06) $ (0.13) $ (0.34)
======== ======== ======== =========
Diluted - as pro forma. . . . . . . . . . . . . . . . . . . $ (0.10) $ (0.07) $ (0.18) $ (0.39)
======== ======== ======== =========
The above pro forma effects on net loss may not be representative of the
effects on future results as options granted typically vest over several years
and additional option grants are expected to be made in future years.
The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the three and nine months ended September 30, 2003, and 2002:
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average risk free interest rates 1.93% 2.03% 2.08% 3.53%
Weighted average expected life 3.0 years 3.0 years 3.0 years 3.0 years
Weighted average expected volatility 93% 123% 98% 104%
Expected dividend yield 0% 0% 0% 0%
The weighted average fair value of options granted in the three months
ended September 30, 2003 and 2002 was $2.38 and $1.13, respectively. The
weighted average fair value of options granted in the nine months ended
September 30, 2003 and 2002 was $1.86 and $1.95, respectively.
The fair value of the employees' stock purchase rights under the 1989
Employee Stock Purchase Plan was estimated using the Black-Scholes
option-pricing model with the following assumptions for the nine months ended
September 30, 2003 and 2002:
Nine Months Ended
September 30,
2003 2002
---------- ----------
Weighted average risk free interest rates 1.03% 1.44%
Weighted average expected life 0.5 years 0.5 years
Weighted average expected volatility 74% 89%
Expected dividend yield 0% 0%
The weighted average fair value of those purchase rights granted in the
nine months ended September 30, 2003 and 2002 was $0.80 and $0.86, respectively.
Revenue Recognition.
The Company derives revenue from the sale and installation of semiconductor
manufacturing systems and from engineering services and the sale of spare parts
to support such systems.
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
Equipment selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. Effective January 1, 2000, at which time the Company had not established
verifiable objective evidence of the fair value of installation services, the
Company commenced deferring recognition of revenue from such equipment sales
until installation was complete and the product was accepted by the customer to
comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101. In the third quarter of 2002, the Company
established verifiable objective evidence of fair value of installation
services, one of the requirements for Genus to recognize revenue for
multiple-element arrangements prior to completion of installation services.
Accordingly, under SAB 101, if Genus has met defined customer acceptance
experience levels with both the customer and the specific type of equipment,
then the Company recognizes equipment revenue upon shipment and transfer of
title. A portion of revenue associated with undelivered elements such as
installation and on-site support related tasks is recognized when the
installation is completed and the customer accepts the product and for on-site
support as the support service is provided. For products that have not been
demonstrated to meet product specifications for the customer prior to shipment,
revenue is recognized when installation is complete and the customer accepts the
product. Revenues can fluctuate significantly as a result of the timing of
customer acceptances. At September 30, 2003 and December 31, 2002, the Company
had deferred revenue of $2.6 million and $2.7 million, respectively.
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
Borrowings
On December 20, 2001 and as amended on March 26, 2002 and March 20, 2003,
the Company maintains line of credit facilities for a maximum of $15.0 million,
based on eligible receivables and inventory. The interest rate is prime plus
1.75% per annum and the facility expires on June 29, 2004. The loan 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 (calculated as the excess of total assets over total liabilities
adjusted to exclude intangible assets and balances receivable from officers or
affiliates and to exclude the convertible notes) of $15.0 million. As of
September 30, 2003, there was $2.0 million outstanding under this credit
facility, the maximum amount available to the Company.
On January 4, 2002, the Company received gross proceeds of $1.2 million
under a secured loan, which is payable over 36 months, accrues interest of 8.75%
per annum and is secured by two systems in the Company's demonstration lab.
There was $313,000 outstanding at September 30, 2003.
CONVERTIBLE NOTES AND WARRANTS
On August 15, 2002, the Company raised $7.0 million, net of issuance costs,
by issuing $7.8 million unsecured 7% convertible notes and warrants to purchase
2,761,000 shares of common stock.
- - The convertible notes are convertible into common stock at a price of
$1.42 per share and $525,000 of the notes were subsequently converted into
370,000 shares of common stock. In addition, a $300,000 convertible note
was issued and was subsequently converted into common stock at a price of
$1.25 per share. All convertible notes accrue interest at 7% per annum,
payable semi-annually each February 15 and August 15, in cash or, at the
election of the Company, in registered stock. The remaining convertible
notes are redeemable three years after issuance or may be converted into
4,912,000 shares of common stock prior to the redemption date at the
election of the investors.
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - The warrants were exercisable for 2,641,000 shares of common stock at an
exercise price of $1.42 per share and for 120,000 shares of common stock
at an exercise price of $1.25 per share. Warrants for 600,000 shares of
common stock were previously exercised. In August 2003, all the remaining
warrants under this arrangement were exercised and the Company issued
2,161,000 shares of common stock in exchange for cash proceeds of $3
million.
The Company classified the warrants as equity and allocated a portion of
the proceeds from the convertible notes to the warrants, using the relative fair
value method in accordance with APB No. 14. " Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants". The allocation of proceeds to the
warrants reduced the carrying value of the convertible notes. As a result, the
fair value of the common stock issuable upon conversion of the notes exceeded
the carrying value of the convertible notes, resulting in a beneficial
conversion feature. The value of the beneficial conversion feature is accreted
over the stated term of the convertible notes in accordance with EITF No. 98-5 "
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application
Issue No. 98-5 to Certain Convertible Instruments".
The net cash proceeds from the issuance of the convertible notes and
warrants were recorded as follows (in thousands):
Convertible note $5,560
Detachable warrants 1,312
Beneficial conversion feature 928
-------
Proceeds from convertible notes and warrants 7,800
Other asset, issuance costs (814)
-------
Net proceeds $6,986
=======
The $2.2 million difference between the $5.6 million original carrying
value of the notes and the $7.8 million face value of the notes, representing
the value of the warrant and the beneficial conversion feature, has been
recorded as equity and is accreted as interest expense over the three year term
of the convertible notes, using the effective interest rate method.
The Company incurred issuance costs of approximately $868,000, representing
cash of $814,000 and warrant with a fair value of $54,000. The warrants to
purchase 79,000 shares of common stock at $1.42 per share was subsequently net
exercised for 38,631 shares of common stock.
Issuance costs are included with other assets and are amortized as
interest expense over the stated term of the convertible notes.
The carrying value of the convertible note and deferred issuance costs at
September 30, 2003 is calculated as follows (in thousands):
10
Notes to Condensed Consolidated Financial Statements (Unaudited)
Convertible Other Asset,
Note Issuance Costs
------------- ---------------
Balance at issuance, August 15, 2002 $ 5,560 ($868)
Conversions (675) -
Accretion and amortization 416 104
------------- ---------------
Balance at December 31, 2002 5,301 (764)
Conversions (150) -
Accretion and amortization 496 216
------------- ---------------
Balance at September 30, 2003 $ 5,647 ($548)
============= ===============
The Company recorded interest costs related to the convertible notes and
warrants of $350,000 and $1.1 million during the three and nine months ended
September 30, 2003. Interest cost includes coupon interest of $122,000 and
$371,000 during the three and nine months ended September 30, 2003.
In the event of a change of control of the Company, the note holders may
elect to receive repayment of the notes at a premium of 10% over the face value
of the notes.
Inventories
Inventories comprise the following (in thousands):
September 30, December 31,
2003 2002
-------------- -------------
Raw materials and purchased parts $ 4,503 $ 4,493
Work in process 2,114 3,417
Finished goods 498 175
Inventory at customers' locations 1,890 3,320
-------------- -------------
$ 9,005 $ 11,405
============== =============
Inventory at customers' locations represent the cost of systems shipped to
customers for which we have not recognized revenue and for which we are awaiting
customer acceptance.
Accrued Expenses
Accrued expenses comprise the following (in thousands):
September 30, December 31,
2003 2002
-------------- -------------
System warranty $ 1,586 $ 970
Accrued compensation, commissions and related items 861 509
Federal , state and foreign taxes 388 751
Accrued legal expenses 22 129
Accrued rent 312 162
Other 688 543
-------------- -------------
$ 3,857 $ 3,064
============== =============
11
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company generally provides one-year labor and two-year material
warranty on its products. Warranty expenses are accrued at the time that revenue
is recognized from the sale of products. At present, based upon historical
experience, the Company accrues material warranty equal to 2% and 5% of shipment
value for its 200mm and 300mm products, respectively, and labor warranty equal
to $20,000 per system for both its 200mm and 300mm products. At the end of every
quarter, the Company reviews its actual spending on warranty and reassesses if
its accrual is adequate to cover warranty expenses on the systems in the field
which are still under warranty. Differences between the required accrual and
recorded accrual are charged or credited to warranty expense for the period.
Changes in the warranty accrual during the three and nine months ended
September 30, 2003 were as follows (in thousands):
Three Months Ended
September 30, 2003
--------------------
Balance, June 30, 2003 $ 1,564
Accrual for warranty liability for revenues recognized in the period 545
Settlements made (523)
--------------------
Balance, September 30, 2003 $ 1,586
--------------------
Nine Months Ended
September 30, 2003
--------------------
Balance, December 31, 2002 $ 970
Accrual for warranty liability for revenues recognized in the period 1,611
Settlements made (995)
--------------------
Balance, September 30, 2003 $ 1,586
--------------------
12
Notes to Condensed Consolidated Financial Statements (Unaudited)
Common Stock and Warrants
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 aggregate proceeds of
approximately $7.9 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 of September 30, 2003, all these warrants were exercisable and
outstanding.
In August 2002, the Company completed a $7.8 million financing in a private
placement of subordinated notes convertible into common stock and warrants
convertible into or exercisable for common stock. Refer to the Convertible
Notes and Warrants footnote for further information.
Related Party Transactions
Mario M. Rosati, a Director of the Company is also a member of the law firm
of Wilson Sonsini Goodrich & Rosati, the general counsel of the Company. During
the nine months ended September 30, 2003 and 2002, the Company paid $412,000 and
$1,455,000 respectively, to Wilson Sonsini Goodrich & Rosati. At September 30,
2003, the Company owed approximately $44,000 to Wilson Sonsini Goodrich &
Rosati.
Comprehensive Loss
The following are the components of comprehensive loss (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(2,837) $(1,575) $(3,787) $(8,936)
Change in foreign currency translation adjustment. . . 128 (57) 151 124
------- ------- -------- --------
Comprehensive loss. . . . . . . . . . . . . . . . $(2,709) $(1,632) $(3,636) $(8,812)
======= ======= ======= ========
The components of accumulated other comprehensive loss is as follows (in
thousands):
September 30 December 31
2003 2002
-------------- -------------
Cumulative translation adjustment $ (1,982) $ (2,133)
============= =============
13
Notes to Condensed Consolidated Financial Statements (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 ASMA 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 ASMA 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 ASMA 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 ASMA's
amended complaint and counterclaimed against ASMA for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. On August
15, 2002, the Court issued a claim construction order regarding the '590, '365,
and 598' Patents. A claim construction hearing regarding the '165 Patent was
held on September 26, 2002, and the Court issued a claim construction ruling
regarding this patent on November 13, 2002. On September 23, 2002 Genus filed
motions for summary judgment on noninfringement regarding the '590 and '365
Patents. On November 20, 2002, the Court granted the Genus motion for summary
judgment on noninfringement of the '365 Patent. On January 10, 2003, the Court
granted Genus' motion for summary judgment on the '590 Patent.
On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement").
Under the terms of the Settlement, Genus gained a royalty-free license to each
of the patents ASMI asserted in the litigation, including both ALD patents as
well as Patent '165. By specific agreement of the parties, these licenses are
applicable to Genus' successors and affiliates. Genus has likewise obtained a
covenant from ASMI that it will not sue Genus for patent infringement or
antitrust violations for the next five years.
In return, Genus has granted ASMI and its successors and affiliates a
royalty-free license to the patent Genus asserted in the litigation, Patent
'568, and has agreed to dismiss its antitrust claims against ASMI. Genus has
also agreed not to sue ASMI for patent infringement or antitrust violations for
the next five years.
No payments have been made by either Genus or ASMI in exchange for these
licenses and the covenant not to sue. However, under the terms of the
Settlement, ASMI has the right to pursue an appeal of the District Court's
judgments of non-infringement regarding the ALD patents. The agreement specifies
that if the Federal Circuit vacates either of the existing judgments related to
the ALD patents based on a change in the District Court's claim construction,
Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents
it has been granted under the agreement.
14
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21(EITF 00-21), Multiple-Deliverable Revenue Arrangements. EITF 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both which are
to be delivered separately in a bundled sales arrangement should be accounted
for separately because they are "separate units of accounting." The guidance can
affect the timing of revenue recognition for such arrangements, even though it
does not change rules governing the timing or patterns of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal periods beginning after June 15,
2003, with early adoption permitted. Additionally, companies will be permitted
to apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with Accounting
Principles Board Opinion No. 20, Accounting Changes. The Company adopted EITF
00-21 during the third quarter of 2003 and the adoption did not result in any
material impact on our financial position, cash flows or results of operations.
In May 2003, the EITF reached a consensus on Issue 03-05 (EITF 03-05),
Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software. EITF 03-05 provides
guidance on whether non-software deliverables included in arrangements that
contain more-than-incidental software are included within the scope of SOP 97-2.
This issue does not address the allocation of the overall arrangement fee to the
software and the non-software elements of the arrangement. This issue does not
address the determination of whether the software is more than incidental but
assumes that an arrangement includes software that is more than incidental to
the products or services as a whole. The provisions of EITF 03-05 applies to new
revenue arrangements entered into after the beginning of an entity's reporting
period beginning after August 13, 2003. The Company believes the adoption of
this standard will have no material effect on our consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting of derivative instruments and
hedging activities under SFAS No. 133. The amendments pertain to decisions
made: (i) as part of the Derivatives Implementation Group process that require
amendment to SFAS 133, (ii) in connection with other FASB projects dealing with
financial instruments, and (iii) in connection with the implementation issues
raised related to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
designated hedging relationships after June 30, 2003. SFAS 149 will be applied
prospectively. The Company adopted SFAS 149 during the third quarter of 2003 and
the adoption did not result in any material impact on our financial position,
cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
further requires that an issuer classify as a liability (or an asset in some
circumstances) financial instruments that fall within its scope because that
financial instrument embodies an obligation of the issuer. Many of such
instruments were previously classified as equity. The statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatory redeemable financial instruments as
they relate to minority interest in consolidated finite-lived entities. The
Statement is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance of
the date of the Statement and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. The Company adopted SFAS 150
during the third quarter of 2003 and the adoption did not result in any material
impact on our financial position, cash flows or results of operations.
15
Notes to Condensed Consolidated Financial Statements (Unaudited)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied to the first
reporting period ending after December 15, 2003. The Company believes that the
adoption of this standard will have no material effect on our consolidated
financial statements.
Subsequent Events
On November 7, 2003, the Company completed a private placement of approximately
6.4 million shares of its common stock at a per share price of $5.25. The
offering resulted in gross proceeds to the company of approximately $33.6
million, before costs related to the private placement. The purchase price for
the shares represented approximately a 5 percent discount to the average closing
price for 10 days prior to the close on November 7, 2003. No warrants were
issued in this transaction.
The company stated that it expects to use the net proceeds of the offering for
working capital and general corporate purposes. Halpern Capital, Inc. acted as
the lead placement agent to Genus for this private placement.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain information contained in this Quarterly Report on Form 10-Q is
forward- looking in nature. All statements included in this Quarterly Report on
Form 10- Q or made by management of Genus, Inc., other than statements of
historical fact, are forward-looking statements. Examples of forward-looking
statements include statements regarding the Company's future financial results,
operating results, business strategies, projected costs, products, competitive
positions and plans and objectives of management for future operations. These
forward-looking statements are based on management's estimates and projections
as of the date hereof and include the assumptions that underlie such statements.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "should", "would," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and uncertainties and other
important factors, including those discussed in the section below entitled "Risk
Factors." Other risks and uncertainties are disclosed in the Company's prior SEC
filings, including its Annual Report on Form 10-K for the fiscal year ended
December 31, 2002. These and many other factors could affect the Company's
future financial and operating results, and could cause actual results to differ
materially from expectations based on forward-looking statements made in this
document or elsewhere by the Company or on its behalf.
CRITICAL ACCOUNTING POLICIES
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and require management to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements and related
footnotes. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. The significant accounting
policies which the Company believes are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
Revenue recognition
The Company derives revenue from the sale and installation of semiconductor
manufacturing systems and from engineering services and the sale of spare parts
to support such systems.
Equipment selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. Effective January 1, 2000, the Company did not have verifiable objective
evidence of the fair value of installation services. The Company generally
defers recognition of revenue from equipment sales until installation is
complete and the product is accepted by the customer. In the third quarter of
2002, the Company established verifiable objective evidence of fair value of
installation services, one of the requirements for Genus to recognize revenue
for multiple-element arrangements prior to completion of installation services.
Accordingly, if a product delivered to a customer has met defined customer
acceptance experience levels with both the customer and the specific type of
equipment, then the Company recognizes equipment revenue upon shipment and
transfer of title. A portion of revenue associated with undelivered elements
such as installation and on-site support related tasks is recognized for
installation when the installation is completed and the customer accepts the
product and for on-site support as the support service is provided. For
products that have not been demonstrated to meet product specifications for the
customer prior to shipment, revenue is recognized when installation is complete
and the customer accepts the product. Revenues can fluctuate significantly as a
result of the timing of customer acceptances and the applicability of multiple
element accounting to products shipped in any particular period. At September
30, 2003 and 2002, the Company had deferred revenue of $2.6 million and $2.9
million, respectively.
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
Accrual for warranty expenses
The Company generally provides one-year labor and two-year material warranty on
its products. Warranty expenses are accrued at the time that revenue is
recognized from the sale of products. At present, based upon historical
experience, the Company accrues material warranty equal to 2% and 5% of shipment
value for its 200mm and 300mm products, respectively, and labor warranty equal
to $20,000 per system for both its 200mm and 300mm products. At the end of every
quarter, the Company reviews its actual
17
spending on warranty and reassesses if its accrual is adequate to cover warranty
expenses on the systems in the field which are still under warranty. Differences
between the required accrual and recorded accrual are charged or credited to
warranty expenses for the period. At September 30, 2003 and 2002, the Company
had accrued $1,586,000 and $878,000, respectively, for material and labor
warranty obligations. Actual results could differ from estimates. In the
unlikely event that a problem is identified that would result in the need to
replace components on a large scale, we would experience significantly higher
expenses and our results of operations and financial condition could be
materially and adversely effected.
Valuation of Inventories
Inventories are recorded at the lower of standard cost, which approximates
actual cost on a first-in-first-out basis, or market value. We write down
inventories to net realizable value based on forecasted demand and market
conditions. Raw material and purchased parts include spare parts inventory for
systems and was $4.5 million at September 30, 2003 and December 31, 2002. The
forecasted demand for spare parts takes into account the Company's obligations
to support systems for periods that are as long as five years.
Actual demand and market conditions may be different from those projected by the
Company. This could have a material effect on operating results and financial
position. Net inventory write-downs during the nine months ended September 30,
2003 and 2002, were $431,000 and $901,000, respectively.
Valuation of research and demonstration equipment
Equipment includes research and demonstration equipment, which is located in our
Applications Laboratory and is used to demonstrate to our customers the
capabilities of our equipment to process wafers and deposit films. The gross
value of demonstration equipment is based on the cost of materials and actual
factory labor and overhead expenses incurred in manufacturing the equipment.
Costs related to refurbishing or maintaining existing demonstration equipment,
which do not add to the capabilities or useful life of the equipment, are not
capitalized and are expensed as incurred. Demonstration equipment is stated at
cost and depreciated over a period of five years. If the Company sells the
equipment, it may experience gross margins that are different from the gross
margins achieved on equipment manufactured specifically for customers.
RESULTS OF OPERATIONS
- -----------------------
NET SALES. Net sales for the three and nine months ended September 30, 2003
were $ 9.1 million and $41.5 million, when compared to net sales of $12.2
million and $28.5 million for the corresponding periods in 2002. Revenues during
the third quarter of 2003 included two 300mm systems, one ALD and one CVD
system. Revenue during the third quarter of 2002 included one 200mm CVD systems,
two 200mm ALD system and one 200mm ALD upgrade system revenue. During the nine
months ended September 30, 2003, twelve systems were recognized as revenue
compared to eight systems and an upgrade recognized as revenue in the first nine
months of 2002.
Based on the slow recovery of the semiconductor capital equipment market
and the uncertainty on the timing of the orders, Genus has maintained its
booking guidance to the $45 million to $60 million range and full year revenue
guidance in the $50 million to $60 million range.
18
COST OF GOODS SOLD. Cost of goods sold for the three and nine months ended
September 30, 2003 were $7.0 million and $29.4 million, compared to $7.8 million
and $20.5 million for the same periods in 2002. Gross profit as a percentage of
revenues was 23% for the third quarter of 2003 compared to 36% in the third
quarter of 2002. Gross profit as a percentage of revenues was 29% for the nine
months ended September 30, 2003 compared to 28% for the corresponding period in
2002. The decrease in gross margin as a percentage of revenues during the third
quarter of 2003 as compared to third quarter of 2002 is primarily due to lower
revenues resulting in lower production volumes and decreased manufacturing
efficiencies. The adverse mix effect during the third quarter of 2003 as
compared to third quarter of 2002 was a result of our recognizing a higher
portion of 300mm systems during the third quarter of 2003, which currently has a
lower margin than other systems. The increase in gross margin during the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002 was primarily due to higher revenues, resulting in higher production
volumes and increased manufacturing efficiencies.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the
quarter ended September 30, 2003 were $1.7 million, compared with $2.1 million
or 18% of net sales for the both periods in 2003 and 2002. For the nine months
ended September 30, 2003, research and development expenses were $5.8 million or
14% of sales, compared to $6.1 million or 21% of net sales for the nine months
ended September 30, 2002.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses were $2.8 million and $8.8 million for the three and nine months
ended September 30, 2003 compared to $3.5 million and $10.2 million in the
corresponding periods in 2002. As a percent of net sales, selling, general and
administrative expenses were 31% and 21% for the three and nine months ended
September 30, 2003 compared to 29% and 36% for the corresponding periods in
2002. The dollar decreases in selling, general and administrative expenses in
the nine month period ended September 30, 2003 compared with corresponding
period in 2002 was primarily due to lower legal costs, partially offset by
increased in facilities expenses and severance costs.
INTEREST EXPENSE. Interest expense for the three and nine months ended
September 30, 2003 was $411,000 and $1,318,000, respectively, compared to
interest expense of $160,000 and $278,000 for the corresponding periods in 2002.
The increase in interest expense during the three and nine months ended
September 30, 2003, compared with the corresponding period in 2002 was primarily
due to an increase in interest expense and accretion and amortization of
discount and issuance costs related to the convertible notes that were issued
during the third quarter of 2002.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the three and
nine months ended September 30, 2003 were $35,000 and $84,000 respectively
compared to other income (expense), net of ($46,000) and ($215,000) for the
corresponding periods in 2002.
PROVISION FOR INCOME TAXES. We did not record any provision for income
taxes in the U.S. and Japan for the three and nine months ended September 30,
2003 and 2002, as we recorded losses in these entities. We provide for a full
valuation allowance against the tax benefit associated with these losses. We
recorded $56,000 in income tax expense for our South Korean subsidiary for the
three and nine months ended September 30, 2003, as compared to $71,000 and
$159,000 recorded for the corresponding periods in 2002.
19
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, our cash and cash equivalents were $10.5 million, a
$1.0 million decrease over cash and cash equivalents of $11.5 million held as of
December 31, 2002 .The reduction in cash and cash equivalents at September 30,
2003 as compared with the cash and cash equivalents balance at December 31, 2002
primarily resulted from losses generated in the nine month period ended
September 30, 2003. Cash generated by operating activities totaled $2.4 million
for the nine months ended September 30, 2003, and consisted primarily of net
loss of $3.8 million, decreases in accounts payable of $3.3 million, partially
offset by decrease in accounts receivable of $4.2 million, decrease in
inventories of $1.8 million, increase in accrued expenses and customer advances
of $712,000, decrease in other assets of $757,000, and depreciation of $2.4
million.
Financing activities used cash of $1.2 of million for the nine months ended
September 30, 2003, and primarily consisted payments of debt of $5.8 million,
net, partially offset from proceeds from issuance of common stock of $4.8
million.
We made capital expenditures of $2.4 million for the nine months ended
September 30, 2003. These expenditures were primarily related to purchase of
property, plant and equipment.
Our primary source of funds at September 30, 2003 consisted of $10.5
million in cash and cash equivalents, $3.3 million of accounts receivable, and
our credit line of up to $15 million with Silicon Valley Bank, of which $2.0
million, the maximum available amount, was outstanding at September 30, 2003.
A summary of our contractual obligations as of September 30, 2003 is as
follows (in thousands):
Less than After
Total Revolving 1 year 1-3 years 4-5 years 5 years
------- ---------- ---------- --------- ---------- ---------
Silicon Valley Bank $ 1,969 $ 1,969 $ - $ - $ - $ -
Citicapital 313 N/A 266 47 - -
Convertible Notes* 6,975 N/A - 6,975 - -
Operating Leases 16,866 N/A 1,628 4,946 3,768 6,524
------- ---------- ---------- --------- ---------- ---------
$26,123 $ 1,969 $ 1,894 $ 11,968 $ 3,768 $ 6,524
====== ========== ========== ========== ========== ========
<FN>
*In the event of a change of control in the Company, the note holder may elect to
receive repayment of the notes at a premium of 10%.
The Company has an accumulated deficit of $111.6 million and a net
loss of $3.8 million during the nine months ended September 30, 2003. The
Company is in the process of executing its business strategy and has plans to
eventually achieve profitable operations on an ongoing basis. Management
believes that existing cash, cash generated by operations, and available
financing will be sufficient to meet projected working capital, capital
expenditure and other cash requirements for the next twelve months. Management
cannot provide assurances that its cash and its future cash flows from
operations alone will be sufficient to meet operating requirements and allow the
Company to service debt and repay any underlying indebtedness at maturity. If
the Company does not achieve anticipated cash flows, we may not be able to meet
planned product release schedules and forecast sales objectives. In such event
the Company will require additional financing to fund on-going and planned
operations and may need to implement expense reduction measures. In the event
the Company needs additional financing, there is no assurance that funds would
be available to the Company or, if available, under terms that would be
acceptable to the Company.
20
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21(EITF 00-21), Multiple-Deliverable Revenue Arrangements. EITF 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both which are
to be delivered separately in a bundled sales arrangement should be accounted
for separately because they are "separate units of accounting." The guidance can
affect the timing of revenue recognition for such arrangements, even though it
does not change rules governing the timing or patterns of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal periods beginning after June 15,
2003, with early adoption permitted. Additionally, companies will be permitted
to apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with Accounting
Principles Board Opinion No. 20, Accounting Changes. The Company adopted EITF
00-21 during the third quarter of 2003 and the adoption did not result in any
material impact on our financial position, cash flows or results of operations.
In May 2003, the EITF reached a consensus on Issue 03-05 (EITF 03-05),
Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables
in Arrangement Containing More-Than-Incidental Software. EITF 03-05 provides
guidance on whether non-software deliverables included in arrangements that
contain more-than-incidental software are included within the scope of SOP 97-2.
This issue does not address the allocation of the overall arrangement fee to the
software and the non-software elements of the arrangement. This issue does not
address the determination of whether the software is more than incidental but
assumes that an arrangement includes software that is more than incidental to
the products or services as a whole. The provisions of EITF 03-05 applies to new
revenue arrangements entered into after the beginning of an entity's reporting
period beginning after August 13, 2003. The Company believes the adoption of
this standard will have no material effect on our consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting of derivative instruments and hedging
activities under SFAS No. 133. The amendments pertain to decisions made: (i) as
part of the Derivatives Implementation Group process that require amendment to
SFAS 133, (ii) in connection with other FASB projects dealing with financial
instruments, and (iii) in connection with the implementation issues raised
related to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
designated hedging relationships after June 30, 2003. SFAS 149 will be applied
prospectively. The Company adopted SFAS 149 during the third quarter of 2003 and
the adoption did not result in any material impact on our financial position,
cash flows or results of operations.
21
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
further requires that an issuer classify as a liability (or an asset in some
circumstances) financial instruments that fall within its scope because that
financial instrument embodies an obligation of the issuer. Many of such
instruments were previously classified as equity. The statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments as they relate
to minority interest in consolidated finite-lived entities. The Statement is to
be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance of the date of
the Statement and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The Company adopted SFAS 150 during the
third quarter of 2003 and the adoption did not result in any material impact on
our financial position, cash flows or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied to the first
reporting period ending after December 15, 2003. The Company believes that the
adoption of this standard will have no material effect on our consolidated
financial statements.
RISK FACTORS
Sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations 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 the Risk
Factors set forth below.
WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO
ACHIEVE OR SUSTAIN PROFITABILITY
22
We have experienced losses of $11.6 million, $6.7 million and $9.7 million
for 2002, 2001 and 2000, respectively.
While we believe our cash position, anticipated cash from operations, and
our available credit facilities are sufficient for the next twelve months, we
cannot provide assurances that future cash flows from operations will be
sufficient to meet operating requirements and allow us to service debt and repay
any underlying indebtedness at maturity. If we do not achieve the cash flows
that we anticipate, we may not be able to meet our planned product release
schedules and our forecast sales objectives. In such event we will require
additional financing to fund on-going and planned operations and may need to
implement further expense reduction measures, including, but not limited to, the
sale of assets, the consolidation of operations, workforce reductions, and/or
the delay, cancellation or reduction of certain product development, marketing,
licensing, or other operational programs. Some of these measures would require
third-party consents or approvals, including that of our bank, and we cannot
provide assurances that these consents or approvals will be obtained. There can
be no assurance that we will be able to make additional financing arrangements
on satisfactory terms, if at all, and our operations and liquidity would be
materially adversely affected.
We cannot assure our shareholders and investors that we will achieve
profitability in fiscal 2003 and beyond, nor can we provide assurances that we
will achieve the sales necessary to avoid further expense reductions in the
future.
..
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
In nine month period ended September 30, 2003, Samsung Electronics Company,
Ltd., Seagate Technologies, Inc. and IBM, accounted for 74%, 9%, and 9%, of
revenues, respectively. In the nine month period ended September 30, 2002,
Samsung Electronics Company, Ltd., and Seagate accounted for 51%, and 23% of our
revenues, respectively.
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
None of our customers has entered into a long-term agreement with us
requiring them to purchase our products. 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 could 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 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.
23
We rely on third parties to manufacture the components used in our
products. Some of our suppliers are sole or limited source. In addition, some
of these suppliers are relatively small-undercapitalized companies that may have
difficulties in raising sufficient funding to continue operations. There are
risks associated with the use of independent suppliers, including unavailability
of or delays in obtaining adequate supplies of components and potentially
reduced control of quality, production costs and timing of delivery. We may
experience difficulty identifying alternative sources of supply for certain
components used in our products. In addition, the use of alternate components
may require design alterations, which may delay installation and increase
product costs. These components may not be available in the quantities
required, on reasonable terms, or at all. Financial or other difficulties faced
by our suppliers or significant changes in demand for these components or
materials could limit their availability. Any failures by these third parties
to adequately perform may impair our ability to offer our existing products,
delay the submission of products for regulatory approval, and impair our ability
to deliver products on a timely basis or otherwise impair our competitive
position. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. Our
business, results of operations and financial condition would be adversely
affected if we were unable to continue to obtain components in the quantity and
quality desired and at the prices we have budgeted.
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 78% of our total net sales for the
nine months ended September 30, 2003. Net sales to our South Korean-based
customers accounted for approximately 73% of total net sales for the nine months
ended September 30, 2003. Export sales accounted for approximately 72%, 93% and
98% of our total net sales in 2002, 2001 and 2000, respectively. Net sales to
our South Korean-based customers accounted for approximately 56%, 73% and 92% of
total net sales in 2002, 2001 and 2000, 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 additional risks, including:
- - unexpected changes in foreign law or regulatory requirements;
- - exchange rate volatility;
- - tariffs and other barriers;
- - political and economic instability;
- - military confrontation;
- - Severe Acute Respiratory Syndrome (SARS);
- - difficulties in accounts receivable collection;
- - extended payment terms;
- - difficulties in managing distributors or representatives;
- - difficulties in staffing our subsidiaries;
- - difficulties in managing foreign 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
increase the cost of our products to our customers and could lead these
customers to delay or defer their purchasing decisions.
24
Wherever currency devaluations occur abroad, our goods become more
expensive for our customers in that country. In addition, difficult economic
conditions may limit capital spending by our customers. These circumstances may
also affect the ability of our customers to meet their payment obligations,
resulting in the cancellations or deferrals of existing orders and the
limitation of additional 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 magnetic thin film heads, flat panel displays,
micro-electromechanical systems and inkjet printers, we are still dependent on
sales to semiconductor manufacturers. The semiconductor industry is cyclical
which impacts 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.
However, the 2001 downturn in the industry marked a corresponding decline in
unit production, as well as price reduction. We expect that our revenues will
continue to be further impacted by the continued downturn in the semiconductor
industry and global economy, which may prevent us from increasing our revenues
and achieving profitability.
OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW PRODUCTS AND MARKET
ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE PRODUCTS
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, or even a delay in our
introduction of new products or enhancements, 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-ten 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 or at all.
25
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 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, and
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 system 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.
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.
26
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.
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 any such 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.
Litigation is time consuming, expensive and its outcome is uncertain. We
may not prevail in any litigation in which we are involved. Should we be found
to infringe any of the patents asserted or any other intellectual property
rights of others, in addition to potential monetary damages and any injunctive
relief granted, we may need either to obtain a license to commercialize our
products or redesign our products so they do not infringe any third party's
intellectual property. If we are 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 products, which would have an immediate and
materially adverse impact on our business and our operating results.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees. 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 employees are at
will.
27
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,
market, or manufacture our products or to 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 our failure to meet delivery commitments or
our service levels could lead to customer dissatisfaction.
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, where our facilities are located, imposes high
environmental standards to businesses operating within the city. Genus 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 NINE 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 United States, Europe, South Korea and
Japan and through nine independent sales representatives and distributors in the
United States, 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
In 2000, we invested significant resources in Japan by establishing a
direct sales organization, Genus-Japan, Inc. To date, we have had limited
success in penetrating in Japanese semiconductor industry. Although we continue
to invest significant resources in our Japan office, 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 our office in
Japan.
28
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 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.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A disaster
could severely damage our ability to deliver our products to our customers. Our
products depend on our ability to maintain and protect our operating equipment
and computer systems, which are primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. 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 WILL DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS
As of September 30, 2003, we have approximately 3,798,000 shares of common
stock underlying warrants, and outstanding employee stock options. Of the stock
options, 1,816,000 shares are exercisable as of September 30, 2003. 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 because there may not be sufficient demand to purchase the
increased number of shares that would be available for sale.
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
On September 7, 2000, the Company's Board of Directors declared a dividend
pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar
earlier plan that had expired on July 3, 2000. The intended purpose of the
Rights Plan is to protect shareholders' rights and to maximize share value in
the event of an unfriendly takeover attempt. As of the record date of October
13, 2000, each
29
share of common stock of Genus, Inc. outstanding was granted one right under the
new plan. Each right is exercisable only under certain circumstances and upon
the occurrence of certain events and permits the holder to purchase from the
Company one one-thousandth (0.001) of a share of Series C Participating
Preferred Stock at an initial exercise price of forty dollars ($40.00) per one
one-thousandth share. The 50,000 shares of Series C preferred stock authorized
in connection with the Rights Plan will be used for the exercise of any
preferred shares purchase rights in the event that any person or group (the
Acquiring Person) acquires beneficial ownership of 15% or more of the
outstanding common stock. In such event, the shareholders (other than the
Acquiring Person) would receive common stock of the Company having a market
value of twice the exercise price. Subject to certain restrictions, the Company
may redeem the rights issued under the Rights Plan for $0.001 per right and may
amend the Rights Plan without the consent of rights holders. The rights will
expire on October 13, 2010, unless redeemed by the Company.
In the event that circumstances trigger the transferability and
exercisability of rights granted in our Rights Plan, 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 and your failure to
exercise your rights under the Rights Plan.
In the event of a change of control of the Company, the convertible note
holders may elect to receive repayment of the notes at a premium of 10% over the
face value of the notes.
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, including those set forth above in "Risk
Factors,", and in documents incorporated into this 10-Q report, 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, including those set forth above in "Risk
Factors," and in documents incorporated into this report, 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.
30
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 and Japan,
are currently denominated in U.S. dollars. The spare parts and service sales of
$7.2 million for nine months ended September 30, 2003 generated by the South
Korean subsidiary are WON denominated and Japanese subsidiary are YEN
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.
We have both fixed rate and floating rate interest obligations. Fixed rate
obligations may result in interest expenses in excess of market rates if
interest rates fall, while floating rate obligations may result in additional
interest costs if interest rates rise. An increase of one percentage point in
interest rates would not materially impact the results of our operations.
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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated,
with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change
in our internal control over the financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
During the fiscal 2002 financial reporting process, management, in
consultation with the Company's independent accountants, identified deficiencies
involving internal controls over inventories, warranties and the Company's
Korean operations which constituted a "Reportable Condition" under standards
established by the American Institute of Certified Public Accountants.
Management believes that these matters have not had any material impact on our
financial statements. Management established a project plan and implemented
processes and controls to address these deficiencies.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Part II, Item 1 is incorporated herein by
reference to that certain disclosure under the caption "Legal Proceedings" in
Part I, Item 1 of this Form 10-Q
ITEM 5. OTHER INFORMATION
On November 7, 2003, the Company completed a private placement of approximately
6.4 million shares of its common stock at a per share price of $5.25. The
offering resulted in gross proceeds to the company of approximately $33.6
million, before costs related to the private placement. The purchase price for
the shares represented approximately a 5 percent discount to the average closing
price for 10 days prior to the close on November 7, 2003. No warrants were
issued in this transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- ---- -----------
2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian
Associates, Inc. and Registrant and exhibits thereto (15)
3.1 Amended and Restated Articles of Incorporation of Registrant as filed
September 6, 1997 (11)
3.2 By-laws of Registrant, as amended (13)
4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between
Registrant and Bank of America, N.T. and S.A., as Rights Agent (4)
4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998,
among the Registrant and the Investors (14)
4.3 Registration Rights Agreement, dated February 2, 1998, among the
Registrant and the Investors (14)
4.4 Certificate of Determination of Rights, Preferences and Privileges of
Series A Convertible Preferred Stock (14)
4.5 Certificate of Determination of Rights, Preferences and Privileges of
Series B Convertible Preferred Stock (17)
4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the
Registrant and the Investors (17)
4.7 Registration Rights Agreement, dated January 17, 2002, as amended, amongst
the Registrant and the Investors (20)
4.8 Securities Purchase Agreement dated July 31, 2002 among the Company and
the Purchasers signatory thereto. (21)
4.9 Resale Registration Rights Agreement dated August 14, 2002 among the
Company and the Purchasers signatory thereto. (21)
4.10 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (21)
10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4 Mulliken
Way, Newburyport, Massachusetts, and amendment and extension of lease,
dated March 17, 1987 (1)
10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at Unit
11A, Melbourn Science Park, Melbourn, Hertz, England (1)
10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10)
10.5 Registrant's 2000 Stock Plan (19)
10.6 Distributor/Representative Agreement, dated August 1, 1984, between
Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.) (1)
10.7 Exclusive Sales and Service Representative Agreement, dated October 1,
1989, between Registrant and AVBA Engineering Ltd. (3)
32
10.8 Exclusive Sales and Service Representative Agreement, dated as of April 1,
1990, between Registrant and Indosale PVT Ltd. (3)
10.9 License Agreement, dated November 23, 1987, between Registrant and Eaton
Corporation (1)
10.10 Exclusive Sales and Service Representative Agreement, dated May 1, 1989,
between Registrant and Spirox Taiwan, Ltd. (2)
10.11 Lease, dated April 7, 1992, between Registrant and The John A. and Susan
R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive,
Sunnyvale, California (6)
10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.13 License and Distribution Agreement, dated September 8, 1992, between the
Registrant and Sumitomo Mutual Industries Ltd. (8)
10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot
62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9)
10.15 International Distributor Agreement, dated July 18, 1997, between
Registrant and Macrotron Systems GmbH (12)
10.16 Credit Agreement, dated August 18, 1997, between Registrant and Sumitomo
Bank of California (12)
10.18 Settlement Agreement and Mutual Release, dated April 20, 1998, between
Registrant and James T. Healy (16)
10.19 Form of Change of Control Severance Agreement (16)
10.20 Settlement Agreement and Mutual Release, dated January 1998, between the
Registrant and John Aldeborgh (18)
10.21 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Mary Bobel (18)
31 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Exchange Act Rule 13a-14(a).
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- -------------------------------
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988,
and amended on September 21, 1988, October 5, 1988, November 3, 1988,
November 10, 1988, and December 15, 1988, which Registration Statement
became effective November 10, 1988.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989,
and amended May 24, 1989, which Registration Statement became effective
May 24, 1989.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1990.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Report on Form 8-K dated September 12, 1992.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 21, 1992.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
33
(10) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(12) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(13) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(14) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated February 12, 1998.
(15) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated April 15, 1998.
(16) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K/A for the year ended December 31, 1997.
(17) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated July 29, 1998.
(18) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1998.
(19) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000.
(20) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated January 25, 2002.
(21) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated August 20, 2002.
(b) Report of Form 8-K
The Company furnished, but did not file, one current report on Form 8-K during
the three months ended September 30, 2003. The report dated July 31, 2003,
contained the Company's press release announcing it's earnings for the three
months ended June 30, 2003.
34
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 13, 2003
GENUS, INC.
/s/ William W.R. Elder
--------------------------
William W.R. Elder, President,
Chief Executive Officer and Chairman
/s/ Shum Mukherjee
--------------------------
Shum Mukherjee
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
35