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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 March 31, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 0-17139
GENUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-279080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1139 KARLSTAD DRIVE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip code)
(408) 747-7120
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of April 30, 2003, the issuer had 28,956,073 shares of common stock
outstanding.
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GENUS, INC.
FORM 10-Q
INDEX
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
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and March 31, 2002 4
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2003 and March 31, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
2
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 31
Signatures 34
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------- --------
Net sales $17,695 $ 9,591
Costs and expenses:
Cost of goods sold 11,577 7,467
Research and development 2,113 2,185
Selling, general and administrative 3,174 3,436
------- --------
Income (loss) from operations 831 (3,497)
Other expenses, net 423 255
------- --------
Net income (loss) $ 408 $(3,752)
======= ========
Net income (loss) per share:
Basic $ 0.01 $ (0.15)
Diluted $ 0.01 $ (0.15)
Shares used in per share calculation - basic 28,913 25,249
======= ========
Shares used in per share calculation - diluted 30,532 25,249
======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 12,483 $ 11,546
Accounts receivable (net of allowance for doubtful
accounts of $69 in 2003 and $69 in 2002) 14,050 7,505
Inventories 12,766 11,405
Other current assets 1,442 1,336
----------- --------------
Total current assets 40,741 31,792
Equipment, furniture and fixtures, net 8,853 8,661
Other assets 1,238 1,057
----------- --------------
Total assets $ 50,832 $ 41,510
=========== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings $ 10,074 $ 7,813
Accounts payable 7,109 6,498
Accrued expenses 3,974 3,064
Deferred revenue 8,099 2,713
Customer advances 1,151 1,809
Long-term liabilities, current portion 253 245
----------- --------------
Total current liabilities 30,660 22,142
Convertible notes 5,451 5,301
Long-term liabilities 183 270
----------- --------------
Total liabilities 36,294 27,713
----------- --------------
Contingencies (see note on legal proceeding)
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000 shares;
Issued and outstanding 28,945 shares in
2003 and 28,621 in 2002 124,335 123,890
Accumulated deficit (107,401) (107,809)
Note receivable from shareholder (151) (151)
Accumulated other comprehensive loss (2,245) (2,133)
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Total shareholders' equity 14,538 13,797
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Total liabilities and shareholders' equity $ 50,832 $ 41,510
=========== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 408 $(3,752)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 809 895
Provision for excess and obsolete inventories and
lower of cost or market 100 368
Amortization of deferred finance costs 222 -
Write-off of fixed assets 36 -
Changes in assets and liabilities:
Accounts receivable (6,545) 1,059
Inventories (1,691) 3,605
Other current assets (706) 396
Other assets (253) (181)
Accounts payable 611 (2,743)
Accrued expenses 252 (844)
Deferred revenue and customer deposits 5,386 (474)
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Net cash used in operating activities (1,371) (1,671)
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Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures (207) (275)
-------- --------
Net cash used in investing activities (207) (275)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 445 7,971
Proceeds (payments) from short-term bank borrowings, net 2,261 (633)
Proceeds from debt - 1,200
Payments for debt (79) (228)
-------- --------
Net cash provided by financing activities 2,627 8,310
-------- --------
Effect of exchange rate changes on cash (112) 49
-------- --------
Net increase (decrease) in cash and cash equivalents 937 6,413
Cash and cash equivalents, beginning of period 11,546 3,043
-------- --------
Cash and cash equivalents, end of period $12,483 $ 9,456
======== ========
Supplemental cash flow information
Cash paid during the period for:
Interest $ 319 $ 70
Income taxes $ 151 $ -
Non-cash investing and financing activities
Transfer of inventory to fixed assets $ 525 $ -
Transfer of fixed assets to inventory $ 295 $ -
Transfer of prepaids to fixed assets $ 600 $ -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with SEC requirements for interim financial statements.
These financial statements should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in the Company's
2002 Annual Report on Form 10-K.
The information furnished reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for the fair statement of financial position, results of operations and cash
flows for the interim periods. The results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the full
year.
LIQUIDITY
The Company has an accumulated deficit of $107 million and cash used
in operations of $1.4 million during the three months ended March 31, 2003. The
Company is in the process of executing its business strategy and has plans to
eventually achieve profitable operations on an ongoing basis. Management
believes that existing cash, cash generated by operations, and available
financing will be sufficient to meet projected working capital, capital
expenditure and other cash requirements for the next twelve months. Management
cannot provide assurances that its cash and its future cash flows from
operations alone will be sufficient to meet operating requirements and allow the
Company to service debt and repay any underlying indebtedness at maturity. If
the Company does not achieve anticipated cash flows, we may not be able to meet
planned product release schedules and forecast sales objectives. In such event
the Company will require additional financing to fund on-going and planned
operations and may need to implement expense reduction measures. In the event
the Company needs additional financing, there is no assurance that funds would
be available to the Company or, if available, under terms that would be
acceptable to the Company.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the sum of the
weighted average number of common shares outstanding and potential common shares
(when dilutive).
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
Basic:
Net income (loss) $ 408 $(3,752)
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Weighted average common shares
outstanding 28,913 25,249
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Basic net income (loss) per share $ 0.01 $ (0.15)
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7
THREE MONTHS ENDED
MARCH 31,
2003 2002
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Diluted:
Net income (loss) $ 408 $(3,752)
Weighted average common shares
outstanding 28,913 25,249
Effect of dilutive stock options 648 -
Effect of dilutive warrants 971 -
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30,532 25,249
======= ========
Diluted net income (loss) per share $ 0.01 $ (0.15)
======= ========
Stock options, warrants and convertible debt to purchase approximately
7,764,121 shares of common stock were outstanding during the three months ended
March 31, 2003, but were not included in the computation of diluted net earnings
per share because of the anti-dilutive effects.
Stock options and warrants to purchase approximately 5,678,959 shares of
common stock were outstanding during the three months ended March 31, 2002, but
were not included in the computation of diluted net loss per share because the
Company had a net loss for the three months ended March 31, 2002.
Stock Compensation. The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting
Standards Board Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation." Generally, the Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's statements of operations. Pro forma information
regarding net loss and net loss per share as if the Company recorded
compensation expense based on the fair value of stock-based awards have been
presented in accordance with Statement of Financial Accounting Standards No.148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" and is as
follows for the three months ended March 31, 2003 and 2002 (in thousands, except
per share data):
THREE MONTHS ENDED
MARCH 31,
2003 2002
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Net income (loss), as reported $ 408 $(3,752)
Add: Stock -based employee compensation recorded - -
Deduct: Total stock-based employee compensation
expense determined using a fair value based method
for all awards, net of related tax effects (703) (794)
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Pro forma net loss attributable to common
shareholders $ (295) $(4,546)
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8
Earnings per share
Basic - as reported $ 0.01 $ (0.15)
Basic - pro forma $(0.01) $ (0.18)
Diluted - as reported $ 0.01 $ (0.15)
Diluted - as pro forma $(0.01) $ (0.18)
The above pro forma effects on net loss may not be representative of the effects
on future results as options granted typically vest over several years and
additional option grants are expected to be made in future years.
The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the three months ended March 31, 2003, and 2002;
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Risk free interest rates 2.17% 3.83%
Expected life 3.0 years 3.0 years
Expected volatility 100% 107%
Expected dividend yield 0% 0%
The weighted average fair value of options granted in the three months
ended March 31, 2003 and 2002 was $1.63 and $1.76, respectively.
The fair value of the employees' stock purchase rights under the 1989
Employee Stock Purchase Plan was estimated using the Black-Scholes
option-pricing model with the following assumptions for the three months ended
March 31, 2003 and 2002.
9
THREE MONTHS ENDED
MARCH 31,
2003 2002
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Risk free interest rates 1.10% 1.21%
Expected life 0.5 years 0.5 years
Expected volatility 93% 123%
Expected dividend yield 0% 0%
The weighted average fair value of those purchase rights granted in the
three months ended March 31, 2003 and 2002 was $0.82 and $1.18, respectively.
REVENUE RECOGNITION.
The Company derives revenue from the sale and installation of semiconductor
manufacturing systems and from engineering services and the sale of spare parts
to support such systems.
Equipment selling arrangements generally involve contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title. Effective January 1, 2000, at which time the Company did not
have verifiable objective evidence of the fair value of installation services,
the Company commenced deferring recognition of revenue from such equipment sales
until installation was complete and the product was accepted by the customer to
comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101. In the third quarter of 2002, the Company
established verifiable objective evidence of fair value of installation
services, one of the requirements for Genus to recognize revenue for
multiple-element arrangements prior to completion of installation services.
Accordingly, under SAB 101, if Genus has met defined customer acceptance
experience levels with both the customer and the specific type of equipment,
then the Company recognizes equipment revenue upon shipment and transfer of
title. A portion of revenue associated with undelivered elements such as
installation and on-site support related tasks is recognized for installation
when the installation is completed and the customer accepts the product and for
on-site support as the support service is provided. For products that have not
been demonstrated to meet product specifications for the customer prior to
shipment, revenue is recognized when installation is complete and the customer
accepts the product. Revenues can fluctuate significantly as a result of the
timing of customer acceptances. At March 31, 2003 and December 31, 2002, the
Company had deferred revenue of $8.1 million and $2.7 million, respectively.
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
SHORT-TERM BANK BORROWINGS
As of December 20, 2001 and as amended on March 26, 2002 and March
20, 2003, the Company maintains line of credit facilities for a maximum of $15
million, based on eligible receivables and inventory. The interest rate is prime
plus 1.75% per annum and the facility expires on June 29, 2004. The loan is
collateralized by a first priority perfected security interest in the Company's
assets and has a covenant requiring the Company to maintain a minimum tangible
net worth (calculated as the excess of total assets over total liabilities
adjusted to exclude intangible assets and balances receivable from officers or
affiliates and to exclude debt subordinated) of $15 million. As of March 31,
2003, there was $10 million outstanding under this credit facility.
10
On January 4, 2002, the Company received gross proceeds of $1.2 million
under a secured loan, which is payable over 36 months, accrues interest of 8.75%
per annum and is secured by two systems in the Company's demonstration lab.
There was $436,000 outstanding at March 31, 2003.
CONVERTIBLE NOTES AND WARRANTS
On August 15, 2002, the Company raised $7.0 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 of the convertible notes are convertible into common
stock at a price of $1.42 per share and a $300,000 convertible note is
convertible into common stock at a price of $1.25 per share. All
convertible notes accrue interest at 7% per annum, payable
semi-annually each February 15 and August 15, in cash or, at the
election of the Company, in registered stock. The 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 exercisable for 2,641,000 shares of common stock have an
exercise price of $1.42 per share and warrants exercisable for 120,000
shares of common stock have an exercise price of $1.25 per share. 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, using the Black Scholes option pricing
model with a risk free interest 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 net cash proceeds from the issuance of the convertible notes and warrants
were recorded as follows (in thousands):
Convertible note $ 5,560
Detachable warrants 1,312
Beneficial conversion feature 928
--------
7,800
Other asset, issuance costs (814)
--------
$ 6,986
========
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 is accreted as interest expense over the
three year term of the convertible notes, using the effective interest rate
method.
The Company incurred issuance costs of approximately $868,000, representing
cash obligations of $814,000 and warrants with a Black Scholes value of $54,000
to purchase 79,000 shares of common stock at $1.42 per share issued to a
placement agent in connection with the transaction. In the first quarter ending
March 31, 2003, 15,000 shares were issued related to these warrants. The
remaining 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; accordingly, the Company recorded interest costs
of $72,000 during the three months ended March 31, 2003. The remaining deferred
issuance costs at March 31, 2003 was $692,000.
11
Convertible Other Asset,
Note Issuance Costs
------------- ---------------
Balance at issuance, August 15, 2002 $ 5,560 ($868)
Conversions (675) -
Accretion and amortization 416 104
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Balance at December 31, 2002 5,301 (764)
Conversions - -
Accretion and amortization 150 72
------------- ---------------
Balance at March 31, 2003 $ 5,451 ($692)
============= ===============
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.
During the fourth quarter of 2002, convertible notes with a face value of
$675,000 were converted into 489,544 shares of common stock.
During the first quarter of 2003, warrants were exercised for an aggregate
of 315,000 shares of common stock.
INVENTORIES
Inventories comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
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Raw materials and purchased parts $ 3,806 $ 4,493
Work in process 2,881 3,417
Finished goods 482 175
Inventory at customers' locations 5,597 3,320
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$ 12,766 $ 11,405
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12
Inventory at customers' locations represent the cost of systems shipped to
customers for which we are awaiting customer acceptance.
ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- -------------
System warranty $ 1,290 $ 970
Accrued compensation, commissions and related items 638 509
Federal, state and foreign income taxes 595 751
Accrued sales tax 438 72
Accrued legal expenses 434 129
Deferred rent 212 162
Other 367 471
---------- -------------
$ 3,974 $ 3,064
========== =============
Genus adopted Financial Accounting Standards Board Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Indebtedness of Others" (FIN 45) during the first fiscal quarter of
2003. FIN 45 requires disclosures concerning Genus' obligations under certain
guarantees.
The Company's warranty period terminates for material coverage in
twenty-four months and for labor coverage in twelve months after the warranty
period begins, but in any event no later than twenty-seven months from the
product shipment date for material coverage and fifteen months for labor
coverage, unless otherwise stated in the quotation. The Company provides labor
for all product repairs and replacement parts, excluding consumable items, free
of charge during the warranty period.
Changes in the warranty reserves during the first fiscal quarter of 2003
were as follows (in thousands):
Balance, December 31, 2002 $ 970,000
Accrual for warranty liability for revenues recognized in the period 455,000
Settlements made (135,000)
-----------
Balance, March 31, 2003 $1,290,000
===========
COMMON STOCK AND WARRANTS
On January 25, 2002, the Company sold 3,871,330 shares of common stock, and
warrants to purchase 580,696 shares of common stock, for aggregate proceeds of
approximately $7.9 million. The warrants issued to the purchasers in the
private placement are exercisable for $3.23 per share and the warrants have a
five-year term.
13
In the May 2001 private placement transaction the Company issued 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 the January 25, 2002
financing, 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 May 2001 Warrants representing
1,420,224 shares 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 for further information.
RELATED PARTY TRANSACTIONS
Mario M. Rosati, a Director of the Company is also a partner of Wilson
Sonsini Goodrich & Rosati, the general counsel of the Company. During the first
quarters of 2003 and 2002, the Company paid $138,000 and $108,000, respectively,
to Wilson Sonsini Goodrich & Rosati. At March 31, 2003, the Company owed
approximately $189,000 to Wilson Sonsini Goodrich & Rosati.
COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss) (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- --------
Net income (loss) $ 408 $(3,752)
Foreign currency translation adjustment. (112) 49
----------- --------
Comprehensive income (loss) $ 296 $(3,703)
=========== ========
The components of accumulated other comprehensive loss is as follows (in
thousands):
MARCH 31 DECEMBER 31
2002 2002
-------- -----------
Cumulative translation adjustment $(2,245) $ (2,133)
======== ===========
14
LEGAL PROCEEDINGS
On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement
action against Genus, Inc. ASMA's Complaint alleges that Genus is directly and
indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled
"Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590
Patent") entitled "Method For Growing Thin Films," which ASMA claims to own or
exclusively license. The Complaint seeks monetary and injunctive relief. Genus
served its Answer to ASMA's complaint on August 1, 2001. Also on August 1,
2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for
(1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled
"Method of Selective Etching Native Oxide"; (2) declaratory judgment that the
'365 and '590 Patents are invalid, unenforceable, and not infringed by Genus;
and (3) antitrust violations. An initial Case Management Conference was held on
October 16, 2001. On January 9, 2002, the Court issued an order granting ASMA
leave to amend its complaint to add Dr. Sherman as a party and to add a claim
that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the
"165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially
Symmetric Gas Flow", which ASMA claims to own. The Court also severed and stayed
discovery and trail of Genus' antitrust claims until after the trial of the
patent claims. On February 4, 2002, Genus served its Amended Answer to ASMA's
amended complaint and counterclaimed against ASMA for declaratory judgment that
the '165 Patent is invalid, unenforceable, and not infringed by Genus. On August
15, 2002, the Court issued a claim construction order regarding the '590, '365,
and 598' Patents. A claim construction hearing regarding the '165 Patent was
held on September 26, 2002, and the Court issued a claim construction ruling
regarding this patent on November 13, 2002. On September 23, 2002 Genus filed
motions for summary judgment on noninfringement regarding the '590 and '365
Patents. On November 20, 2002, the Court granted the Genus motion for summary
judgment on noninfringement of the '365 Patent. On January 10, 2003, the Court
granted Genus' motion for summary judgment on the '590 Patent.
On April 11, 2003, Genus settled its lawsuit with ASMI (the "Settlement").
Under the terms of the Settlement, Genus gained a royalty-free license to each
of the patents ASMI asserted in the litigation, including both ALD patents as
well as Patent '165. By specific agreement of the parties, these licenses are
applicable to Genus' successors and affiliates. Genus has likewise obtained a
covenant from ASMI that it will not sue Genus for patent infringement or
antitrust violations for the next five years.
In return, Genus has granted ASMI and its successors and affiliates a
royalty-free license to the patent Genus asserted in the litigation, Patent
'568, and has agreed to dismiss its antitrust claims against ASMI. Genus has
also agreed not to sue ASMI for patent infringement or antitrust violations for
the next five years.
No payments have been made by either Genus or ASMI in exchange for these
licenses and the covenant not to sue. However, under the terms of the
Settlement, ASMI has the right to pursue an appeal of the District Court's
judgments of non-infringement regarding the ALD patents. The agreement specifies
that if the Federal Circuit vacates either of the existing judgments related to
the ALD patents based on a change in the District Court's claim construction,
Genus will pay ASMI $1 million for the royalty-free licenses to the ALD patents
it has been granted under the agreement.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. We have adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002. The adoption of FIN No. 45 did not have a material impact on
the consolidated financial statements for the three months ended March 31, 2003.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire our stock. We have adopted the annual disclosure provisions of SFAS No.
148 in our financial reports for the year ended December 31, 2002 and have
adopted the interim disclosure provisions for quarterly financial reports
starting quarter ending March 31, 2003. As the adoption of this standard
involves disclosures only, we do not expect a material impact on our
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on our financial position, results of operations, or cash flows
for the three months ended March 31, 2003.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information contained in this Quarterly Report on Form 10-Q is
forward- looking in nature. All statements included in this Quarterly Report on
Form 10- Q or made by management of Genus, Inc., other than statements of
historical fact, are forward-looking statements. Examples of forward-looking
statements include statements regarding the Company's future financial results,
operating results, business strategies, projected costs, products, competitive
positions and plans and objectives of management for future operations. These
forward-looking statements are based on management's estimates and projections
as of the date hereof and include the assumptions that underlie such statements.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "should", "would," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and uncertainties and other
important factors, including those discussed in the section below entitled "Risk
Factors." Other risks and uncertainties are disclosed in the Company's prior SEC
filings, including its Annual Report on Form 10-K for the fiscal year ended
December 31, 2002. These and many other factors could affect the Company's
future financial and operating results, and could cause actual results to differ
materially from expectations based on forward-looking statements made in this
document or elsewhere by the Company or on its behalf.
CRITICAL ACCOUNTING POLICIES
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and require management to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements and related
footnotes. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. The significant accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results include the following:
Revenue recognition
The Company derives revenue from the sale and installation of semiconductor
manufacturing systems and from engineering services and the sale of spare parts
to support such systems.
Equipment selling arrangements generally involve contractual customer acceptance
provisions and installation of the product occurs after shipment and transfer of
title. Effective January 1, 2000, the Company did not have verifiable objective
evidence of the fair value of installation services. The Company generally
defers recognition of revenue from equipment sales until installation is
complete and the product is accepted by the customer. In the third quarter of
2002, the Company established verifiable objective evidence of fair value of
installation services, one of the requirements for Genus to recognize revenue
for multiple-element arrangements prior to completion of installation services.
Accordingly, if Genus has met defined customer acceptance experience levels with
both the customer and the specific type of equipment, then the Company
recognizes equipment revenue upon shipment and transfer of title. A portion of
revenue associated with undelivered elements such as installation and on-site
support related tasks is recognized for installation when the installation is
completed and the customer accepts the product and for on-site support as the
support service is provided. For products that have not been demonstrated to
meet product specifications for the customer prior to shipment, revenue is
recognized when installation is complete and the customer accepts the product.
Revenues can fluctuate significantly as a result of the timing of customer
acceptances. At March 31, 2003 and 2002, the Company had deferred revenue of
$8.1 million and $6.9 million, respectively.
17
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
Accrual for warranty expenses
The Company generally provides one-year labor and two-year material warranty on
its products. Warranty expenses are accrued at the time that revenue is
recognized from the sale of products. At present, based upon historical
experience, the Company accrues material warranty equal to 2% and 5% of shipment
value for its 200mm and 300mm products, respectively, and labor warranty equal
to $20,000 per system for both its 200mm and 300mm products. At the end of every
quarter, the Company reviews its actual spending on warranty and reassesses if
its accrual is adequate to cover warranty expenses on the systems in the field
which are still under warranty. Differences between the required accrual and
recorded accrual are charged or credited to warranty expenses for the period. At
March 31, 2003 and 2002, the Company had accrued $1,290,000 and $968,000,
respectively, for material and labor warranty obligations. Actual results could
differ from estimates. In the unlikely event that a problem is identified that
would result in the need to replace components on a large scale, we would
experience significantly higher expenses and our results of operations and
financial condition could be materially and adversely effected.
Valuation of Inventories
Inventories are recorded at the lower of standard cost, which approximates
actual cost on a first-in-first-out basis, or market value. We write down
inventories to net realizable value based on forecasted demand and market
conditions. Raw material and purchased parts include spare parts inventory for
systems were $3.8 million and $4.2 million at March 31, 2003 and 2002,
respectively. The forecasted demand for spare parts takes into account the
Company's obligations to support systems for periods that are as long as five
years.
Actual demand and market conditions may be different from those projected by the
Company. This could have a material effect on operating results and financial
position. At March 31, 2003 and 2002, the Company increased its inventory
reserve by $100,000 and $368,000, respectively.
Valuation of research and demonstration equipment
Equipment includes research and demonstration equipment, which is located in our
Applications Laboratory and is used to demonstrate to our customers the
capabilities of our equipment to process wafers and deposit films. The gross
value of demonstration equipment is based on the cost of materials and actual
factory labor and overhead expenses incurred in manufacturing the equipment.
Costs related to refurbishing or maintaining existing demonstration equipment,
which do not add to the capabilities or useful life of the equipment, are not
capitalized and are expensed as incurred. Demonstration equipment is stated at
cost and depreciated over a period of five years. If the Company sells the
equipment, it may experience gross margins that are different from the gross
margins achieved on equipment manufactured specifically for customers.
RESULTS OF OPERATIONS
NET SALES. Net sales for three months ended March 31, 2003 of $17.7 million
represented a increase of 84% when compared to net sales of $9.6 million for the
same quarter of 2002, and increased 57% sequentially from $11.3 million in the
fourth quarter of 2002. Two 300 mm ALD system, three 200 mm ALD system and one
200 mm CVD system were recognized as revenue in the first quarter of 2003.
First quarter of 2002 revenues consisted of one 300 mm CVD system, one 300 mm
ALD system, one 200 mm CVD system. In the fourth quarter of 2002, one 300 mm CVD
system, one 200 mm CVD system and one 200 mm ALD system were recognized as
revenue.
18
COST OF GOODS SOLD. Cost of goods sold for the three months ended March 31,
2003 was $11.6 million, compared to $7.5 million for the same period in 2002.
Cost of goods was $8.7 million in the fourth quarter of 2002. Gross profit as a
percentage of revenues was 35 % in the first quarter of 2003 compared to 22% in
the same period of 2002. Gross profit as a percentage of revenue was 23% in the
fourth quarter of 2002. The higher gross profit percentages in the first
quarter of 2003 was a direct result of increasing production volumes and
manufacturing efficiencies compared to the first quarter of 2002 and the fourth
quarter of 2002. First quarter 2002 cost of sales also included $368,000 of
inventory reserves and fourth quarter 2002 cost of sales included $1,227,000 of
inventory reserves compared to first quarter of 2003, when $100,000 reserves
were recorded.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the
quarter ended March 31, 2003 was $2.1 million, compared with $2.2 million for
the same period in 2002. Research and development expenses for the fourth
quarter of 2002 were $1.9 million. As a percent of net sales, research and
development expenses were 12%, 23% and 17% in the first quarter of 2003, first
quarter of 2002 and fourth quarter of 2002, respectively. The dollar decrease
in the first quarter of 2003 when compared to 2002 was mainly due to the
decrease in headcount.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses were $3.2 million in the first quarter of 2003 compared to $3.4
million in the first quarter of 2002 and $2.4 million in the fourth quarter of
2002. As a percent of net sales, selling, general and administrative expenses
were 18%, 36% and 21 % in the first quarter of 2003, first quarter of 2002 and
fourth quarter of 2002, respectively. The increase in selling, general and
administrative expenses in the first quarter of 2003 when compared to the fourth
quarter of 2002 was mainly due to an increase in professional fees of $617,000
including increase in legal fees of $356,000 primarily related to settlement of
the "ASMI" lawsuit and increases in sales commission of $71,000 due to an
increase in sales.
OTHER INCOME (EXPENSE), NET. Other expenses for the first quarter of 2003
were $423,000 compared to $255,000 in first quarter of 2002. The increase in
other expenses in first quarter of 2003 compared to the first quarter of 2002
was primarily related to interest charges of $347,000 on convertible notes. The
convertible notes were issued in the third quarter of 2002. The interest
expenses in first quarter of 2003 was partially offset by increase in other
income of $76,000, comprised of interest income from cash deposits of $22,000
and currency exchange gain of $54,000 whereas in the first quarter of 2002 total
other income was $44,000
PROVISION FOR INCOME TAXES. We did not record any provision for income
taxes for the three months ended March 31, 2003 for U.S as we have enough
federal loss carry-forwards to cover net income recorded in U.S for the quarter
ended March 31, 2003. We did not record any provision for income taxes for the
three months ended March 31, 2002. We provide for a full valuation allowance
against the tax benefit associated with the losses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, our cash and cash equivalents were $12.5 million, an
increase of $1.0 million over cash and cash equivalents of $11.5 million held as
of December 31, 2002. Cash used by operating activities totaled $1.4 million
for the three months ended March 31, 2003, and consisted primarily of net
increase in customer accounts receivables of $6.5 million due to an increase in
sales and increase of inventories $1.7 million for building future shipments,
partially offset by depreciation and amortization expenses of $1.0 million and
increase in deferred revenue and customer deposits of $5.4 million because of an
increase in shipments.
19
Financing activities provided cash of $2.6 million for the three months
ended March 31, 2003 and primarily consists of net proceeds from short-term bank
borrowings compared with $8.3 million for the three months ended March 31, 2002.
The increase in cash provided from financing activities in the first quarter of
2002 was mainly due to $8 million of proceeds received from a sale of common
stock and warrants to purchase common stock.
We made capital expenditures of $207,000 for the three months ended March
31, 2003. These expenditures were primarily related to purchase of property,
plant and equipment
Our primary source of funds at March 31, 2003 consisted of $12.5 million in
cash and cash equivalents, $14.1 million of accounts receivable and a credit
line of $15 million with Silicon Valley Bank, of which $10 million is
outstanding at March 31, 2003.
A summary of our contractual obligations as of March 31, 2003 is as follows
(in thousands):
Less than After
Total Revolving 1 year 1-3 years 4-5 years 5 years
- ------------------- -------- --------- ---------- --------- --------- -------
Silicon Valley Bank $ 10,074 $ 10,074 $ - $ - $ - $ -
Citicapital . 436 N/A 253 183 - -
Convertible Notes* 7,125 N/A - 7,125 - -
Operating Leases 17,680 N/A 1,628 4,946 3,768 7,338
-------- --------- ---------- --------- --------- -------
$ 35,315 $ 10,074 $ 1,881 $ 12,254 $ 3,768 $ 7,338
======== ========= ========== ========= ========= =======
*In the event of a change of control in the Company, the note holder may elect to
receive repayment of the notes at a premium of 10%.
The Company has an accumulated deficit of $107 million and cash used
in operations of $1.4 million during the three months ended March 31, 2003. The
Company is in the process of executing its business strategy and has plans to
eventually achieve profitable operations on an ongoing basis. Management
believes that existing cash, cash generated by operations, and available
financing will be sufficient to meet projected working capital, capital
expenditure and other cash requirements for the next twelve months. Management
cannot provide assurances that its cash and its future cash flows from
operations alone will be sufficient to meet operating requirements and allow the
Company to service debt and repay any underlying indebtedness at maturity. If
the Company does not achieve anticipated cash flows, we may not be able to meet
planned product release schedules and forecast sales objectives. In such event
the Company will require additional financing to fund on-going and planned
operations and may need to implement expense reduction measures. In the event
the Company needs additional financing, there is no assurance that funds would
be available to the Company or, if available, under terms that would be
acceptable to the Company.
20
RELATED PARTY TRANSACTIONS
Mario M. Rosati, a director of the Company is also a partner of Wilson
Sonsini Goodrich and Rosati, the general counsel of the Company. During the
first quarters of 2003 and 2002, the Company paid $138,000 and $108,000,
respectively, to Wilson Sonsini Goodrich & Rosati. At March 31, 2003, the
Company owed approximately $189,000 to Wilson Sonsini Goodrich & Rosati.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. We have adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002. The adoption of FIN No. 45 did not have a material impact on
the consolidated financial statements for the three months ended March 31, 2003.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire our stock. We have adopted the annual disclosure provisions of SFAS No.
148 in our financial reports for the year ended December 31, 2002 and have
adopted the interim disclosure provisions for quarterly financial reports
starting quarter ending March 31, 2003. As the adoption of this standard
involves disclosures only, we do not expect a material impact on our
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." FIN No. 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The adoption of this
standard did not have a material impact on our financial position, results of
operations, or cash flows for the three months ended March 31, 2003.
21
RISK FACTORS
Sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors set forth above in Management's Discussion and Analysis and the Risk
Factors set forth below.
WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO
ACHIEVE OR SUSTAIN PROFITABILITY
We have experienced losses of $11.6 million, $6.7 million and $9.6 million
for 2002, 2001 and 2000, respectively.
While we believe our cash position, anticipated cash from operations, and
our available credit facilities are sufficient for the next twelve months, we
cannot provide assurances that future cash flows from operations will be
sufficient to meet operating requirements and allow us to service debt and repay
any underlying indebtedness at maturity. If we do not achieve the cash flows
that we anticipate, we may not be able to meet our planned product release
schedules and our forecast sales objectives. In such event we will require
additional financing to fund on-going and planned operations and may need to
implement further expense reduction measures, including, but not limited to, the
sale of assets, the consolidation of operations, workforce reductions, and/or
the delay, cancellation or reduction of certain product development, marketing,
licensing, or other operational programs. Some of these measures would require
third-party consents or approvals, including that of our bank, and we cannot
provide assurances that these consents or approvals will be obtained. There can
be no assurance that we will be able to make additional financing arrangements
on satisfactory terms, if at all, and our operations and liquidity would be
materially adversely affected.
We cannot assure our shareholders and investors that we will achieve
profitability in fiscal 2003 and beyond, nor can we provide assurances that we
will achieve the sales necessary to avoid further expense reductions in the
future.
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS
In first quarter ended March 31, 2003, Samsung Electronics Company, Ltd.,
Seagate Technologies, Inc., Selete and ZMC Technology Pte Ltd. accounted for
67%, 19%, 8%, and 3% of revenues, respectively. In first quarter ended March
31, 2002, Samsung Electronics Company, Ltd., and Selete accounted for 70%, and
27% of revenues, respectively.
22
The semiconductor manufacturing industry generally consists of a limited
number of larger companies. Consequently, we expect that a significant portion
of our future product sales will continue to be concentrated within a limited
number of customers, even though we are making progress in reducing the
concentration of our reliance on these customers through our strategy of product
and customer diversification.
None of our customers has entered into a long-term agreement with us
requiring them to purchase our products. In addition, sales to these customers
may decrease in the future when they complete their current semiconductor
equipment purchasing requirements. If any of our customers were to encounter
financial difficulties or become unable to continue to do business with us at or
near current levels, our business, results of operations and financial condition
could be materially harmed. Customers may delay or cancel orders or may stop
doing business with us for a number of reasons including:
- customer departures from historical buying patterns;
- general market conditions;
- economic conditions; or
- competitive conditions in the semiconductor industry or in the
industries that manufacture products utilizing integrated circuits.
WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND
SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT
IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS.
We rely on third parties to manufacture the components used in our
products. Some of our suppliers are sole or limited source. In addition, some
of these suppliers are relatively small-undercapitalized companies that may have
difficulties in raising sufficient funding to continue operations. There are
risks associated with the use of independent suppliers, including unavailability
of or delays in obtaining adequate supplies of components and potentially
reduced control of quality, production costs and timing of delivery. We may
experience difficulty identifying alternative sources of supply for certain
components used in our products. In addition, the use of alternate components
may require design alterations, which may delay installation and increase
product costs. These components may not be available in the quantities
required, on reasonable terms, or at all. Financial or other difficulties faced
by our suppliers or significant changes in demand for these components or
materials could limit their availability. Any failures by these third parties
to adequately perform may impair our ability to offer our existing products,
delay the submission of products for regulatory approval, and impair our ability
to deliver products on a timely basis or otherwise impair our competitive
position. Establishing our own capabilities to manufacture these components
would be expensive and could significantly decrease our profit margins. Our
business, results of operations and financial condition would be adversely
affected if we were unable to continue to obtain components in the quantity and
quality desired and at the prices we have budgeted.
WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT
ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES
Export sales accounted for approximately 98% of our total net sales for the
three months ended March 31, 2003. Net sales to our South Korean-based customers
accounted for approximately 66% of total net sales for the three months ended
March 31, 2003. Export sales accounted for approximately 72%, 93% and 98% of our
total net sales in 2002, 2001 and 2000, respectively. Net sales to our South
Korean-based customers accounted for approximately 56%, 73% and 92% of total net
sales in 2002, 2001 and 2000, respectively. We anticipate that international
sales, including sales to South Korea, will continue to account for a
significant portion of our net sales. As a result, a significant portion of our
net sales will be subject to additional risks, including:
23
- unexpected changes in foreign law or regulatory requirements;
- exchange rate volatility;
- tariffs and other barriers;
- political and economic instability;
- military confrontation;
- Severe Acute Respiratory Syndrome (SARS);
- difficulties in accounts receivable collection;
- extended payment terms;
- difficulties in managing distributors or representatives;
- difficulties in staffing our subsidiaries;
- difficulties in managing foreign operations; and
- potentially adverse tax consequences.
Our foreign sales are primarily denominated in U.S. dollars and we do not
engage in hedging transactions. As a result, our foreign sales are subject to
the risks associated with unexpected changes in exchange rates, which could
increase the cost of our products to our customers and could lead these
customers to delay or defer their purchasing decisions.
Wherever currency devaluations occur abroad, our goods become more
expensive for our customers in that country. In addition, difficult economic
conditions may limit capital spending by our customers. These circumstances may
also affect the ability of our customers to meet their payment obligations,
resulting in the cancellations or deferrals of existing orders and the
limitation of additional orders.
OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD
CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO
FAIL TO ACHIEVE ANTICIPATED SALES
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. Although we
are marketing our atomic layer deposition technology to non-semiconductor
markets such as magnetic thin film heads, flat panel displays,
micro-electromechanical systems and inkjet printers, we are still dependent on
sales to semiconductor manufacturers. The semiconductor industry is cyclical
which impacts the semiconductor industry's demand for semiconductor
manufacturing capital equipment.
Semiconductor industry downturns have significantly decreased our revenues,
operating margins and results of operations in the past. During the industry
downturn in 1998, several of our customers delayed or cancelled investments in
new manufacturing facilities and equipment due to declining DRAM prices, the
Asian economic downturn, and general softening of the semiconductor market. This
caused our sales in 1998 to be significantly lower than in the prior three
years.
After the dramatic industry boom for semiconductor equipment that peaked
early in the year 2000, another cyclical downturn is presently occurring. The
sharp and severe industry downturn in 2001 was the largest in the industry's
history. Almost all previous downturns have been solely due to pricing declines.
However, the 2001 downturn in the industry marked a corresponding decline in
unit production, as well as price reduction. We expect that our revenues will
continue to be further impacted by the continued downturn in the semiconductor
industry and global economy, which may prevent us from increasing our revenues
and achieving profitability.
24
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.
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
25
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 quarters. 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. Consequently, our
penetrating these markets and our ability to get additional orders may be
limited.
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.
26
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
appropriate. However, no assurance can be given that we will be able to
negotiate any such necessary licenses on commercially reasonable terms, or at
all, or that any litigation resulting from such claims would not have a material
adverse effect on our business and financial results.
Litigation is time consuming, expensive and its outcome is uncertain. We
may not prevail in any litigation in which we are involved. Should we be found
to infringe any of the patents asserted or any other intellectual property
rights of others, in addition to potential monetary damages and any injunctive
relief granted, we may need either to obtain a license to commercialize our
products or redesign our products so they do not infringe any third party's
intellectual property. If we are unable to obtain a license or adopt a
non-infringing product design, we may not be able to proceed with development,
manufacture and sale of our products, which would have an immediate and
materially adverse impact on our business and our operating results.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees. The loss of Dr. Elder or Dr. Seidel or other key employees could
limit or delay our ability to develop new products and adapt existing products
to our customers' evolving requirements and would also result in lost sales and
diversion of management resources. None of our executive officers are bound by a
written employment agreement, and the relationships with our officers are at
will.
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
and process engineers. Competition for such personnel is intense, particularly
in the San Francisco bay area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop,
market, or manufacture our products or to perform services for our customers. As
a result, our growth could be limited due to our lack of capacity to develop and
market our products to customers, or 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.
27
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 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 SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR
PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US
We currently sell and support our thin film products through direct sales
and customer support organizations in the 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
In 2000, we invested significant resources in Japan by establishing a
direct sales organization, Genus-Japan, Inc. To date, we have had limited
success in penetrating in Japanese semiconductor industry. Although we continue
to invest significant resources in our Japan office, we may not be able to
attract new customers in the Japanese semiconductor industry, and as a result,
we may fail to yield a profit or return on our investment in 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 fluctuations
which have affected the market price of many technology companies, in
particular, and which have often been unrelated to the operating performance of
these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which we do
business, may adversely affect the market price of our common stock.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A disaster
could severely damage our ability to deliver our products to our customers. Our
products depend on our ability to maintain and protect our operating equipment
and computer systems, which are primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. Although we maintain general
business insurance against interruptions such as fires and floods, there can be
no assurance that the amount of coverage will be adequate in any particular
case.
28
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE WILL DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS
As of March 31, 2003, we have approximately of 6,897,061 shares of common
stock underlying warrants, and outstanding employee stock options. Of the stock
options, 2,223,943 shares are exercisable as of March 31, 2003. All of the
shares underlying the warrants are currently exercisable. Some warrants have
terms providing for an adjustment of the number of shares underlying the
warrants in the event that we issue new shares at a price lower than the
exercise price of the warrants, where we make a distribution of common stock to
our shareholders or effect a reclassification.
If all of the shares underlying the exercisable options and warrants were
exercised and sold in the public market, the value of your current holdings in
Genus may decline because there may not be sufficient demand to purchase the
increased number of shares that would be available for sale.
WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR
PERCENTAGE OWNERSHIP OF GENUS STOCK
On September 7, 2000, the Company's Board of Directors declared a dividend
pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar
earlier plan that had expired on July 3, 2000. The intended purpose of the
Rights Plan is to protect shareholders' rights and to maximize share value in
the event of an unfriendly takeover attempt. As of the record date of October
13, 2000, each share of common stock of Genus, Inc. outstanding was granted one
right under the new plan. Each right is exercisable only under certain
circumstances and upon the occurrence of certain events and permits the holder
to purchase from the Company one one-thousandth (0.001) of a share of Series C
Participating Preferred Stock at an initial exercise price of forty dollars
($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred
stock authorized in connection with the Rights Plan will be used for the
exercise of any preferred shares purchase rights in the event that any person or
group (the Acquiring Person) acquires beneficial ownership of 15% or more of the
outstanding common stock. In such event, the shareholders (other than the
Acquiring Person) would receive common stock of the Company having a market
value of twice the exercise price. Subject to certain restrictions, the Company
may redeem the rights issued under the Rights Plan for $0.001 per right and may
amend the Rights Plan without the consent of rights holders. The rights will
expire on October 13, 2010, unless redeemed by the Company.
In the event that circumstances trigger the transferability and
exercisability of rights granted in our Rights Plan, your current holdings in
Genus may decline as a result of dilution to your percentage ownership in Genus
or as a result of a reduction in the per share value of our stock resulting from
the increase in the number of outstanding shares available and your failure to
exercise your rights under the Rights Plan.
In the event of a change of control of the Company, the convertible note
holders may elect to receive repayment of the notes at a premium of 10% over the
face value of the notes.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this 10-Q report that may not prove
to be accurate.
29
This 10-Q report contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding, among other items, our business
strategy, growth strategy and anticipated trends in our business. We may make
additional written or oral forward-looking statements from time to time in
filings with the Securities and Exchange Commission or otherwise. When we use
the words "believe," "expect," "anticipate," "project" and similar expressions,
this should alert you that this is a forward-looking statement.
We base these forward-looking statements on our expectations. They are
subject to a number of risks and uncertainties that cannot be predicted,
quantified or controlled. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements.
Statements in this 10-Q report, including those set forth above in "Risk
Factors,", and in documents incorporated into this 10-Q report, describe
factors, among others, that could contribute to or cause these differences. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this 10-Q report will in fact transpire
or prove to be accurate. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
Statements in this report, including those set forth above in "Risk
Factors," and in documents incorporated into this report, describe factors,
among others, that could contribute to or cause these differences. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this report will in fact transpire or
prove to be accurate. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
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. The spare parts and service sales of $2.6
million in Q1 of 2003 generated by the South Korean subsidiary are WON
denominated. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, reduce the
demand for our products. Reduced demand for our products could materially
adversely affect our business, results of operations and financial condition.
We have both fixed rate and floating rate interest obligations. Fixed rate
obligations may result in interest expenses in excess of market rates if
interest rates fall, while floating rate obligations may result in additional
interest costs if interest rates rise. An increase of one percentage point in
interest rates would not materially impact the results of our operations.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
30
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days before filing this report, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are designed to
ensure that the information that the Company must disclose in its reports filed
under the Securities Exchange Act is communicated and processed in a timely
manner. William W.R. Elder, Chairman of the Board, President and Chief
Executive Officer and Shum Mukherjee, Executive Vice President and Chief
Financial Officer, participated in this evaluation.
Based on this evaluation, Messrs. Elder and Mukherjee concluded that, as of the
date of their evaluation, the Company's disclosure controls and procedures were
effective, except as noted in the next paragraph. Since the date of the
evaluation described above, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls.
During the fiscal 2002 financial reporting process, management, in consultation
with the Company's independent accountants, identified deficiencies involving
internal controls over inventories, warranties and the Company's Korean
operations which constituted a "Reportable Condition" under standards
established by the American Institute of Certified Public Accountants.
Management believes that these matters have not had any material impact on our
financial statements. Management has established a project plan and has
completed the initial design of processes and controls to address these
deficiencies. Development is ongoing and implementation/completion of this
project is anticipated in 2003.
PART II. OTHER INFORMATION
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 Registration Rights Agreement, dated January 17, 2002, as amended, amongst
the Registrant and the Investors (20)
31
4.8 Securities Purchase Agreement dated July 31, 2002 among the Company and
the Purchasers signatory thereto. (21)
4.9 Resale Registration Rights Agreement dated August 14, 2002 among the
Company and the Purchasers signatory thereto. (21)
4.10 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (21)
10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4 Mulliken
Way, Newburyport, Massachusetts, and amendment and extension of lease,
dated March 17, 1987 (1)
10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at Unit
11A, Melbourn Science Park, Melbourn, Hertz, England (1)
10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5)
10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10)
10.5 Registrant's 2000 Stock Plan (19)
10.6 Distributor/Representative Agreement, dated August 1, 1984, between
Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.) (1)
10.7 Exclusive Sales and Service Representative Agreement, dated October 1,
1989, between Registrant and AVBA Engineering Ltd. (3)
10.8 Exclusive Sales and Service Representative Agreement, dated as of April 1,
1990, between Registrant and Indosale PVT Ltd. (3)
10.9 License Agreement, dated November 23, 1987, between Registrant and Eaton
Corporation (1)
10.10 Exclusive Sales and Service Representative Agreement, dated May 1, 1989,
between Registrant and Spirox Taiwan, Ltd. (2)
10.11 Lease, dated April 7, 1992, between Registrant and The John A. and Susan
R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive,
Sunnyvale, California (6)
10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the
Registrant and Advantage Production Technology, Inc. (7)
10.13 License and Distribution Agreement, dated September 8, 1992, between the
Registrant and Sumitomo Mutual Industries Ltd. (8)
10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot
62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9)
10.15 International Distributor Agreement, dated July 18, 1997, between
Registrant and Macrotron Systems GmbH (12)
10.16 Credit Agreement, dated August 18, 1997, between Registrant and Sumitomo
Bank of California (12)
10.18 Settlement Agreement and Mutual Release, dated April 20, 1998, between
Registrant and James T. Healy (16)
10.19 Form of Change of Control Severance Agreement (16)
10.20 Settlement Agreement and Mutual Release, dated January 1998, between the
Registrant and John Aldeborgh (18)
10.21 Settlement Agreement and Mutual Release, dated May 1998, between the
Registrant and Mary Bobel (18)
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.
32
(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.
(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
Annual Report on Form 10-K for the year ended December 31, 2000.
(20) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated January 25, 2002.
(21) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated August 20, 2002.
(b) Report on Form 8-K
None.
33
GENUS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2003 GENUS, INC.
/s/ William W.R. Elder
----------------------------
William W.R. Elder, President,
Chief Executive Officer and Chairman
/s/ Shum Mukherjee
----------------------------
Shum Mukherjee
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
34
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: May 15, 2003
/s/ William W. R. Elder
---------------------------
William W.R. Elder
Chief Executive Officer
35
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: May 15, 2003
/s/ Shum Mukherjee
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Shum Mukherjee
Chief Financial Officer
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