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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, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___ to ___
Commission file number 0-17139
GENUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-279080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1139 KARLSTAD DRIVE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip code)
(408) 747-7120
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares outstanding at October 31, 2002: 27,740,162
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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, 2002 and September 30, 2001 . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2002 and September 30, 2001 . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . 26
Item 4: Controls & Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART II. OTHER INFORMATION
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2:. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 4:. Submissions of Matters to Vote of Security Holders. . . . . . . . . . . . . . . . . . . . 28
Item 5:. Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 6:. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of Genus, Inc. to differ materially from those expressed or implied by
such forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements,
including any projections of earnings, revenue, synergies, accretion, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations, including the execution of integration and
restructuring plans; any statement concerning proposed new products, services,
developments or industry rankings; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include the performance of contracts by customers
and partners; employee management issues; the challenge of managing asset
levels, including inventory; the difficulty of aligning expense levels with
revenue changes; and other risks that are described herein and that are
otherwise described from time to time in Genus' Securities and Exchange
Commission reports. Genus assumes no obligation and does not intend to update
these forward-looking statements.
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,
2002 2001 2002 2001
----------- ----------- ---------- -----------
Net sales . . . . . . . . . . . . . . . . . . $ 12,153 $ 15,094 $ 28,487 $ 43,062
Costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 7,826 10,300 20,463 27,523
Research and development . . . . . . . . . . 2,127 2,592 6,079 8,838
Selling, general and administrative. . . . . 3,498 2,739 10,229 7,971
----------- ----------- ---------- -----------
Loss from operations . . . . . . . . . . . . . (1,298) (537) (8,284) (1,270)
Other income (expenses), net . . . . . . . . . (206) (207) (493) (127)
----------- ----------- ---------- -----------
Loss before income taxes . . . . . . . . . . . (1,504) (744) (8,777) (1,397)
Provision for income taxes . . . . . . . . . . 71 0 159 69
----------- ----------- ---------- -----------
Net loss . . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466)
=========== =========== ========== ===========
Net loss per share:
Basic. . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07)
Diluted. . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07)
Shares used in per share calculation-basic . . 27,693 22,268 26,572 20,793
=========== =========== ========== ===========
Shares used in per share calculation-diluted . 27,693 22,268 26,572 20,793
=========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 1,
2002 2001
--------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 9,136 $ 3,043
Accounts receivable (net of allowance for doubtful
accounts of $69 in 2002 and $69 in 2001). . . . . . . . 5,937 4,262
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 8,137 12,648
Other current assets. . . . . . . . . . . . . . . . . . . . 980 1,221
--------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . 24,190 21,174
Equipment, furniture and fixtures, net. . . . . . . . . . . 12,159 14,573
Other assets, net . . . . . . . . . . . . . . . . . . . . . 1,161 155
--------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 37,510 $ 35,902
=============== =============
LIABILITIES
Current Liabilities:
Short-term bank borrowings. . . . . . . . . . . . . . . . . $ 4,239 $ 4,481
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 5,220 8,352
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . 3,640 3,553
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 2,938 7,388
Long term liabilities, current portion. . . . . . . . . . . 313 0
--------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 16,350 23,774
Convertible notes . . . . . . . . . . . . . . . . . . . . . 5,639 0
Long term liabilities . . . . . . . . . . . . . . . . . . . 320 0
--------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 22,309 23,774
--------------- -------------
Contingencies (see note)
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000 shares;
Issued and outstanding 27,740 shares at September 30, 2002
and 22,365 shares at December 31, 2001. . . . . . . . . . 122,638 110,753
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (105,125) (96,189)
Note receivable from shareholder. . . . . . . . . . . . . . (151) (151)
Accumulated other comprehensive loss. . . . . . . . . . . . (2,161) (2,285)
--------------- -------------
Total shareholders' equity. . . . . . . . . . . . . . . . 15,201 12,128
--------------- -------------
Total liabilities and shareholders' equity. . . . . . . . $ 37,510 $ 35,902
=============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------- ----------
Cash flows from operating activities: . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (8,936) $ (1,466)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . 2,816 2,004
Amortization and accretion of non-cash interest on
convertible notes . . . . . . . . . . . . . . . . . . 115 0
Stock-based compensation. . . . . . . . . . . . . . . . 0 44
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (1,675) 3,438
Inventories . . . . . . . . . . . . . . . . . . . . . 4,511 9,893
Other assets. . . . . . . . . . . . . . . . . . . . . 67 (149)
Accounts payable. . . . . . . . . . . . . . . . . . . (3,132) 457
Accrued expenses. . . . . . . . . . . . . . . . . . . 87 (249)
Deferred revenue. . . . . . . . . . . . . . . . . . . (4,450) (14,172)
----------- ----------
Net cash used in operating activities . . . . . . . . (10,597) (200)
----------- ----------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures. . . . . (402) (7,737)
----------- ----------
Net cash used in investing activities . . . . . . . . (402) (7,737)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . . 9,591 7,530
Proceeds from short-term bank borrowings. . . . . . . . . 0 5,567
Payments for short-term bank borrowings . . . . . . . . . (242) (2,719)
Proceeds from issuance of convertible notes and warrants,
net of cash issuance costs of $ 814 . . . . . . . . . . 6,986 0
Proceeds from debt. . . . . . . . . . . . . . . . . . . . 1,200 0
Payments for debt . . . . . . . . . . . . . . . . . . . . (567) 0
----------- ----------
Net cash provided by financing activities . . . . . . 16,968 10,378
----------- ----------
Effect of exchange rate changes on cash . . . . . . . . . . 124 (63)
----------- ----------
Net increase in cash and cash equivalents . . . . . . . . . 6,093 2,378
Cash and cash equivalents, beginning of period. . . . . . . 3,043 3,136
----------- ----------
Cash and cash equivalents, end of period. . . . . . . . . . $ 9,136 $ 5,514
=========== ==========
Supplemental cash flow information
Cash paid during the period for:. . . . . . . . . . . . .
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 198 $ 287
Income taxes. . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 473
Non cash transactions for the period
Warrants issued in connection with convertible note . . . . $ 54 0
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with SEC requirements for interim financial statements.
These financial statements should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in the Company's
2001 Annual Report on Form 10-K.
The information furnished reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for the fair statement of financial position, results of operations and cash
flows for the interim periods. The results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the full
year.
LIQUIDITY
The Company is in the process of executing its business strategy and has
plans to eventually achieve profitable operations. During August 2002, the
Company raised an additional $7 million, net of issuance costs, through the sale
of subordinated convertible notes and warrants. Management believes that the
cash generated from this transaction, together with cash resources and borrowing
capacity, will be sufficient to meet projected working capital, capital
expenditures and other cash requirements for the next twelve months. However,
there can be no assurance the currently available funds will meet the Company's
cash requirements in the future, or, that any required additional funding will
be available on terms attractive to the Company or at all, which could have a
material adverse effect on its business, financial condition and results of
operations. Any additional equity financing may be dilutive to shareholders,
and any additional debt financing, if available, may involve restrictive
covenants.
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,
2002 2001 2002 2001
---------- ------------ ----------- ----------
Basic:
Net loss . . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466)
========== ============ =========== ==========
Weighted average common shares outstanding 27,693 22,268 26,572 20,793
========== ============ =========== ==========
Basic net loss per share . . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07)
========== ============ =========== ==========
Diluted:
Net loss . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466)
========== ============ =========== ==========
Weighted average common shares outstanding 27,693 22,268 26,572 20,793
========== ============ =========== ==========
Diluted net loss per share . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07)
========== ============ =========== ==========
6
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
Stock options, warrants and convertible debt shares to purchase
approximately 12,675,000 shares of common stock were outstanding at September
30, 2002, but were not included in the computation of diluted net loss per share
because the Company had a net loss for the three and nine months ended September
30, 2002.
Stock options and warrants to purchase approximately 4,607,000 shares of
common stock were outstanding at September 30, 2001 but were not included in the
computation of diluted net loss per share because the Company had a net loss for
the three and nine months ended September 30, 2001.
REVENUE RECOGNITION.
The Company's selling arrangements generally involve contractual customer
acceptance provisions, and installation of the product occurs after shipment and
transfer of title. As a result, effective January 1, 2000, to comply with the
provisions of Securities and Exchange Commission Staff Accounting Bulletin No.
101, the Company defers recognition of revenue from such equipment sales until
installation is complete and the product is accepted by the customer.
Genus subsequently established verifiable objective evidence of fair value
of installation services, a requirement to recognize revenue for
multiple-element arrangements prior to completion of installation services.
Accordingly, if Genus has met defined customer acceptance experience levels with
both the customer and the specific type of equipment, then Genus recognizes
equipment revenue upon shipment and transfer of title. A portion of revenue
associated with installation-related tasks is recognized when the installation
is completed and the customer accepts the product. 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 product is
accepted by the customer.
Revenue from sale of spare parts and system upgrades are recognized upon
shipment. Revenues related to maintenance and service contracts are recognized
ratably over the duration of the contracts.
BORROWINGS
In December 2001, the Company replaced the $10.0 million line of credit
with Venture Bank with a $10.0 million line of credit from Silicon Valley Bank.
The Silicon Valley Bank agreement includes a domestic revolving line of credit
of $7.5 million, based on domestic eligible receivables and a foreign line of
credit of $7.5 million, financed by EXIM bank, based on foreign eligible
receivables and inventory. The initial term of the loan was 12 months ending
December 20, 2002. Total availability under both lines at any given point in
time is limited to $10.0 million. The interest rate for borrowings under both
the domestic and foreign lines is prime plus 1.75% per annum calculated on the
basis of a 360-day year. The loan agreement is collateralized by a first
priority perfected security interest in the Company's assets and has a covenant
requiring the Company to maintain a minimum tangible net worth of $12.0 million
plus 50% of consideration for subsequent equity issuances and 50% of net income
of future quarters. The minimum tangible net worth requirement is reduced by
any losses in a subsequent quarter, but will not be reduced to less than $12.0
million.
On March 27, 2002, we amended our line of credit with Silicon Valley Bank
to increase the funds available under both lines of credit to $15.0 million, to
extend the initial term of the loan to 15 months ending March 19, 2003 and to
reset the covenant to $12.0 million plus 50% of consideration for equity and
subordinated debt issuances subsequent to March 8, 2002. In July 2002, the term
of the credit was extended to June 30, 2003. As of September 30, 2002, there
was $4.2 million outstanding under this credit facility.
7
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
On January 4, 2002, the Company received gross proceeds of $1.2 million
under a secured loan with CitiCapital, a division of Citigroup. The loan is
payable over 36 months, accrues interest of 8.75% per annum and is secured by
two systems in our demonstration lab. As of September 30, 2002, the short-term
portion of this loan was $313,000 and the long-term portion was $320,000.
CONVERTIBLE NOTES AND WARRANTS
On August 15, 2002, the Company raised $7 million, net of issuance costs,
by issuing unsecured 7% convertible notes and warrants to purchase 2,761,000
shares of common stock.
- $7.5 million convertible notes are convertible at a price of $1.42 per
share of common stock and $300,000 convertible note is convertible at
a price of $1.25 per share of common stock. 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 convertible notes are redeemable three years
after issuance or may be converted into 5,521,000 shares of common
stock prior to the redemption date at the election of the investors.
- Warrants to purchase 2,641,000 shares of common stock have an exercise
price of $1.42 per share of common stock and warrants to purchase
120,000 shares of common stock have an exercise price of $1.25 per
share of common stock. All warrants are currently exercisable, expire
on August 15, 2006 and are callable by the Company after one year if
the common stock price exceeds 200% of the respective exercise prices.
The Company determined the fair value of the warrants to be
$1,312,000, using the Black Scholes option pricing model with a risk
free intrest rate of 4.4 percent, volatility of 75%, a term of three
years and no dividend yield.
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. 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 exceeds the
carrying value of the convertible notes, resulting in a beneficial conversion
feature. The beneficial conversion feature is accreted over the stated term of
the convertible notes in accordance with EITF No. 00-27.
The gross 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
------
$7,800
======
The $2.2 million difference between the $5.6 million carrying value of the
notes and the $7.8 million face value of the notes, representing the value of
the warrants and the beneficial conversion feature, has been recorded as equity
and the corresponding debt discount will be accreted as interest expense over
the three year term of the convertible notes, using the effective interest rate
method.
8
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
The Company incurred issuance costs of approximately $868,000, representing
cash obligations of $814,000 and the Black Scholes value of $54,000 of a warrant
to purchase 79,000 shares of common stock at $1.42 per share issued in
connection with the transaction. These warrants are currently exercisable and
expire on August 15, 2006. Issuance costs are deferred and amortized as
interest expense over the stated term of the convertible notes.
In connection with the transaction, the Company entered into a registration
rights agreement requiring the Company to file a registration statement and
committing the Company to pay monthly interest of 1.5% of the face value of the
notes if the Company does not maintain the effectiveness of the shelf
registration for the common stock underlying the convertible notes and warrants
throughout the stated term of the convertible notes. The registration statement
on Form S-3 filed with the SEC was declared effective on September 26, 2002.
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,
2002 2001
-------------- -------------
Raw materials and purchased parts $ 4,793 $ 4,446
Work in process 1,049 2,499
Finished goods 339 630
Inventory at customers' locations 1,956 5,073
-------------- -------------
$ 8,137 $ 12,648
============== =============
Inventory at customers' locations represent the cost of a system shipped to
our customer, and related installation costs, for which we are awaiting customer
acceptance.
ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
System warranty . . . . . . . . . . . . $ 878 $ 803
Accrued commissions and incentives. . . 19 330
Accrued compensation and related items. 416 723
Federal, state and foreign income taxes 374 444
Other . . . . . . . . . . . . . . . . . 1,953 1,253
-------------- -------------
$ 3,640 $ 3,553
============== =============
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 net aggregate proceeds
of approximately $7.8 million. The warrants issued to the purchasers in the
private placement are exercisable for $3.23 per share and the warrants have a
five-year term.
9
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
The January 25, 2002 transaction diluted the interests of certain investors
in the May 2001 private placement transaction who had received warrants to
purchase 1,270,891 shares of Company Common Stock (the "May 2001 Warrants"), at
an exercise price of $3.50 per share. As a result of this dilution, and pursuant
to the terms of the May 2001 Warrants, the Company reduced the exercise price
for the May 2001 Warrants from $3.50 per share to $2.19 per share and increased
the underlying shares to an aggregate of 2,031,094 shares. The May 2001
Warrants have now been exercised. May 2001 Warrants representing 610,872 shares
were exercised for cash in an aggregate amount of approximately $1.3 million and
the remaining 1,420,224 May 2001 Warrants were exercised on a cash-less basis.
The Company issued a total of 642,295 shares as a result of the cash-less
exercise of May 2001 Warrants pursuant to the terms therein.
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.
RELATED PARTY TRANSACTIONS
Mario Rosati, a board member of the Company, is also a partner of Wilson
Sonsini Goodrich and Rosati, the general counsel of the Company. During the
three months ended September 30, 2002 and 2001, the Company incurred
approximately $363,000 and $296,000 in legal costs, and paid approximately
$655,000 and $0, respectively, to Wilson Sonsini Goodrich and Rosati. During the
nine months ended September 30, 2002 and 2001, the Company incurred
approximately $547,000 and $609,000 in legal costs, and paid approximately
$913,000 and $57,000, respectively, to Wilson Sonsini Goodrich and Rosati. At
September 30, 2002, the Company owed approximately $387,000 to Wilson Sonsini
Goodrich and Rosati.
COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ------------ --------- ------------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466)
Change in foreign currency translation adjustment (57) (59) 124 (63)
---------- ------------ --------- ------------
Comprehensive loss . . . . . . . . . . . . . . $ (1,632) $ (803) $ (8,812) $ (1,529)
========== ============ ========= ============
The components of accumulated other comprehensive loss is as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Cumulative translation adjustment . . . . . $ (2,161) $ (2,285)
============= ============
10
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
CONTINGENCIES
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ("Genus"). ASMA's complaint alleges that Genus is
directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"),
entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590
(the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to
own or exclusively license. The Complaint seeks monetary and injunctive relief.
Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August
1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI")
for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled
"Method of Selective Etching Native Oxide"; (2) declaratory judgment that the
'365 and '590 Patents are invalid, unenforceable, and not infringed by Genus;
and (3) antitrust violations. An initial Case Management Conference was held on
October 16, 2001. On January 9, 2002, the Court issued an order granting ASM
leave to amend its complaint to add Dr. Sherman as a party and to add a claim
that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the
"165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed
discovery and trial of Genus' antitrust claims until after the trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's
amended complaint and counterclaimed against ASM for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. On
August 15, 2002, the Court issued a claim construction order regarding the '590,
'365, and '568 patents. A claim construction hearing regarding the '165 Patent
was held on September 26, 2002. On September 23, 2002, Genus filed motions for
summary judgment of noninfringement regarding the '590 and '365 patents, and a
hearing on these motions is scheduled for December 17, 2002.
We intend to defend our position vigorously. The outcome of any litigation
is uncertain, however, and we may not prevail. Should we be found to infringe
any of the patents asserted, in addition to potential monetary damages and any
injunctive relief granted, we would need either to obtain a license from ASM to
commercialize our products or redesign our products so they do not infringe any
of these patents. If we are unable to obtain licenses or adopt a non-infringing
product design, we may not be able to proceed with development, manufacture and
sale of our atomic layer products. In this case, our business may not develop as
planned, and our results could materially suffer.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of long-lived assets, except for certain
obligations of leases. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities'" ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
11
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS No.
146 also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. We will adopt SFAS No.
146 during the first quarter ended March 31, 2003. The provisions of EITF No.
94-3 shall continue to apply for an exit activity initiated under an exit plan
that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146.
The effect on adoption of SFAS No. 146 will change on a prospective basis the
timing of when restructuring charges are recorded from a commitment date
approach to when the liability is incurred.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", anticipation" or
"expectation" as well as other statements which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Risk Factors" in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in or incorporated by reference into this report. The
following discussion should be read in conjunction with the Company's Financial
Statements and Notes thereto included in this report.
CRITICAL ACCOUNTING POLICIES
For information related to our revenue recognition and other critical
accounting policies, please refer to the "Critical Accounting Policies" section
of our Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission.
Revenue Recognition
The Company's selling arrangements generally involve contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title. As a result, effective January 1, 2000, to comply with the
provisions of Securities and Exchange Commission Staff Accounting Bulletin No.
101, the Company defers recognition of revenue from such equipment sales until
installation is complete and the product is accepted by the customer.
Genus subsequently established verifiable objective evidence of fair value
of installation services, a requirement to recognize revenue for
multiple-element arrangements prior to completion of installation services.
Accordingly, if Genus has met defined customer acceptance experience levels with
both the customer and the specific type of equipment, then Genus recognizes
equipment revenue upon shipment and transfer of title. A portion of revenue
associated with installation-related tasks is recognized when the installation
is completed and the customer accepts the product. 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 product is
accepted by the customer.
Revenues from sale of spare parts and system upgrades are recognized upon
shipment. Revenues related to maintenance and service contracts are recognized
ratably over the duration of the contracts.
Revenues can fluctuate significantly as a result of the timing of
customers' acceptances. At September 30, 2002 and December 31, 2001, the Company
had deferred revenue of $ 2.9 million and $7.4 million, respectively.
RESULTS OF OPERATIONS
NET SALES. Net sales for the three and nine months ended September 30, 2002
were $ 12.2 million and $28.5 million, which represented decreases of 19% and
34% when compared to net sales of $15.1 million and $43.1 million for the
corresponding periods in 2001. The decreases were attributable to the slow-down
in the technology industry and orders being postponed by our customers. One 200
mm CVD system, two 200 mm ALD systems and one 200 mm ALD upgrade were accepted
in the third quarter of 2002, compared to three ALD systems and two CVD systems
accepted during the third quarter of 2001. During the nine months ended
September 30, 2002, eight systems and an upgrade were accepted compared to ten
systems and several upgrades accepted in the first nine months of 2001.
13
We recorded a low level of bookings in the three months ended September 30,
2002 of approximately $3.0 million. In October 2002, we have received purchase
orders of approximately $10.0 million and letters of intent (subject to
cancellation) for an additional $16.0 million. The purchase orders and letters
of intent received in October include both 200mm and 300mm for CVD and ALD
systems and additional system purchases for Thin Film Head manufacturing.
COST OF GOODS SOLD. Cost of goods sold for the three and nine months ended
September 30, 2002 were $7.8 million and $20.5 million, compared to $10.3
million and $27.5 million for the same periods in 2001. Gross profit as a
percentage of revenues was 35.6% for the third quarter of 2002 compared to 31.8%
in the third quarter of 2001. Gross profit as a percentage of revenues was 28.2%
for the nine months ended September 30, 2002 compared to 36.1% for the
corresponding period in 2001. The higher gross profit percentages in the third
quarter of 2002 were due to higher proportion of ALD systems which have a higher
margin than CVD systems when compared to 2001. The lower gross profit in the
year to date 2002 results was due to lower production volumes that resulted in
lower manufacturing absorption in Q2 2002. The Company expects gross profit
percentage to increase with anticipated increases in production volumes.
Severance costs in cost of sales was approximately $155,000 in the three months
ended September 30, 2002.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the
quarter ended September 30, 2002 were $2.1 million, or 17.5% of net sales,
compared with $2.6 million or 17.2% of net sales for the same period in 2001.
For the nine months ended September 30, 2002, expenses were $6.1 million or
21.3% of sales, compared to $8.8 million or 20.5% of net sales for the first
nine months of 2001. The dollar decrease of research and development expenses in
2002 was due to cost saving measures implemented beginning in the fourth quarter
of 2001, including reduced use of outside consultants. In 2001, the higher
level of research and development expenses was due to the addition of
significant capacity in our demonstration lab, which enables us to complete
customer requests for demos of wafers in 15 to 30 days. Severance costs in R&D
was approximately $129,000 in the three months ended September 30, 2002.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses were $3.5 million and $10.2 million for the three and nine
months ended September 30, 2002 compared to $2.7 million and $8.0 million in the
corresponding periods in 2001. As a percent of net sales, selling, general and
administrative expenses were 28.8% and 35.9% for the three and nine months ended
September 30, 2002 compared to 18.1% and 18.5% for the corresponding periods in
2001. The increase in selling, general and administrative expenses in 2002 was
mainly due to higher legal expenses of approximately $638,000 and $2.2 million
for the three months and nine months ended September 30, 2002, respectively,
related to the lawsuit. In addition, during 2001, the Company received income
from a government SBIR grant that amounted to $400,000 and subleasing revenue of
$312,000 that was offset against 2001 selling, general and administrative
expenses. The Company had minimal government grants and no subleasing income in
2002. Severance costs in SG&A was approximately $156,000 in the three months
ended September 30, 2002.
OTHER INCOME (EXPENSE), NET. Other expenses for the three and nine months
ended September 30, 2002 were $206,000 and $493,000 respectively compared to
other expense of $207,000 and $127,000 for the corresponding periods in 2001.
Other expense in the nine months ended September 30, 2002 includes approximately
$183,000 related to the convertible notes, partially offset by net exchange
gains of $150,000. Cash interest cost on convertible notes was approximately
$68,000 and non-cash interest expense on convertible notes was $115,000 in the
three months ended September 30, 2002. In connection with the convertible note,
the Company expects to incur cash interest expense of approximately $136,000 a
quarter and additional
14
non-cash expense on convertible notes of $159,000 a quarter. These non-cash
expenses relate primarily to the accretion of beneficial conversion feature and
amortization of issuance costs related to the convertible notes.
PROVISION FOR INCOME TAXES. We recorded income tax expenses of $70,000 and
$159,000 for our South Korean subsidiary for the three and nine months ended
September 30, 2002, compared to none and $69,000 recorded for the corresponding
periods in 2001. We did not record any provision for income taxes in the United
States and Japan for the three and nine months ended September 30, 2002 as we
recorded losses in these entities. We provide for a full valuation allowance
against the tax benefit associated with these losses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, our cash and cash equivalents were $9.1 million, an
increase of $6.1 million over cash and cash equivalents of $3.0 million held as
of December 31, 2001. At September 30, 2001, our cash and cash equivalents were
$5.5 million, an increase of $2.4 million over cash and cash equivalents of $3.1
million held as of December 31, 2000. Accounts receivable at September 30, 2002
was $5.9 million, an increase of $1.7 million from $4.3 million as of December
31, 2001. The increase relates to shipment of systems during the third quarter
of 2002. Accounts receivable at September 30, 2001 was $5.0 million, a decrease
of $3.4 million from $8.4 million as of December 31, 2000, as we were able to
collect on most of our overdue receivables. Cash used by operating activities
totaled $10.6 million for the nine months ended September 30, 2002, and
consisted primarily of net loss of $8.9 million, increase in accounts receivable
of $1.7 million, decreases in accounts payable of $3.1 million and a decrease in
deferred revenue of $4.5 million, partially offset by depreciation of $2.8
million and a decrease in inventories of $4.5 million. Inventory reductions were
primarily related to decreases in inventory held at customer sites from $5.1
million to $2.0 million. Cash used by operating activities totaled $200,000 for
the nine months ended September 30, 2001, and consisted primarily of net loss of
$1.5 million and decreases in deferred revenues of $14.2 million, partially
offset by depreciation of $2.0 million and reductions in working capital,
primarily receivables of $3.4 million and inventories of $9.9 million.
Inventory reductions were primarily related to improved supply chain management,
decreases in inventory held at customer sites from $9.5 million to $4.2 million.
We made capital expenditures of $402,000 for the nine months ended
September 30, 2002 compared to $7.7 million for the nine months ended September
30, 2001. These expenditures were primarily related to the continuing program of
upgrading existing equipment in our development and applications laboratories to
meet our most advanced system capabilities and specifications, especially for
our ALD processes. This has improved our product and film development
capabilities, and increased our customer demonstration capabilities, which is
critical in the sales process.
Financing activities provided cash of $17.0 million for the nine months
ended September 30, 2002. In the first nine months of 2002, we received
approximately $9.6 million of proceeds from a sale of common stock and warrants
to purchase common stock. In the third quarter of 2002, we received $7 million,
net of issuance costs, from the sale of subordinated convertible notes and
warrants. Financing activities provided cash of $10.4 million for the nine
months ended September 30, 2001. In May 2001, we received approximately $7.5
million of proceeds from a private placement and from issuance of common stock
under the stock plans of 2.5 million shares of our common stock. Additionally,
we increased our net short-term borrowings by $2.8 million.
Our primary source of funds at September 30, 2002 consisted of $9.1 million
in cash and cash equivalents, $6.0 million of accounts receivable, and our
15
credit facilities with Silicon Valley Bank. Our primary source of funds at
September 30, 2001 consisted of $5.5 million in cash and cash equivalents and
$5.0 million of accounts receivable.
A summary of our contractual obligations as of September 30, 2002 is as
follows (in thousands):
Less than After
Total Revolving 1 year 2-3 years 4-5 years 5 years
------- ---------- ------- ---------- ---------- --------
Silicon Valley Bank $ 4,239 $ 4,239 $ 0 $ 0 $ 0 $ 0
Citicapital 633 N/A 313 320 0 0
Operating Leases 18,475 N/A 1,610 3,257 3,389 10,219
Convertible Notes* 7,800 N/A 0 7,800 0 0
------- ---------- ------- ---------- ---------- --------
$31,147 $ 4,239 $ 1,923 $ 11,377 $ 3,389 $ 10,219
======= ========== ======= ========== ========== ========
*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%.
We are actively marketing our existing and new products, which we believe
will ultimately lead to profitable operations. Management believes that the
cash resources and borrowing capacity will be sufficient to meet projected
working capital, capital expenditures and other cash requirements for the next
twelve months. However, there can be no assurance the currently available funds
will meet the company's cash requirements in the future, or, that any required
additional funding will be available on terms attractive to us or at all, which
could have a material adverse affect on our business, financial condition and
results of operations. Any additional equity financing may be dilutive to
shareholders, and any additional debt financing, if available, may involve
restrictive covenants.
RELATED PARTY TRANSACTIONS
Mario Rosati, a board member of the Company, is also a partner of Wilson
Sonsini Goodrich and Rosati, the general counsel of the Company. During the
three months ended September 30, 2002 and 2001, the Company incurred
approximately $363,000 and $296,000 in legal costs, and paid approximately
$655,000 and $0, respectively, to Wilson Sonsini Goodrich and Rosati. During the
nine months ended September 30, 2002 and 2001, the Company incurred
approximately $547,000 and $609,000 in legal costs, and paid approximately
$913,000 and $57,000, respectively, to Wilson Sonsini Goodrich and Rosati. At
September 30, 2002, the Company owed approximately $387,000 to Wilson Sonsini
Goodrich and Rosati.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement
applies to all entities. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of long-lived assets, except for
certain obligations of leases. As used in this Statement, a legal obligation is
an obligation that a party is required to settle as a result of an existing or
enacted law, stature, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to
have a material effect on our results of operations.
16
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities'" ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of SFAS No.
146 also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. We will adopt SFAS No.
146 during the first quarter ended March 31, 2003. The provisions of EITF No.
94-3 shall continue to apply for an exit activity initiated under an exit plan
that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146.
The effect on adoption of SFAS No. 146 will change on a prospective basis the
timing of when restructuring charges are recorded from a commitment date
approach to when the liability is incurred.
RISK FACTORS
You should consider the risks described below before making an
investment decision. We believe that the risks and uncertainties described
below are the principal material risks facing our company as of the date of this
Form 10-Q. In the future, we may become subject to additional risks that are not
currently known to us. Our business, financial condition or results of
operations could be materially adversely affected by any of the following risks.
The trading price of our common stock could decline due to any of the following
risks.
WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO
ACHIEVE OR SUSTAIN PROFITABILITY
We experienced losses of $6.7 million for fiscal year 2001 and losses of
$9.6 million for the fiscal year ended 2000. At September 30, 2002, our net loss
was $8.9 million.
While we believe our cash position is 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.
17
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
Historically, we have relied on a small number of customers for a
substantial portion of our net revenues. For example, in 2001 Samsung
Electronics Company, Ltd., Read-Rite Corporation, NEC, Infineon and SCS
Hightech, Inc. accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively.
In the first nine months of 2002, Samsung Electronics accounted for 51% of our
net revenues and Seagate accounted for 23% of our net revenues.
The semiconductor manufacturing industry generally is comprised 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. In addition, sales to these customers
may decrease in the future when they complete their current semiconductor
equipment purchasing requirements. If any of our current customers were to
encounter financial difficulties or become unable to continue to do business
with us at or near current levels, our business, results of operations and
financial condition would be materially harmed. Customers may delay or cancel
orders or may stop doing business with us for a number of reasons including:
- customer departures from historical buying patterns;
- general market conditions;
- technological breakthroughs;
- economic conditions; or
- competitive conditions in the semiconductor industry or in the
industries that manufacture products utilizing integrated circuits.
WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT
ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES
Export sales accounted for approximately 93%, 98% and 86% of our total net
sales in 2001, 2000 and 1999, respectively. For the first nine months of 2002,
export sales accounted for approximately 71% of total net sales. We anticipate
that international sales, including sales to South Korea, will continue to
account for a significant portion of our net sales. As a result, a significant
portion of our net sales will be subject to risks, including:
- unexpected changes in law or regulatory requirements;
- exchange rate volatility;
- tariffs and other barriers;
- political and economic instability in Asia;
- difficulties in accounts receivable collection;
- extended payment terms;
- difficulties in managing distributors or representatives;
- difficulties in staffing our subsidiaries;
- difficulties in managing foreign subsidiary operations; and
- potentially adverse tax consequences.
Our foreign sales are primarily denominated in U.S. dollars and we do not
engage in hedging transactions. As a result, our foreign sales are subject to
18
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.
Wherever currency devaluations occur abroad, our goods become more
expensive for our customers in that region. Difficult economic conditions may
limit capital spending by our customers. These circumstances may also affect the
ability of our customers to meet their payment obligations, resulting in the
cancellations or deferrals of existing orders and the limitation of additional
orders.
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. Although we
are marketing our atomic layer deposition technology to non-semiconductor
markets such as markets in magnetic thin film heads, flat panel displays,
micro-electromechanical systems and inkjet printers, we are still dependent on
the semiconductor market. The semiconductor industry is cyclical and experiences
periodic downturns both of which reduce the semiconductor industry's demand for
semiconductor manufacturing capital equipment.
Semiconductor industry downturns have significantly decreased our revenues,
operating margins and results of operations in the past. During the industry
downturn in 1998, several of our customers delayed or cancelled investments in
new manufacturing facilities and equipment due to declining DRAM prices, the
Asian economic downturn, and general softening of the semiconductor market. This
caused our sales in 1998 to be significantly lower than in the prior three
years.
After the dramatic industry boom for semiconductor equipment that peaked
early in the year 2000, another cyclical downturn is presently occurring. The
sharp and severe industry downturn in 2001 was the largest in the industry's
history. Almost all previous downturns have been solely due to pricing declines.
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 make it more difficult to increase our
revenues and to achieve 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.
19
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,
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.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we have
observed that once a particular piece of equipment is selected from a vendor,
the customer is likely to continue purchasing that same piece of equipment from
the vendor for similar applications in the future. Our customer list, though
limited, has expanded in recent months. Yet our broadening market share remains
at risk due to choices made by customers that continue to be influenced by
pre-existing installed bases by competing vendors.
20
A semiconductor manufacturer frequently will attempt to consolidate its
other capital equipment requirements with the same vendor. Accordingly, we may
face narrow windows of opportunity to be selected as the "vendor of choice" by
potential new customers. It may be difficult for us to sell to a particular
customer for a significant period of time once that customer selects a
competitor's product, and we may not be successful in obtaining broader
acceptance of our systems and technology. If we are not able to achieve broader
market acceptance of our systems and technology, we may be unable to grow our
business and our operating results and financial condition will be harmed.
OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF
OUR REVENUE
Sales of our systems depend upon the decision of a prospective customer to
increase manufacturing capacity. That decision typically involves a significant
capital commitment by our customers. Accordingly, the purchase of our systems
typically involves time-consuming internal procedures associated with the
evaluation, testing, implementation and introduction of new technologies into
our customers' manufacturing facilities. For many potential customers, an
evaluation as to whether new semiconductor manufacturing equipment is needed
typically occurs infrequently. Following an evaluation by the customer as to
whether our systems meet its qualification criteria, we have experienced in the
past and expect to experience in the future delays in finalizing system sales
while the customer evaluates and receives approval for the purchase of our
systems and constructs a new facility or expands an existing facility.
Due to these factors, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort. The time
between our first contact with a customer and the customer placing its first
order typically lasts from nine to twelve months and is often longer. This
lengthy sales cycle makes it difficult to accurately forecast future sales and
may cause our quarterly and annual revenue and operating results to fluctuate
significantly from period to period. If anticipated sales from a particular
customer are not realized in a particular period due to this lengthy sales
cycle, our operating results may be adversely affected for that period.
OUR INTELLECTUAL PROPERTY IS IMPORTANT TO US AND WE RISK LOSS OF A VALUABLE
ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSES IF WE CANNOT ADEQUATELY
PROTECT OUR INTELLECTUAL PROPERTY.
Our success depends in part on our proprietary technology. There can be no
assurance that we will be able to protect our technology or that competitors
will not be able to develop similar technology independently. We currently have
a number of United States and foreign patents and patent applications. On August
1, 2001, we filed a counterclaim against ASM International N.V., charging ASM
with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective
Etching Native Oxide," and with committing antitrust violations designed to harm
the developing atomic layer deposition market.
There can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented or that the rights granted there under
will provide us with competitive advantages.
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
appropriate. However, no assurance can be given that we will be able to
negotiate necessary licenses on commercially reasonable terms, or at all, or
that any litigation resulting from such claims would not have a material adverse
effect on our business and financial results.
21
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ("Genus"). ASMA's complaint alleges that Genus is
directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"),
entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590
(the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to
own or exclusively license. The Complaint seeks monetary and injunctive relief.
Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August
1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI")
for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled
"Method of Selective Etching Native Oxide"; (2) declaratory judgment that the
'365 and '590 Patents are invalid, unenforceable, and not infringed by Genus;
and (3) antitrust violations. An initial Case Management Conference was held on
October 16, 2001. On January 9, 2002, the Court issued an order granting ASM
leave to amend its complaint to add Dr. Sherman as a party and to add a claim
that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the
"165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed
discovery and trial of Genus' antitrust claims until after the trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's
amended complaint and counterclaimed against ASM for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. On
August 15, 2002, the Court issued a claim construction order regarding the '590,
'365, and '568 patents. A claim construction hearing regarding the '165 Patent
was held on September 26, 2002. On September 23, 2002, Genus filed motions for
summary judgment of noninfringement regarding the '590 and '365 patents, and a
hearing on these motions is scheduled for December 17, 2002.
We intend to defend our position vigorously. 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, in addition to potential monetary damages and any injunctive relief
granted, we would need either to obtain a license from ASM to commercialize our
products or redesign our products so they do not infringe any of these patents.
If we 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
atomic layer products. In this case our business may not develop as planned, and
our results could materially suffer.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel
or other key employees could limit or delay our ability to develop new products
and adapt existing products to our customers' evolving requirements and would
also result in lost sales and diversion of management resources. None of our
executive officers are bound by a written employment agreement, and the
relationships with our officers are at will.
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
and process engineers. Competition for such personnel is intense, particularly
22
in the San Francisco Bay Area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop and
market our products and perform services for our customers. As a result, our
growth could be limited due to our lack of capacity to develop and market our
products to customers, or fail to meet delivery commitments or experience
deterioration in service levels or decreased customer satisfaction.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations. If we fail to
comply with present or future regulations, we could be subject to substantial
liability for clean up efforts, property damage, personal injury and fines or
suspension or cessation of our operations.
We use the following regulated gases at our manufacturing facility in
Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen.
We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The
city of Sunnyvale, California, imposes high environmental standards to
businesses operating within the city. Genus has met the city's stringent
requirements and has received an operating license from Sunnyvale. Presently,
our compliance record indicates that our methods and practices successfully meet
standards. Moving forward, if we fail to continuously maintain high standards to
prevent the leakage of any toxins from our facilities into the environment,
restrictions on our ability to expand or continue to operate our present
locations could be imposed upon us or we could be required to acquire costly
remediation equipment or incur other significant expenses.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS
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. We have some long term or volume purchase agreements with our
suppliers and currently purchase components on a purchase order basis. 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 DEPEND UPON SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR
PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US
23
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 six 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
We terminated our relationship with our distributor, Innotech Corp. in
Japan in 1998. In 2000, we invested significant resources in Japan by
establishing a direct sales organization, Genus-Japan, Inc. Although we continue
to invest significant resources in our Japan office, we may not be able to
attract new customers in the Japanese semiconductor industry, and as a result,
we may fail to yield a profit or return on our investment in Japan.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR
TO SECURITIES LITIGATION
Our common stock has experienced substantial price volatility, particularly
as a result of quarter-to-quarter variations in our, our competitors or our
customers' actual or anticipated financial results, our competitors or our
customers' announcements of technological innovations, revenue recognition
policies, changes in earnings estimates by securities analysts and other events
or factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which we do
business, may adversely 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 is primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. Although we maintain general
business insurance against interruptions such as fires and floods, there can be
no assurance that the amount of coverage will be adequate in any particular
case.
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR
CAUSE OUR STOCK PRICE TO DROP
As of September 30, 2002, we had a total of approximately 7,059,000 shares
of common stock underlying warrants and outstanding employee stock options. Of
the stock options, approximately 2,069,000shares were exercisable as of
September 30, 2002. All of the shares underlying the warrants are currently
exercisable. Some warrants have terms providing for an adjustment of the number
of shares underlying the warrants in the event that we issue new shares at a
price lower than the exercise price of the warrants, where we make a
distribution of common stock to our shareholders or effect a reclassification.
24
If all of the shares underlying the exercisable options and warrants were
exercised and sold in the public market, the value of your current holdings in
Genus may decline as a result of dilution to your percentage ownership in Genus
or as a result of a reduction in the per share value of our stock resulting from
the increase in the number of Genus shares available on the market, if such
availability were to exceed the demand for our stock.
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
Pursuant to a preferred stock rights agreement, our board of directors has
declared a dividend of one right for each share of our common stock that was
outstanding as of October 13, 2000. The rights trade with the certificates for
the common stock until a person or group acquires beneficial ownership of 15% or
more of our common stock. After such an event, we will mail rights certificates
to our shareholders and the rights will become transferable apart from the
common stock. At that time, each right, other than rights owned by an acquirer
or its affiliates, will entitle the holder to acquire, for the exercise price, a
number of shares of common stock having a then-current market value of twice the
exercise price.
In the event that circumstances trigger the transferability and
exercisability of rights granted in our preferred stock rights agreement, your
current holdings in Genus may decline as a result of dilution to your percentage
ownership in Genus or as a result of a reduction in the per share value of our
stock resulting from the increase in the number of outstanding shares available.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this 10-Q report that may not prove
to be accurate.
This 10-Q report contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding, among other items, our business
strategy, growth strategy and anticipated trends in our business. We may make
additional written or oral forward-looking statements from time to time in
filings with the Securities and Exchange Commission or otherwise. When we use
the words "believe," "expect," "anticipate," "project" and similar expressions,
this should alert you that this is a forward-looking statement.
We base these forward-looking statements on our expectations. They are
subject to a number of risks and uncertainties that cannot be predicted,
quantified or controlled. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements.
Statements in this 10-Q report, and in documents incorporated into this
10-Q report, including those set forth above in "Risk Factors," describe
factors, among others, that could contribute to or cause these differences. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this 10-Q report will in fact transpire
or prove to be accurate. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
Statements in this report, and in documents incorporated into this report,
including those set forth above in "Risk Factors," describe factors, among
others, that could contribute to or cause these differences. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this report will in fact transpire or prove to be
accurate. All subsequent written and oral forward-looking statements
25
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this section.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We face exposure to adverse movements in foreign currency exchange rates.
These exposures may change over time as our business practices evolve and could
seriously harm our financial results. All of our international sales, except
spare parts and service sales made by our subsidiary in South Korea, are
currently denominated in U.S. dollars. All spare parts and service sales made by
the South Korean subsidiary are WON denominated. An increase in the value of the
U.S. dollar relative to foreign currencies would make our products more
expensive and, therefore, could reduce the demand for our products. Reduced
demand for our products could materially adversely affect our business, results
of operations and financial condition.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our "disclosure controls and procedures" (as defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934) within 90 days of
the filing date of this report. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that our disclosure
controls and procedures need improvement. (See Item 4(b) below)
(b) Management and the Audit Committee are aware of conditions that were
considered to be a "material weakness" for the year ended December 31, 2001
under standards established by the American Institute of Certified Public
Accountants. In particular, the Company needed to (i) perform regular detailed
reconciliations of general ledger accounts to supporting documentation (ii)
regularly reconcile cash accounts to bank statements and investigate any
differences, and (iii) improve policies and procedures for tracking
work-in-progress, construction-in-progress and demonstration equipment.
Management and the Audit Committee have taken actions with respect to the
material weakness, including the hiring of new, more experienced and qualified
finance staff and has made certain operational changes in policies and
procedures and additional procedures are being implemented to expand the scope
of detailed reconciliations, including reconciliations of subsidiary accounts.
Management believes that the Company will successfully implement procedures
addressing all material weakness by December 31, 2002.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to the ongoing intellectual property litigation with ASM
America, Inc., as previously disclosed in the company's Annual Report on Form
10-K filed April 1, 2002, the following events transpired in Q3:
- On August 15, 2002, the Court issued a claim construction order
regarding U.S Patents Nos. 6,015,590, 5,916,365, and 5,294,568.
- A claim construction hearing regarding the U.S. Patent No.
4,798,165 was held on September 26, 2002.
- On September 23, 2002, Genus filed motions for summary judgment
of noninfringement regarding U.S. Patent Nos. 6,015,590 and
5,916,365, and a hearing on these motions is scheduled for
December 17, 2002.
-
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On July 31, 2002 and August 14, 2002, we entered into Securities Purchase
Agreements with certain investors (together, the "Purchasers"). Pursuant to the
Securities Purchase Agreements, we agreed to issue and sell to the Purchasers,
in a private placement, an aggregate of $7.8 million principal amount of 7%
convertible subordinated notes due 2005 (the "Notes") together with related
four-year warrants (the "Warrants") to purchase shares of our common stock.
Summary of the Transaction
On August 14, 2002, we issued to the Purchasers the Notes convertible into
an aggregate of 5,521,341 shares of common stock and the Warrants to purchase an
aggregate of 2,760,669 shares of common stock in a private placement. The
conversion price of the Notes and the exercise price of the Warrants is based on
a premium of 105.19% to the average closing bid price for the five trading days
preceding the execution of the Securities Purchase Agreements for this
transaction. For those investors who committed to the private placement on July
31, 2002, the conversion price for the Notes and the exercise price for the
Warrants is $1.42 per share. For the investor who committed to the private
placement on August 14, 2002, the conversion price for the Notes and the
exercise price for the Warrants is $1.2518 per share. In addition to the
issuances specified above, a warrant for 79,225 shares was issued to SG Cowen as
placement agent to Genus for the transaction closing August 14, 2002. This
warrant has an exercise price of $1.42 and contains the identical terms as those
warrants issued to the Purchasers.
Each Note is convertible into, and each Warrant is exercisable to purchase,
shares of our common stock at any time beginning August 14, 2002 and ending
after a term of three years and four years, respectively. The Warrants include
a net exercise provision permitting the holders to pay the exercise price by
cancellation of a number of shares with a fair market value equal to the
exercise price of the Warrants.
After August 14, 2003, we may require the holders of the Warrants issued in
the private placement to exercise them if the closing bid price per share of our
common stock is greater than 200% of the exercise price for twenty of the thirty
trading days immediately preceding the date we give notice to the holders of our
decision to effect the exercise and upon satisfaction of the other requirements
specified in the Warrants. Under the terms of this mandatory exercise provision,
27
a holder can choose not to exercise such holder's Warrants, although such holder
would then forfeit all rights under the Warrants to the extent that such holder
fails to exercise within thirty business days of receiving our notice.
The Notes and Warrants issued to the Purchasers include antidilution
provisions, including provisions that call for adjustments in the number of
shares of stock issued upon exercise of the Warrants and adjustments to the
conversion price of the Notes to prevent dilution to the Purchasers because of
dividends or distributions in common stock, reclassifications of the common
stock, the issuance of new stock at less than the exercise price of the Warrants
or conversion price of the Notes, and similar types of issuances.
Restrictions on Conversion and Exercise
Under the terms of the Notes and the Warrants, the Purchasers may not
convert the Notes, or exercise the Warrants, to the extent such conversion or
exercise would cause the Purchaser, together with its affiliates, to have
acquired a number of shares of common stock which would exceed 4.99% of our then
outstanding common stock, excluding for purposes of such determination shares of
common stock issuable upon conversion of the Notes which have not been converted
and upon exercise of the Warrants which have not been exercised.
Use of Proceeds
A placement fee of 7% of the consideration received for the transaction
plus expenses was paid to the Company's placement agent, SG Cowen Securities
Corporation. We intend to use the proceeds from the private placement for
general corporate purposes, including growth initiatives, capital expenditures
and potential acquisitions. As of November 1, 2002, we have used the proceeds
for working capital.
Exemption
In executing and delivering the Notes and the Warrants, we relied upon the
exemption from securities registration afforded by Rule 506 of Regulation D as
promulgated by the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended. Our reliance on this exemption was based on
representations made by each Purchaser that such Purchaser is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D.
Resale Registration
On September 11, 2002, Genus filed a resale registration statement on Form
S-3 (the "Registration Statement") with the SEC pursuant to the terms of the
Registration Rights Agreements dated August 14, 2002 by and among Genus and the
Purchasers. The Registration Statement covers the shares underlying the Notes
and the Warrants. On September 26, 2002 the SEC rendered the Registration
Statement effective.
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
28
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
June 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 Securities Purchase Agreement dated July 31, 2002 among the Company
and the Purchasers signatory thereto. (19)
4.8 Resale Registration Rights Agreement dated August 14, 2002 among the
Company and the Purchasers signatory thereto. (19)
4.9 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (19)
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
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)
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)
29
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)
99.1 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 June 30, 1992.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Report on Form 8-K dated June 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.
(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 June 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.
30
(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 June 30, 1998.
(19) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated August 20, 2002.
(b) Report on Form 8-K
On August 20, 2002, the company filed a current report on Form 8-K
announcing the close of a private placement of 7% subordinated convertible notes
due 2005 and warrants to purchase company common stock on August 14, 2002.
On September 25, 2002, the company filed a current report on Form 8-K
regarding its filing of motions for summary judgment with the court regarding
the pending ASM America, Inc. litigation. The motions apply to U.S. Patent No.
6,015,590 and U.S. Patent No. 5,916,365 and move that the court make a
decision on non-infringement without going to trial on the basis of the
court's claim construction ruling and evidence produced in the
litigation.
31
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 12, 2002 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)
32
Sarbanes-Oxley Section 302(a) Certifications
I, William W.R. Elder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genus, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ William W. R. Elder
------------------------
William W.R. Elder
Chief Executive Officer
33
I, Shum Mukherjee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genus, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Shum Mukherjee
--------------------
Shum Mukherjee
Chief Financial Officer
34