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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, 2004 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 X No
--- ---
As of April 30, 2004, the issuer had 39,662,451 shares of common stock
outstanding.
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GENUS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2004 and March 31, 2003 (unaudited). . . . . . 3
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2004 and March 31, 2003 (unaudited). . . . . . 5
Notes to Condensed Consolidated Financial Statements (unaudited). . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . 30
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART II. OTHER INFORMATION
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . 31
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ---------
Net sales $ 12,207 $ 17,695
Costs and expenses:
Cost of goods sold 8,550 11,577
Research and development 1,994 2,113
Selling, general and administrative 3,018 3,174
------------ ---------
(Loss) income from operations (1,355) 831
Other expenses, net 304 423
------------ ---------
Net (loss) income before taxes (1,659) 408
Provision for income tax 18 -
------------ ---------
Net (loss) income $ (1,677) $ 408
------------ ---------
Net (loss) income per share:
Basic $ (0.04) $ 0.01
============ =========
Diluted $ (0.04) $ 0.01
============ =========
Shares used in per share calculation - basic 39,590 28,913
============ =========
Shares used in per share calculation - diluted 39,590 30,532
============ =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 28,346 $ 41,608
Short term investments . . . . . . . . . . . . . . . . . . 8,275 -
Accounts receivable (net of allowance for doubtful
accounts of $160 in 2004 and $0 in 2003) . . . . . . . . 5,790 9,606
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 10,184 9,783
Other current assets . . . . . . . . . . . . . . . . . . . 887 854
----------- --------------
Total current assets . . . . . . . . . . . . . . . . . . 53,482 61,851
Equipment, furniture and fixtures, net . . . . . . . . . . . 8,435 8,748
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,112 1,169
----------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 63,029 $ 71,768
=========== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings . . . . . . . . . . . . . . . . $ 183 $ 6,749
Accounts payable . . . . . . . . . . . . . . . . . . . . . 4,030 4,956
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 3,575 4,130
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 207 331
Customer advances. . . . . . . . . . . . . . . . . . . . . 975 372
----------- --------------
Total current liabilities . . . . . . . . . . . . . 8,970 16,538
7% Convertible notes . . . . . . . . . . . . . . . . . . . 5,970 5,806
----------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . 14,940 22,344
----------- --------------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 100,000 shares;
Issued and outstanding 39,620 shares in
2004 and 39,554 in 2003. . . . . . . . . . . . . . . . . 163,097 163,061
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (113,005) (111,328)
Note receivable from shareholder . . . . . . . . . . . . . - (187)
Accumulated other comprehensive loss . . . . . . . . . . . (2,003) (2,122)
----------- --------------
Total shareholders' equity . . . . . . . . . . . . . 48,089 49,424
----------- --------------
Total liabilities and shareholders' equity . . . . . . . . $ 63,029 $ 71,768
=========== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . $ (1,677) $ 408
Adjustments to reconcile net (loss) income to net cash
from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 855 809
Provision for excess and obsolete inventories. . . . . . . 144 100
Provision for doubtful accounts. . . . . . . . . . . . . . 160 -
Amortization of deferred finance costs . . . . . . . . . . 236 222
Write-off of fixed assets. . . . . . . . . . . . . . . . . - 36
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . 3,656 (6,545)
Inventories. . . . . . . . . . . . . . . . . . . . . . . (545) (1,691)
Other current assets . . . . . . . . . . . . . . . . . . (33) (706)
Other assets . . . . . . . . . . . . . . . . . . . . . . 3 (172)
Accounts payable . . . . . . . . . . . . . . . . . . . . (926) 611
Accrued expenses . . . . . . . . . . . . . . . . . . . . (555) 252
Deferred revenue and customer advances . . . . . . . . . 479 5,386
----------- -----------
Net cash generated by (used in) operating activities . . 1,797 (1,290)
----------- -----------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures. . . . . . (480) (207)
Acquisition of intangible assets . . . . . . . . . . . . . (80) (81)
Acquisition of short-term investments . . . . . . . . . . . (8,275) -
----------- -----------
Net cash used in investing activities. . . . . . . . . . (8,835) (288)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock . . . . . . . . . 36 445
Proceeds (payments) from (on)short-term bank borrowings, net (6,500) 2,261
Payments for debt. . . . . . . . . . . . . . . . . . . . . . (66) (79)
Proceeds from shareholder note . . . . . . . . . . . . . . . 187 -
----------- -----------
Net cash (used in) provided by financing activities. . . (6,343) 2,627
----------- -----------
Effect of exchange rate changes on cash. . . . . . . . . . . . 119 (112)
----------- -----------
Net (decrease) increase in cash and cash equivalents. . . . . (13,262) 937
Cash and cash equivalents, beginning of period . . . . . . . . 41,608 11,546
----------- -----------
Cash and cash equivalents, end of period . . . . . . . . . . . $ 28,346 $ 12,483
=========== ===========
Supplemental cash flow information
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 314 $ 319
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 151
Non-cash investing and financing activities:
Transfer of inventory to fixed assets. . . . . . . . . . . . $ - $ 525
Transfer of fixed assets from inventory . . . . . . . $ - $ 295
Transfer of prepaids to fixed assets . . . . . . . . . . . . $ - $ 600
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited 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 Annual Report on Form 10-K for the fiscal year ended December 31,
2003.
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 $113 million as of March 31,
2004 and a net loss of $1.7 million during the three months ended March 31,
2004. 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, cash equivalents, and short
term investments 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.
Any additional equity financing may be dilutive to shareholders, and any
additional debt financing, if available, may involve restrictive covenants.
Certain reclassifications have been made to the prior period's financial
statements to conform to current period's presentation. Such reclassifications
had no effect on the previously reported (loss) income from operations or
accumulated deficit.
NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net (loss) income per share is computed by
dividing net (loss) income 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
(loss) income per share is as follows (in thousands, except per share data):
6
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ---------
Basic:
Net (loss) income $ (1,677) $ 408
============ =========
Weighted average common shares
outstanding 39,590 28,913
============ =========
Basic net(loss) income per share $ (0.04) $ 0.01
============ =========
THREE MONTHS ENDED
MARCH 31,
2004 2003
----------- ----------
Diluted:
Net (loss) income $ (1,677) $ 408
Weighted average common shares
outstanding 39,590 28,913
Effect of dilutive stock options - 648
Effect of dilutive warrants - 971
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39,590 30,532
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Diluted net (loss) income per share $ (0.04) $ 0.01
=========== ==========
Stock options, warrants and convertible debt to purchase approximately
8,824,137 shares of common stock were outstanding during the three months ended
March 31, 2004, 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,
2004.
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 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, 2004 and 2003 (in thousands, except
per share data):
7
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
----------- -------
Net income (loss), as reported $ (1,677) $ 408
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 (620) (703)
----------- -------
Pro forma net loss attributable to common
shareholders $ (2,297) $ (295)
=========== =======
Earnings per share
Basic - as reported $ (0.04) $ 0.01
Basic - pro forma $ (0.06) $(0.01)
Diluted - as reported $ (0.04) $ 0.01
Diluted - as pro forma $ (0.06) $(0.01)
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, 2004 and 2003.
8
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
----------- -------
Risk free interest rates 2.77% 2.17%
Expected life 3.75 years 3.0 years
Expected volatility 99% 100%
Expected dividend yield 0% 0%
The weighted average fair value of options granted in the three months
ended March 31, 2004 and 2003 was $3.10 and $1.63, 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, 2004 and 2003.
THREE MONTHS ENDED
MARCH 31,
2004 2003
---------- ----------
Risk free interest rates 0.98% 1.10%
Expected life 0.5 years 0.5 years
Expected volatility 79% 93%
Expected dividend yield 0% 0%
The weighted average fair value of those purchase rights granted in the
three months ended March 31, 2004 and 2003 was $2.16 and $0.82, 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. The Company has 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 104, 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, 2004 and December 31, 2003,
the Company had deferred revenue of $207,000 and $331,000, respectively.
9
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
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
On December 20, 2001 and as amended on March 27, 2002 and March 20, 2003,
the Company established line of credit facilities from Silicon Valley bank for
$15.0 million. The borrowable amounts under the credit facilities are 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 line of credit 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 to Silicon Valley Bank) of $15
million. As of March 31, 2004, and December 31, 2003, there was $0 and $6.5
million outstanding respectively, under this credit facility.
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. The
balance outstanding under this agreement was $183,000 and $249,000 outstanding
at March 31, 2004 and December 31, 2003, respectively.
CONVERTIBLE NOTES AND WARRANTS
On August 15, 2002, the Company raised $7.0 million, net of issuance costs,
by issuing $7.8 million unsecured 7% convertible notes and warrants to purchase
2,761,000 shares of common stock.
$7.5 million of the convertible notes were convertible into common stock
at a price of $1.42 per share and a $300,000 convertible note was convertible
into common stock at a price of $1.25 per share. During 2002, convertible
notes with a face value of $525,000 were converted into common stock at a price
of $1.42 and convertible notes with a face value of $150,000 were converted at a
price of $1.25 per share. During 2003, convertible notes with a face value of
$150,000 were converted at a price of $1.25 per share. The remaining
convertible notes with a face value of $6,975,000 are redeemable three years
after issuance or may be converted into 4,912,000 shares of common stock at a
price of $1.42 per share prior to the redemption date at the election of the
investors. 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.
10
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
Warrants exercisable for 2,641,000 shares of common stock had an
exercise price of $1.42 per share and warrants exercisable for 120,000 shares
of common stock had an exercise price of $1.25 per share. In 2002, warrants
for 300,000 shares were exercised for cash proceeds of $400,000. The remaining
warrants were exercised during 2003 for cash proceeds of $3.5 million.
The net cash proceeds from the issuance of the convertible notes and
warrants were recorded as follows (in thousands):
Convertible note (face value $7.8 million) $ 5,560
Detachable warrants 1,312
Beneficial conversion feature 928
-------
Proceeds from convertible notes and warrants 7,800
Other asset, issuance costs (814)
-------
Net cash proceeds $ 6,986
=======
The Company classified the warrants as equity and allocated a portion of
the proceeds from the convertible notes to the warrants, using the relative fair
value method in accordance with APB No. 14. " Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants". The Company determined the fair
value of the warrants, using the Black Scholes option-pricing model with a risk
free interest rate of 4.4 %, volatility of 75%, a term of three years and no
dividend yield. The allocation of proceeds to the warrants reduced the
carrying value of the convertible notes. As a result, the fair value of the
common stock issuable upon conversion of the notes exceeded the carrying value
of the convertible notes, resulting in a beneficial conversion feature. The
value of the beneficial conversion feature is accreted over the stated term of
the convertible notes in accordance with EITF No. 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF No. 00-27, "Application Issue No. 98-5 to
Certain Convertible Instruments".
The $2.2 million difference between the $7.8 million face value of the
notes and the $5.6 million original carrying value, representing the value of
the warrants and the beneficial conversion feature, has been recorded as equity
and is accreted as interest expense over the three year term of the convertible
notes, using the effective interest rate method.
The Company incurred issuance costs of approximately $868,000, representing
cash obligations of $814,000 and warrants with a fair value of $54,000. The
warrants to purchase 79,000 shares of common stock at $1.42 per share was
subsequently net exercised for 38,631 shares of common stock. Issuance costs are
included with other assets and are amortized as interest expense over the stated
term of the convertible notes.
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.
11
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
The Company recorded interest costs related to the convertible notes and
warrants of $358,000 and $345,000 for the three month period ended March 31,
2004 and 2003, respectively.
INVENTORIES
Inventories comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
---------- -------------
Raw materials and purchased parts $ 5,511 $ 4,602
Work in process 4,111 3,686
Finished goods 562 478
Inventory at customers' locations - 1,017
---------- -------------
$ 10,184 $ 9,783
========== =============
Inventory at customers' locations represent the cost of systems shipped to
customers for which we were awaiting customer acceptance.
12
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
---------- -------------
System warranty. . . . . . . . . . . . . . . . . . . . . . $ 1,191 $ 1,451
Accrued compensation and related expenses. . . . . . . . . 1,236 720
Federal, state and foreign income taxes. . . . . . . . . . 196 511
Accrued rent . . . . . . . . . . . . . . . . . . . . . . . 418 362
Accrued professional fees. . . . . . . . . . . . . . . . . 168 260
Accrued sales tax. . . . . . . . . . . . . . . . . . . . . - 270
Accrued interest . . . . . . . . . . . . . . . . . . . . . 62 184
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 304 372
---------- -------------
$ 3,575 $ 4,130
========== =============
WARRANTIES
The Company warrants that each of the products we sell shall be free of
defects in material and workmanship and meets performance specifications during
our warranty period. The warranty period means the period commencing upon the
earlier of, successful completion of acceptance tests agreed in writing by the
Company's customers or ninety days after the product shipment date.
In general, the Company's warranty period terminates for material coverage
in twelve to 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 three months ended March 31,
2004 and 2003 were as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
2004 2003
Balance, January 31 $ 1,451 $ 970
Accrual for warranty liability for revenues recognized in the period 268 455
Settlements made (528) (135)
----------- -----------
Balance, March 31 $ 1,191 $ 1,290
=========== ===========
13
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
COMMON STOCK AND WARRANTS
On May 17, 2001, the Company sold 2,541,785 shares of our common stock and
warrants to purchase up to 1,461,525 of additional shares of common stock for
net proceeds of approximately $6.9 million. The warrants were issued with
exercise prices ranging from $3.00 to $5.24 per share of common stock. The
warrants had terms providing for an adjustment of the number of shares
underlying the warrants in the event that the Company issued new shares at a
price lower than the exercise price of the warrants, where the new shares at a
price lower than the exercise price of the warrants, where the Company makes
distributions of common stock to its shareholders or effects a reclassification.
In January 2002, warrants exercisable for 1,270,891 shares of common stock were
adjusted and thereafter exercisable for an aggregate 760,203 additional shares
of common stock. As of March 31, 2004, with the exception of certain warrants
exercisable for 118,449 shares of common stock, the warrants issued in May 2001
have been exercised in full.
On January 25, 2002, the Company sold 3,871,330 shares of our common stock
and warrants to purchase up to 580,696 additional shares of common stock for net
proceeds of approximately $7.9 million. The warrants were issued at an exercise
price of $3.23 per share of common stock. The warrants have terms providing
for an adjustment of the number of shares underlying the warrants in the event
that the Company issues new shares at a price lower than the exercise price of
the warrants, where the Company makes a distribution of common stock to its
shareholders or effects a reclassification. In August 2002, the Company issued
a convertible note with a face value of $7.8 million and warrants to purchase
2,760,669 shares of common stock with exercise prices ranging from $1.25 to
$1.42 to the note holders. In connection with the issuance of convertible notes
in August 2002, the Company adjusted the January 2002 warrant to be exercisable
for an additional 86,979 shares of common stock. Additionally the exercise
price of the January 2002 warrants was adjusted to $2.48. As of March 31, 2004,
with the exception of certain warrants exercisable for 38,326 shares of common
stock, the warrants issued in January 2002, as amended in August 2002, have been
exercised in full.
In August 2002, the Company completed a $7.8 million financing in a private
placement of subordinated notes convertible into common stock and warrants
convertible into or exercisable for common stock. Refer to the Convertible
Notes and Warrants footnote for further information.
RELATED PARTY TRANSACTIONS
Mario M. Rosati, a Director of the Company is also a member of Wilson
Sonsini Goodrich & Rosati, a professional corporation and general counsel of the
Company. During the first quarters of 2004 and 2003, the Company paid $67,000
and $138,000, respectively, to Wilson Sonsini Goodrich & Rosati. At March 31,
2004, the Company owed approximately $32,000 to Wilson Sonsini Goodrich &
Rosati.
14
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED)
COMPREHENSIVE (LOSS) INCOME
The following are the components of comprehensive (loss) income (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2004 2003
----------- -----------
Net (loss) income. . . . . . . . . . . . $ (1,677) $ 408
Foreign currency translation adjustment. 119 (112)
----------- -----------
Comprehensive (loss) income. . . . . . . $ (1,558) $ 296
=========== ===========
The components of accumulated other comprehensive loss is as follows (in
thousands):
MARCH 31 DECEMBER 31,
2004 2003
-------------- ------------
Cumulative translation adjustment $ (2,003) $ (2,122)
============== ============
CUSTOMER CONCENTRATION
Our global customer base consists of semiconductor and non-semiconductor
manufacturers in the United States, Europe and Asia. Over the past few years we
were dependent on one customer, Samsung, for a majority of our thin film product
revenue. In first quarter ended March 31, 2004 and 2003, Samsung accounted for
70% and 67% of our revenues, respectively. Samsung accounted for 69%, 58% and
73% of our revenue in 2003, 2002 and 2001, respectively. There is no long-term
agreement between Genus and Samsung. Over the past three years, we have
gradually expanded our customer base and at March 31, 2004, we had twelve
active customers.
CONTINGENCIES
Under the terms of a Settlement with ASM International, N.V. ("ASMI"),
ASMI has the right to pursue an appeal of the District Court's judgments of
non-infringement regarding the ALD patents. If the Federal Circuit vacates the
existing judgments in favor of Genus Inc. related to the ALD patents based on a
change in the District Court's claim construction, Genus will be required to pay
ASMI $1 million for the royalty-free licenses to the ALD patents it has been
granted under the settlement agreement.
ASM filed a notice of appeal with the Federal Circuit on January 14, 2004.
ASM served its appeal brief on April 27, 2004. Genus' appeal brief is due on
June 7, 2004.
The Company believes that the appeal is without merit and intends to defend
the action vigorously.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF No. 03-01 provides guidance on
recording other-than-temporary impairments of cost method investments and
requires additional disclosures for those investments. The recognition and
measurement guidance in EITF No. 03-01 should be applied to other-than-temporary
impairments evaluations in reporting periods beginning after June 15, 2004. The
disclosure requirements are effective for fiscal years ending after June 15,
2004 and are required only for annual periods. The Company does not believe that
the adoption of this standard will have a material impact on its consolidated
balance sheet or statement of operations.
In March 2004, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 03-6, "Participating Securities and the Two-class Method Under FASB
Statement No. 128, Earnings Per Share." EITF Issue No. 03-6 addresses a number
of questions regarding the computation of earnings per share ("EPS") by
companies that have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the company when,
and if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating EPS. It
clarifies what constitutes a participating security and how to apply the
two-class method of Computing EPS once it is determined that a security is
participating, including how to allocate undistributed Earnings to such a
security. This pronouncement is effective for fiscal periods beginning after
March 31, 2004. The Company is currently evaluating the provisions of EITF 03-6
to determine the impact, if any, on its computation of EPS.
15
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, 2003. 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.
OVERVIEW
Since 1982, we have been supplying advanced manufacturing systems to the
semiconductor industry worldwide. Major semiconductor manufacturers use our
leading-edge thin film deposition equipment and process technology to produce
integrated circuits, commonly called chips, that are incorporated into a variety
of products including personal computers, communications, and equipment and
consumer electronics. We pioneered the development of chemical vapor deposition
(CVD) tungsten silicide, which is used in certain critical steps in the
manufacture of integrated circuits. In addition, today we are leading the
commercialization of atomic layer deposition, also known as ALD technology and
of our StrataGem family of products. This technology is designed to enable a
wide spectrum of thin film applications such as aluminum oxide, hafnium oxide
and other advanced dielectric insulating and conducting metal barrier materials
for advanced integrated circuit manufacturing.
Genus' consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(US GAAP). The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. On a quarterly basis,
management reevaluates its estimates and judgments based on historical
experience and relevant current conditions and adjusts the financial statements
as required.
Our global customer base consists of semiconductor and non-semiconductor
manufacturers in the United States, Europe and Asia. Over the past few years we
were dependent on one customer, Samsung, for a majority of our thin film product
revenue. In first quarter ended March 31, 2004 and 2003, Samsung accounted for
70% and 67% of our revenues, respectively. Samsung accounted for 69%, 58% and
73% of our revenue in 2003, 2002 and 2001, respectively. There is no long-term
agreement between Genus and Samsung. Over the past three years, we have
gradually expanded our customer base and at March 31, 2004, we had twelve
active customers.
16
During the fiscal year 2003, Genus increased efforts to generate revenue
from service activities by providing on-site services and support for fees based
on the time spent by our engineers. Currently, revenues from such services are
not material, but the Company hopes to expand service revenues in the future.
International revenue accounted for 86% and 98% for three months ended March
31, 2004 and 2003, respectively. International revenue accounted for 77% of
revenue in 2003, 72% of revenue in 2002 and 93% of revenue in 2001. We
anticipate that international sales, and, in particular, sales from South Korea,
will continue to account for a significant portion of our total revenue.
The local currency is the functional currency for our foreign operations in
South Korea and Japan. All other foreign operations are dollar denominated.
Gains or losses from translation of assets and liabilities of foreign operations
where the local currencies are the functional currency are included as a
component of shareholders' equity and comprehensive loss. Foreign currency
transaction gains and losses are recognized in the statement of operations. To
date, these gains and losses have not been material.
Business activity in the semiconductor and semiconductor manufacturing
equipment industries has been cyclical; for this and other reasons, Genus'
results of operations for the three months ended March 31, 2004, may not
necessarily be indicative of future operating results.
In order to support our business strategy and maintain our competitiveness,
we will be required to make significant investments in research and development.
In addition, we will need to divert additional resources to administration to
comply with our reporting requirement under the Sarbanes-Oxley Act of 2002.
Based on our cost structure, we believe selling, general and administrative
expenses will increase slightly as sales volumes increase. We depend on
increases in sales in order to attain profitability. If our sales do not
increase, we may need to reduce our operating costs, which could impair our
competitiveness and our future viability.
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:
17
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. The Company has 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 104, 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, 2004 and December 31, 2003, the
Company had deferred revenue of $207,000 and $331,000 respectively.
Revenues from sale of spare parts are generally recognized upon shipment.
Revenues from engineering services are recognized as the services are completed
over the duration of the contract.
Accrual for warranty expenses
The Company generally provides one-year labor and two-year material warranty on
its products. Warranty expenses are generally 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% of shipment value
for its 200mm products and 2%- 5% for its 300mm products, 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, 2004 and December 31, 2003, the Company had accrued
$1,191,000 and $1,451,000, respectively, for material and labor warranty
obligations. Actual results could differ from estimates. In the unlikely event
that a problem is identified that would result in the need to replace components
on a large scale, we would experience significantly higher expenses and our
results of operations and financial condition could be materially and adversely
effected.
Valuation of Inventories
Inventories are recorded at the lower of standard cost, which approximates
actual cost on a first-in-first-out basis, or market value. We write down
inventories to net realizable value based on forecasted demand and market
conditions. Raw material and purchased parts include spare parts inventory for
systems and was $5.5 million and $4.6 million at March 31, 2004 and December 31,
2003, 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, 2004 and 2003, the Company increased its cumulative
inventory write-down by $144,000 and $100,000, respectively.
18
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, 2004 were $12.2
million compared to net sales of $17.7 million for the same quarter 2003. First
quarter of 2004 revenues consisted of two 300 mm CVD systems, one 200 mm ALD
system, and one 200 mm ALD module. First quarter of 2003 revenues consisted of
two 300 mm ALD systems, three 200 mm ALD systems and one 200 mm CVD system were
recognized as revenue in the first quarter of 2003.
COST OF GOODS SOLD. Cost of goods sold for the three months ended March 31,
2004 was $8.6 million, compared to $11.6 million for the same period in 2003.
Gross profit as a percentage of revenues was 30 percent in the first quarter of
2004 compared to 35 percent in the same period of 2003. The lower gross profit
percentages in the first quarter of 2004 was primarily due to lower production
volumes which resulted in lower absorption of fixed costs during the first
quarter of 2004, compared with the same period in 2003.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the
quarter ended March 31, 2004 was $2.0 million, compared with $2.1 million for
the same period in 2003. As a percentage of net sales, research and
development expenses were 16% and 12% in the first quarter of 2004, and 2003,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses were $3.0 million in the first quarter of 2004 compared to $3.2
million in the first quarter of 2003. As a percent of net sales, selling,
general and administrative expenses were 25%, and 18 % in the first quarter of
2004 and 2003, respectively. The decrease in selling, general and
administrative expenses in the first quarter of 2004 when compared to the first
quarter of 2003 was mainly due to a decrease in legal fees of $621,000 primarily
related to settlement of the "ASMI" lawsuit and a decrease in sales commission
of $40,000 due to lower sales partially offset by an increase in salaries
expense of $200,000, bonus expenses of $200,000 and severance expense of
$85,000.
OTHER INCOME (EXPENSE), NET. Other expenses for the first quarter of 2004
were $304,000 compared to $423,000 in first quarter of 2003. The decrease in
other expenses in the first quarter of 2004 compared to the first quarter of
2003 was primarily related to an increase in interest income of $58,000,
increase in other income of $52,000 and lower interest expenses on short-term
borrowings. At March 31, 2004, there was $183,000 in short term debt outstanding
compared with $10.3 million at March 31, 2003.
PROVISION FOR INCOME TAXES. We recorded a tax provision of $18,000 and $0
during the first quarter of 2004 and 2003 respectively. The tax provision
relates to our South Korean subsidiary. We did not record any provision for
income taxes in the United States and Japan, as we incurred losses in these
entities. We provide a full valuation allowance against any tax benefit
associated with these losses as there is sufficient uncertainty as to the
ultimate realization of the assets.
19
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2004, our cash and cash equivalents were $28.3 million, a
decrease of $13.3 million over cash and cash equivalents of $41.6 million held
on December 31, 2003 and was primarily due to $8.3 million of cash invested in
short term investments and $6.5 million related to repayment of short term debt.
Cash generated by operating activities totaled $1.8 million for the three months
ended March 31, 2004, and consisted primarily of a decrease in customer accounts
receivables of $3.7 million due to collection from customers and lower billings
during the first quarter of 2004, depreciation and amortization expenses of
$855,000, provision for excess and obsolete inventory of $144,000, provision for
doubtful accounts of $160,000, amortization of deferred finance costs of
$236,000, and increase in customer advances and deferred revenue of $479,000,
partially offset by net loss of $1.7 million, an increase of inventories of
$545,000, for building future shipments, decrease in accounts payable of
$900,000 and decrease in accrued expenses of $555,000.
On 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 too an increase in sales
and increase of inventories $1.7 million, 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.
Financing activities used cash of $6.3 million for the three months ended
March 31, 2004 and primarily consists of repayment of the short-term bank
borrowings of $6.5 million.
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.
Investing activities used $8.8 million of cash during the three months
ended March 31, 2004. We made capital expenditures of $560,000 for the three
months ended March 31, 2004. These expenditures were primarily related to the
purchase of property, plant and equipment. We also purchased short term
investments of $8.3 million during the three months ended March 31, 2004.
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, 2004 consisted of $28.3 million in
cash and cash equivalents, $8.3 million in short-term investments, $5.8 million
of accounts receivable and a credit line of up to $15 million, available based
on eligible receivables and inventory, with Silicon Valley Bank, ($6.1 million
was available at March 31, 2004), of which $0 was outstanding at March 31, 2004.
A summary of our contractual obligations as of March 31, 2004 is as follows
(amounts in thousands):
Less than After 5
Total 1 year 1-3 years 4-5 years years
------- ---------- ---------- ---------- -------
Citicapital 183 183 0 0 0
Convertible Notes* 6,975 0 6,975 0 0
Operating Leases 16,330 1,661 3,525 3,729 7,415
------- ---------- ---------- ---------- -------
$23,488 $ 1,844 $ 10,500 $ 3,729 $ 7,415
======= ========== ========== ========== =======
*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%
At March 31, 2004, the Company had approximately $7.5 million in open
purchase order obligations.
As of March 31, 2004, our cash, and cash equivalents and short-term
investments, net of short-term debt, was $36.4 million. We believe that our
existing working capital, credit lines and cash from operations will be
sufficient to satisfy our cash needs for the next 12 months. Accordingly, these
financial statements have been prepared on a going concern basis.
20
The Company has an accumulated deficit of $113 million as of March 31, 2004
and a net loss of $1.7 million during the three months ended March 31, 2004.
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, cash equivalents, and short term
investments 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. Any
additional equity financing may be dilutive to shareholders, and any additional
debt financing, if available, may involve restrictive covenants.
RELATED PARTY TRANSACTIONS
Mario M. Rosati, a Director of the Company is also a member of Wilson
Sonsini Goodrich & Rosati, a professional corporation and general counsel of the
Company. During the first quarters of 2004 and 2003, the Company paid $67,000
and $138,000, respectively, to Wilson Sonsini Goodrich & Rosati. At March 31,
2004, the Company owed approximately $32,000 to Wilson Sonsini Goodrich &
Rosati.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF No. 03-01 provides guidance on
recording other-than-temporary impairments of cost method investments and
requires additional disclosures for those investments. The recognition and
measurement guidance in EITF No. 03-01 should be applied to other-than-temporary
impairments evaluations in reporting periods beginning after June 15, 2004. The
disclosure requirements are effective for fiscal years ending after June 15,
2004 and are required only for annual periods. The Company does not believe that
the adoption of this standard will have a material impact on its consolidated
balance sheet or statement of operations.
In March 2004, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 03-6, "Participating Securities and the Two-class Method Under FASB
Statement No. 128, Earnings Per Share." EITF Issue No. 03-6 addresses a number
of questions regarding the computation of earnings per share ("EPS") by
companies that have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the company when,
and if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating EPS. It
clarifies what constitutes a participating security and how to apply the
two-class method of Computing EPS once it is determined that a security is
participating, including how to allocate undistributed Earnings to such a
security. This pronouncement is effective for fiscal periods beginning after
March 31, 2004. The Company is currently evaluating the provisions of EITF 03-6
to determine the impact, if any, on its computation of EPS.
RISK FACTORS
You should carefully consider the following risks before making an
investment decision in our common stock. The risks described below are not the
only risks that we face. Additional risks and uncertainties not presently known
to us, or that are currently deemed immaterial may also impair our business
operations. Our business, operating results or financial condition could be
harmed by, and the trading price of our common stock could decline due to any of
those risks and you may lose all or part of your investment. You should also
refer to the other information and our financial statements included in this
Quarterly Report on Form 10-Q and the related information incorporated by
reference into this Quarterly Report on Form 10-Q.
21
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 $1.7 million during the three months ended
March 31, 2004 and $3.5 million, $11.6 million and $6.7 million for twelve month
periods ended December 31, 2003, 2002 and 2001, 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 2004 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 COMPANIES
In the quarter ended March 31, 2004, Samsung Electronics Company, Ltd.,
Fujitsu and HGST (formerly IBM) accounted for 70%, 15%, and 8%, of revenues,
respectively. In the 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 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies,
Inc., IBM, and Western Digital (which acquired Read-Rite Corporation) accounted
for 69%, 8%, 7%, 7%, and 4% of revenues, respectively. In 2002, Samsung
Electronics Company, Ltd., Seagate Technologies, Inc., IBM, and Asuka Project
accounted for 58%, 24%, 7%, and 6% of revenues, respectively.
The semiconductor manufacturing industry generally consists of a limited
number of larger companies. Consequently, we expect that a significant portion
of our future product sales will continue to be concentrated within a limited
number of customers, even though we are making progress in reducing the
concentration of our reliance on these customers through our strategy of product
and customer diversification.
22
None of our customers have 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 86% of our total net sales for the
three months ended March 31, 2004 versus 98% for the three months ended March
31, 2003. Net sales to our South Korean-based customers accounted for
approximately 70% of total net sales for the three months ended March 31, 2004
versus 66% of total net sales for the three months ended March 31, 2003.
Export sales accounted for approximately 77%, 72% and 93% of our total net
sales in 2003, 2002 and 2001, respectively. Net sales to our South Korean-based
customers accounted for approximately 68%, 56% and 73% of total net sales in
2003, 2002 and 2001, respectively. We anticipate that international sales,
including sales to South Korea, will continue to account for a significant
portion of our net sales. As a result, a significant portion of our net sales
will be subject to risks, including:
23
- - unexpected changes in foreign law or regulatory requirements;
- - exchange rate volatility;
- - tariffs and other barriers;
- - political and economic instability;
- - military confrontation;
- - difficulties in accounts receivable collection;
- - extended payment terms;
- - difficulties in managing distributors or representatives;
- - difficulties in staffing our subsidiaries;
- - difficulties in managing foreign subsidiary operations; and
- - potentially adverse tax consequences.
Our foreign sales are primarily denominated in U.S. dollars and we do not
engage in hedging transactions. As a result, our foreign sales are subject to
the risks associated with unexpected changes in exchange rates, which could
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 markets in 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 occurred from year 2000 to
around year 2003. 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.
OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW PRODUCTS AND MARKET
ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE PRODUCTS
24
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
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.
25
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. To do otherwise creates risk for the manufacturer because the
manufacture of a semiconductor requires many process steps and a fabrication
facility will contain many different types of machines that must work cohesively
to produce products that meet the customers' specifications. If any piece of
equipment fails to perform as expected, the customer could incur significant
costs related to defective products, production line downtime, or low production
yields.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we have
observed that once a particular piece of equipment is selected from a vendor,
the customer is likely to continue purchasing that same piece of equipment from
the vendor for similar applications in the future. Our customer list, though
limited, has expanded in recent months. Yet our broadening market share remains
at risk due to choices made by customers that continue to be influenced by
pre-existing installed bases by competing vendors. 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 or our atomic layer products. In this case our business
may not develop as planned, and our results could materially suffer.
Under the terms of a Settlement with ASM International, N.V. ("ASMI"), ASMI
has the right to pursue an appeal of the District Court's judgments of
non-infringement regarding the ALD patents. If the Federal Circuit vacates the
existing judgments in favor of Genus Inc. related to the ALD patents based on a
change in the District Court's claim construction, Genus will be required to pay
ASMI $1 million for the royalty-free licenses to the ALD patents it has been
granted under the settlement agreement.
ASM filed a notice of appeal with the Federal Circuit on January 14, 2004.
ASM served its appeal brief on April 27, 2004. Genus' appeal brief is due on
June 7, 2004.
The Company believes that the appeal is without merit and intends to defend
the action vigorously.
We may in the future be party to litigation arising in the course of our
business, including claims that we allegedly infringe third party trademarks and
other intellectual property rights. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE
DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES
We are highly dependent on key personnel to manage our business, and their
knowledge of business, management skills and technical expertise would be
difficult to replace. Our success depends upon the efforts and abilities of Dr.
William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E.
Seidel, our chief technology officer, and other key managerial and technical
employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel
or other key employees could limit or delay our ability to develop new products
and adapt existing products to our customers' evolving requirements and would
also result in lost sales and diversion of management resources. None of our
executive officers are bound by a written employment agreement, and the
relationships with our officers are at will.
Because of competition for additional qualified personnel, we may not be
able to recruit or retain necessary personnel, which could impede development or
sales of our products. Our growth depends on our ability to attract and retain
qualified, experienced employees. There is substantial competition for
experienced engineering, technical, financial, sales and marketing personnel in
our industry. In particular, we must attract and retain highly skilled design
27
and process engineers. Competition for such personnel is intense, particularly
in the San Francisco bay area where we are based. If we are unable to retain our
existing key personnel, or attract and retain additional qualified personnel, we
may from time to time experience inadequate levels of staffing to develop and
market our products and perform services for our customers. As a result, our
growth could be limited due to our lack of capacity to develop and market our
products to customers, or fail to meet delivery commitments or experience
deterioration in service levels or decreased customer satisfaction.
OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL
LIABILITY TO US
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the protection of health and the environment. These
include laws, rules and regulations governing the use, storage, discharge,
release, treatment and disposal of hazardous chemicals during and after
manufacturing, research and development and sales demonstrations. If we fail to
comply with present or future regulations, we could be subject to substantial
liability for clean up efforts, property damage, personal injury and fines or
suspension or cessation of our operations.
We use the following regulated gases at our manufacturing facility in
Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen.
We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The
city of Sunnyvale, California, imposes high environmental standards to
businesses operating within the city. Genus has 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, Taiwan, Singapore 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 the Japanese semiconductor industry. Although we continue
to invest significant resources in our Japan office, we may not be able to
attract new customers in the Japanese semiconductor industry, and as a result,
we may fail to yield a profit or return on our investment in our office in
Japan.
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
28
Our common stock has experienced substantial price volatility, particularly
as a result of quarter-to-quarter variations in our, our competitors or our
customers' actual or anticipated financial results, our competitors or our
customers' announcements of technological innovations, revenue recognition
policies, changes in earnings estimates by securities analysts and other events
or factors. Also, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies,
in particular, and which have often been unrelated to the operating performance
of these companies. These broad market fluctuations, as well as general economic
and political conditions in the United States and the countries in which we do
business, may adversely affect the market price of our common stock.
CHANGES IN ACCOUNTING RULES
We prepare our financial statements in conformity with accounting
principles generally accepted in the United States of America. These principles
are subject to interpretation by the Securities and Exchange Commission (the
"SEC") and various bodies formed to interpret and create appropriate accounting
policies. A change in these policies can have a significant effect on our
reported results and may even retroactively affect previously reported
transactions. In particular, changes to FASB guidelines relating to accounting
for stock-based compensation will likely increase our compensation expense,
could make our net income less predictable in any given reporting period and
could change the way we compensate our employees or cause other changes in the
way we conduct our business.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. A disaster
could severely damage our ability to deliver our products to our customers. Our
products depend on our ability to maintain and protect our operating equipment
and computer systems, which are primarily located in or near our principal
headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake
fault zone. Although our facilities are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events. Although we maintain general
business insurance against interruptions such as fires and floods, there can be
no assurance that the amount of coverage will be adequate in any particular
case.
WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND
WARRANTS AND SUCH ISSUANCE WILL DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS
As of March 31, 2004, we had approximately of 3,912,868 shares of common
stock underlying warrants and outstanding employee stock options. Of the stock
options, 1,713,320 shares were exercisable as of March 31, 2004. There were
156,775 warrants outstanding as of March 31, 2004. 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.
29
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
face value of the notes.
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 $2.1
million during the first quarter of 2004 was generated by the South Korean
subsidiary and are denominated in Korean Won. 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.
30
We have both fixed rate and floating rate interest obligations. Fixed rate
obligations may result in interest expenses in excess of market rates if
interest rates fall, while floating rate obligations may result in additional
interest costs if interest rates rise. An increase of one percentage point in
interest rates would not materially impact the results of our operations.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents or increase any interest expense owed on the line
of credit facility. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations and cash flows would not be material. Currently, we do not hedge
these interest rates exposures.
ITEM 4. CONTROLS AND PROCEDURES
- -----------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated, with
the participation of our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that
our disclosure controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected
or is reasonably likely to affect, our internal control over financial
reporting.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all potential frauds. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Genus have been detected
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Refer to the Section entitled "Contingencies" in Item 1, Part I of this
Quarterly Report on Form 10-Q for the information required by this Item. Such
information is incorporated by reference into this Item 1 of Part II of this
report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31
Exhibit
No. Description
- ------- -----------
3.1 Second Amended and Restated Articles of Incorporation of Registrant as filed
June 25, 2003
3.2 By-laws of Registrant, as amended (1)
4.1 Registration Rights Agreement, dated January 17, 2002, as amended, amongst
the Registrant and the Investors (2)
4.2 Securities Purchase Agreement dated July 31, 2002 among the Company
and the Purchasers signatory thereto. (3)
4.3 Resale Registration Rights Agreement dated August 14, 2002 among the Company
and the Purchasers signatory thereto. (3)
4.4 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (3)
4.5 Stock Purchase and Registration Agreement dated November 7, 2003 (4)
31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of 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 the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated January 25, 2002.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K dated August 20, 2002.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement of Form S-3 filed November 26, 2003.
(b) Report on Form 8-K
The Company furnished, but did not file, one Current Report on Form 8-K
during the three months ended March 31, 2004. The report dated February 12,
2004 contained the Company's press release announcing its earnings for the
fiscal quarter and fiscal year ended December 31, 2003.
32
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 10, 2004
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)
33