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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 June 30, 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 August 2, 2004, the issuer had 39,759,475 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 (unaudited) for
the three months and six months ended June 30, 2004 and June 30,
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets (unaudited) as of June 30,
2004 and December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows(unaudited) for
the six months ended June 30, 2004 and June 30, 2003. . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (unaudited). . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . .21
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . .42
Item 4. Disclosure Controls and Procedures. . . . . . . . . . . . . . . . .42
PART II. OTHER INFORMATION
Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .43
Item 4: Submission of Matters to a Vote of Security Holders. . . . . . . . .43
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .44
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- ---------- --------
Net sales. . . . . . . . . . . . . . . . . . . $ 8,757 $14,739 $ 20,964 $32,434
Costs and expenses:
Cost of goods sold . . . . . . . . . . . 5,406 10,813 13,956 22,390
Research and development . . . . . . . . 1,678 1,981 3,672 4,094
Selling, general and administrative. . . 3,133 2,868 6,151 6,042
Expenses related to proposed merger. . . 821 0 821 0
-------- -------- ---------- --------
Loss from operations . . . . . . . . . . . . . (2,281) (923) (3,636) (92)
Interest expense . . . . . . . . . . . . . . . (415) (477) (848) (907)
Other income, net . . . . . . . . . . . . . . 4 42 133 49
-------- -------- ---------- --------
Loss before income taxes . . . . . . . . . . . (2,692) (1,358) (4,351) (950)
Provision for income taxes . . . . . . . . . . 181 0 199 0
-------- -------- ---------- --------
Net loss . . . . . . . . . . . . . . . . . . . $(2,873) $(1,358) $ (4,550) $ (950)
======== ======== ========== ========
Net loss per share:
Basic. . . . . . . . . . . . . . . . . . $ (0.07) $ (0.05) $ (0.11) $ (0.03)
Diluted. . . . . . . . . . . . . . . . . $ (0.07) $ (0.05) $ (0.11) $ (0.03)
Shares used in per share calculation - basic . 39,664 29,313 39,628 29,114
======== ======== ========== ========
Shares used in per share calculation - diluted 39,664 29,313 39,628 29,114
======== ======== ========== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
---------- --------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 23,585 $ 41,608
Short term investments. . . . . . . . . . . . . . . . . . . 12,249 -
Accounts receivable, net. . . . . . . . . . . . . . . . . . 6,672 9,606
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 12,469 9,783
Other current assets. . . . . . . . . . . . . . . . . . . . 808 854
---------- --------------
Total current assets. . . . . . . . . . . . . . . . . 55,783 61,851
Equipment, furniture and fixtures, net. . . . . . . . . . . . . . 10,693 8,748
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,041 1,169
---------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . $ 67,517 $ 71,768
========== ==============
LIABILITIES
Current Liabilities:
Short-term bank borrowings. . . . . . . . . . . . . . . . . $ - $ 6,500
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 5,257 4,956
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . 4,512 4,130
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 2,208 331
Customer advances . . . . . . . . . . . . . . . . . . . . . 3,820 372
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . 116 249
---------- --------------
Total current liabilities. . . . . . . . . . . . . . 15,913 16,538
7% Convertible notes. . . . . . . . . . . . . . . . . . . . . . . 6,139 5,806
---------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . 22,052 22,344
---------- --------------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 100,000 shares;
Issued and outstanding 39,759 shares at June 30, 2004
and 39,554 at December 31, 2003 . . . . . . . . . . . 163,408 163,061
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (115,878) (111,328)
Note receivable from shareholder. . . . . . . . . . . . . . - (187)
Accumulated other comprehensive loss. . . . . . . . . . . . (2,065) (2,122)
---------- --------------
Total shareholders' equity. . . . . . . . . . . . . . 45,465 49,424
---------- --------------
Total liabilities and shareholders' equity $ 67,517 $ 71,768
========== ==============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
GENUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,550) $ (950)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,719 1,617
Write-down for excess and obsolete inventories. . . . . . . . 670 167
Provision for doubtful accounts . . . . . . . . . . . . . . . 72 83
Amortization of deferred finance costs. . . . . . . . . . . . 477 484
Fixed assets written-off. . . . . . . . . . . . . . . . . . . - 140
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . 2,862 (395)
Inventories . . . . . . . . . . . . . . . . . . . . . . (1,991) 402
Other assets. . . . . . . . . . . . . . . . . . . . . . 38 (217)
Accounts payable. . . . . . . . . . . . . . . . . . . . 301 (2,461)
Accrued expenses. . . . . . . . . . . . . . . . . . . . 382 (861)
Deferred revenue. . . . . . . . . . . . . . . . . . . . 1,877 2,528
Customer advances . . . . . . . . . . . . . . . . . . . 2,254 31
--------- ---------
Net cash provided by operating activities . . . . . . . 4,111 568
--------- ---------
Cash flows from investing activities:
Acquisition of equipment, furniture and fixtures. . . . . . . . . . (3,691) (1,914)
Acquisition of intangible assets. . . . . . . . . . . . . . . . . . (152) (370)
Acquisition of short term investments . . . . . . . . . . . . . . . (12,203) -
--------- ---------
Net cash used in investing activities . . . . . . . . . (16,046) (2,284)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . . . . . . . 347 1,270
Proceeds from short-term bank borrowings. . . . . . . . . . . . . . 6,500 22,887
Payments for short-term bank borrowings . . . . . . . . . . . . . . (13,000) (22,927)
Payments of long term debts . . . . . . . . . . . . . . . . . . . . (133) -
Proceeds from shareholder note. . . . . . . . . . . . . . . . . . . 187 (139)
--------- ---------
Net cash (used) provided by financing activities. . . . (6,099) 1,091
--------- ---------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . 11 23
--------- ---------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . (18,023) (602)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . 41,608 11,546
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . $ 23,585 $ 10,944
========= =========
Supplemental cash flow information
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 361 $ 380
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 282 $ 158
Non-cash investing and financing activities
Transfer of inventory to fixed assets . . . . . . . . . . . . . . . $ - $ 143
Transfer of fixed assets to inventory . . . . . . . . . . . . . . . $ 171 $ -
Transfer of prepaids to fixed assets. . . . . . . . . . . . . . . . $ - $ 600
Conversion of convertible note to common stock. . . . . . . . . . . $ - $ 150
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004.
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 $115.9 million as of June 30, 2004 and
a net loss of $4.6 million during the six months ended June 30, 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.
6
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing net loss 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
per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Basic:
Net loss . . . . . . . . . . . . . . . . . . $(2,873) $(1,358) $(4,550) $ (950)
======== ======== ======== ========
Weighted average common shares outstanding 39,664 29,313 39,628 29,114
======== ======== ======== ========
Basic net loss per share . . . . . . . . . $ (0.07) $(0.05 ) $ (0.11) $ (0.03)
======== ======== ======== ========
Diluted:
Net loss . . . . . . . . . . . . . . . . . $(2,873) $(1,358) $(4,550) $ (950)
======== ======== ======== ========
Weighted average common shares outstanding 39,664 29,313 39,628 29,114
======== ======== ======== ========
Diluted net loss per share . . . . . . . . $ (0.07) $ (0.05) $ (0.11) $ (0.03)
======== ======== ======== ========
Stock options, warrants and convertible debt to purchase approximately 8,824,137
and 8,746,000 shares of common stock were outstanding as of March 31, 2004 and
June 30, 2004 respectively, but were not included in the computation of diluted
net loss per share because their effect would be anti-dilutive.
Stock options, warrants and convertible debt to purchase approximately
10,933,000 shares of common stock were outstanding as of June 30, 2003, but were
not included in the computation of diluted net earnings per share because of the
anti-dilutive effects.
7
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
Stock Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and Financial Accounting Standards
Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation." Generally, the Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's stock on the
date of the grant. Accordingly, no compensation cost has been recognized in the
Company's statements of operations. Pro forma information regarding net loss and
net loss per share as if the Company recorded compensation expense based on the
fair value of stock-based awards have been presented in accordance with
Statement of Financial Accounting Standards No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" and is as follows for the three and
six months ended June 30, 2004 and 2003 (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net loss, as reported $(2,873) $(1,358) $(4,550) $ (950)
Add: Stock -based employee compensation recorded 0 0 0 0
Deduct: Total stock-based employee compensation
expense, net determined using a fair value based method
for all awards, net of related tax effects (464) (411) (1,084) (1,114)
======== ======== ======== ========
Pro forma net loss attributable to common
shareholders $(3,337) $(1,769) $(5,634) $(2,064)
======== ======== ======== ========
Earnings per share
Basic - as reported $ (0.07) $ (0.05) $ (0.11) $ (0.03)
======== ======== ======== ========
Basic - pro forma $ (0.08) $ (0.06) $ (0.14) $ (0.07)
======== ======== ======== ========
Diluted - as reported $ (0.07) $ (0.05) $ (0.11) $ (0.03)
======== ======== ======== ========
Diluted - as pro forma $ (0.08) $ (0.06) $ (0.14) $ (0.07)
======== ======== ======== ========
8
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
The above pro forma effects on net loss may not be representative of the
effects on future results as options granted typically vest over several years
and additional option grants are expected to be made in future years.
The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the three and six months ended June 30, 2004, and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- ---------- ---------
Weighted average risk free interest rates 3.14% 1.99% 2.92% 2.11%
Weighted average expected life 3.7 years 3.0 years 3.7 years 3.0years
Weighted average expected volatility 96% 96% 98% 99%
Expected dividend yield 0% 0% 0% 0%
The weighted average fair value of options granted in the three months
ended June 30, 2004 and 2003 was $2.18 and $1.77, respectively. The weighted
average fair value of options granted in the six months ended June 30, 2004 and
2003 was $2.72 and $1.78, 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 six months ended
June 30, 2004 and 2003:
9
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2004 2003
---------- ----------
Weighted average risk free interest rates 0.98% 1.04%
Weighted average expected life 0.5 years 0.5 years
Weighted average expected volatility 74% 74%
Expected dividend yield 0% 0%
The weighted average fair value of those purchase rights granted in the six
months ended June 30, 2004 and 2003 was $1.26 and $0.81, 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 obtained 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 only when installation is complete and the
customer accepts the product. During the three months ended June 30, 2004, the
Company recorded a sales return allowance of $2.1 million against revenue in
anticipation of providing a post contract concession to allow a customer to
return a 200 mm system for which revenue was initially recorded during the
quarter ended December 31, 2003. Revenues can fluctuate significantly as a
result of the timing of customer acceptances. At June 30, 2004 and December 31,
2003, the Company had deferred revenue of $2.2 million and $331,000,
respectively.
10
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investment securities with original
maturities of three months or less from the date of purchase to be cash
equivalents. Management determines the appropriate classification of short-term
investments at the time of purchase and evaluates such designations as of each
balance sheet date. To date, all short-term investments have been categorized as
available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included as a component of accumulated comprehensive income in
stockholders' equity, net of any related tax effects. Interest, dividends and
realized gains and losses are included in interest income in the condensed
consolidated statements of operations.
SHORT-TERM BANK BORROWINGS
On December 20, 2001 and as amended on March 27, 2002, March 20, 2003, and June
29, 2004, the Company maintained 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/or cash (or cash equivalents) on deposit with
Silicon Valley Bank. The interest rate is prime plus 0.50% per annum (4.75% as
of June 30, 2004) and the facility expires on June 28, 2005. 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 $30 million as of the end of each fiscal quarter. As of June 30, 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 $116,000 and $249,000 at June 30,
2004 and December 31, 2003, respectively.
11
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
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 notes were 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.
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 approximately $400,000. The remaining
warrants were exercised during 2003 for cash proceeds of approximately $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
7% 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 carrying value of the 7% convertible
note (face value $7.8 million) is
recorded as follows:
Fair value of 7% convertible notes
upon issuance $5,560
Accretion of discount 579
-------
Carrying value $6,139
=======
12
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
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 were 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.
The Company recorded interest costs related to the convertible notes and
warrants of $365,000 and $723,000 for the three and six month period ended June
30, 2004.
The Company recorded interest costs related to the convertible notes and
warrants of $386,000 and $733,000 for the three and six month period ended June
30, 2003.
13
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
INVENTORIES
Inventories comprise the following (in thousands):
June 30, December 31,
2004 2003
--------- -------------
Raw materials and purchased parts $ 4,718 $ 4,602
Work in process 3,309 3,686
Finished goods 482 478
Inventory at customers' locations 3,960 1,017
--------- -------------
$ 12,469 $ 9,783
========= =============
Inventory at customers' locations represent the cost of systems shipped to
customers for which we were awaiting customer acceptance including the system
for which we recorded a return allowance.
14
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands):
June 30, December 31,
2004 2003
--------- -------------
System warranty . . . . . . . . . . . . . $ 927 $ 1,451
Accrued compensation and related expenses 969 720
Federal, state and foreign income taxes . 201 511
Accrued rent. . . . . . . . . . . . . . . 468 362
Accrued professional fees . . . . . . . . 191 260
Accrued sales tax . . . . . . . . . . . . 304 270
Accrued interest. . . . . . . . . . . . . 184 184
Merger related expenses . . . . . . . . . 821 -
Other . . . . . . . . . . . . . . . . . . 447 372
--------- -------------
$ 4,512 $ 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.
15
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
Changes in the warranty reserves during the three and six months ended June 30,
2004 and 2003 were as follows (in thousands):
THREE MONTHS ENDED
JUNE 30,
2004 2003
-------- -------
Balance, March 31 $ 1,191 $1,290
Provisions 248 611
Settlements made (512) (337)
-------- -------
Balance, June 30 $ 927 $1,564
======== =======
SIX MONTHS ENDED
JUNE 30,
2004 2003
-------- -------
Balance, January 1 $ 1,451 $ 970
Provisions 516 1,066
Settlements made (1,040) (472)
-------- -------
Balance, June 30 $ 927 $1,564
======== =======
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 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. 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 June 30, 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.
16
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
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. 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 outstanding January 2002 warrants 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 June 30, 2004, 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 six month ended June 30, 2004 and 2003, the Company paid
$105,000 and $280,000, respectively, to Wilson Sonsini Goodrich & Rosati. At
June 30 2004, the Company owed approximately $337,000 to Wilson Sonsini Goodrich
& Rosati.
COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- --------- -------- ------
Net loss $(2,873) $ (1,358) $(4,550) $(950)
Change in foreign currency
translation adjustment. . (108) 135 11 23
Unrealized gain from
short-term investments 46 - 46 -
-------- --------- -------- ------
Comprehensive loss. . . . $(2,935) $ (1,223) $(4,493) $(927)
======== ========= ======== ======
17
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
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. For the six months ended June 30, 2004 and 2003, Samsung accounted for
74% and 71% 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 June 30, 2004, we had twelve active
customers.
SUBSEQUENT EVENTS - Merger with Aixtron
- - On July 2, 2004, we announced the execution of a definitive merger
agreement with Aixtron Aktiengesellschaft or "Aixtron" (the "Merger Agreement").
Upon the closing of the transactions contemplated by the Merger Agreement, Genus
will become a wholly-owned subsidiary of Aixtron and each share of Genus common
stock will be converted into a right to receive 0.51 Aixtron American Depositary
Shares. Each Aixtron American Depositary Share represents an ownership interest
in one Aixtron ordinary share. The transaction is expected to close by the end
of 2004 and is subject to customary closing conditions, including receipt of
Genus and Aixtron shareholder approvals and U.S. regulatory clearance. Aixtron
plans to file a registration statement on Form F-4 with the Securities and
Exchange Commission, which will include a prospectus of Aixtron and a proxy
statement of Genus relating to the proposed transaction. During the second
quarter of 2004, we incurred $821,000 in expenses related to the merger.
18
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
- - Genus and its directors have been named as defendants in two putative
shareholder class action complaints filed on July 12, 2004 and July 19, 2004 in
the California Superior Court in Santa Clara County related to the Merger
Agreement and the merger. The complaints allege that the defendants breached
their fiduciary duties in connection with the Merger Agreement and seek to
enjoin the completion of the merger. The defendants believe that the lawsuits
are without merit and intend to contest them vigorously.
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.
ASMI filed a notice of appeal with the Federal Circuit on January 14, 2004. ASMI
served its appeal brief on April 27, 2004. Genus' appeal brief was completed on
July 12, 2004.
The Company believes that the appeal is without merit and intends to defend the
action vigorously.
- - In the event the transaction contemplated under the Merger Agreement is
not completed, Genus will be required to pay significant costs incurred in
connection with the Merger, including legal, accounting and a portion of the
financial advisory fees. Moreover, under specified circumstances described in
the Merger Agreement, Genus may be required to pay Aixtron a termination fee of
$7 million in connection with the termination of the Merger Agreement.
19
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
- - The convertible note holders may elect to receive payment of the notes at
a premium of 10% over the face value of the notes when the merger is
consummated. The total payment due, if all note holders elect to receive
payment, will be $7.6 million, $1.5 million in excess of the carrying value at
June 30, 2004. The Company did not attribute any value to the conversion feature
at June 30, 2004 based upon the estimated conversion value of $16.8 million for
the notes on June 30, 2004 being significantly in excess of the cash value of
$7.6 million available upon the change of control.
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 does
not believe the adoption of EITF 03-6 will have a material impact on its
computation of earnings per share.
20
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 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 and its Quarterly Report of Form 10-Q for the fiscal quarter ended March
31, 2004. 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.
21
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. For the six months ended June30, 2004 and 2003, Samsung accounted for
74% and 71% 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 June 30, 2004, we had twelve active
customers.
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 85% and 87% for six months ended June 30,
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 and six months ended June 30, 2004, may not necessarily
be indicative of future operating results.
22
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 as sales volumes increases. 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:
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 only when installation is complete and the
customer accepts the product. Revenues can fluctuate significantly as a result
of the timing of customer acceptances. At June 30, 2004 and December 31, 2003,
the Company had deferred revenue of $2.2 million and $331,000 respectively.
23
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 June 30, 2004 and December 31, 2003, the Company had accrued
$927,000 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 $4.7 million and $4.6 million at June 30, 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. During the three-month period ended June 30, 2004 and 2003, the
Company recorded inventory charges of $526,000 and $67,000, respectively to
reduce the carrying value to market value. During the six-month period ended,
June 30, 2004 and 2003, the Company recorded inventory charges of $670,000 and
$167,000, respectively to reduce the carrying value to market value.
24
Valuation of research and demonstration equipment
Equipment includes research and demonstration equipment, which is located in our
Applications Laboratory and is used to demonstrate to our customers the
capabilities of our equipment to process wafers and deposit films. The gross
value of demonstration equipment is based on the cost of materials and actual
factory labor and overhead expenses incurred in manufacturing the equipment.
Costs related to refurbishing or maintaining existing demonstration equipment,
which do not add to the capabilities or useful life of the equipment, are not
capitalized and are expensed as incurred. Demonstration equipment is stated at
cost and depreciated over a period of five years. If the Company sells the
equipment, it may experience gross margins that are different from the gross
margins achieved on equipment manufactured specifically for customers.
RESULTS OF OPERATIONS
- ---------------------
NET SALES. Net sales for the three and six months ended June 30, 2004 were
$ 8.8 million and $21.0 million, which represented decreases of 41% and 35% when
compared to net sales of $14.7 million and $32.4 million for the corresponding
periods in 2003. The decrease was primarily attributable to delay of purchase
decision made by our customers during the first half of 2004. In addition we
reduced revenue in the three months ended June 30, 2004 by $2.1 million in
anticipation of providing a post contact concession to allow a customer to
return a 200 mm system for which revenue was initially recorded during the
quarter ended December 31,2003. Two 300 mm CVD systems and one 200 mm ALD module
were recognized as revenue during the second quarter of 2004 compared with two
300 mm CVD system and two 200 mm ALD system recognized in the second quarter of
2003. During the six months ended June 30, 2004, five systems and 2 modules were
recognized as revenue as compared to nine systems in the first six months of
2003.
Genus has maintained its booking guidance to the $60 million to $70 million
range. Full year revenue guidance is still in the $55 million to $65 million
range.
COST OF GOODS SOLD. Cost of goods sold for the three and six months ended
June 30, 2004 were $5.4 million and $14.0 million, compared to $10.8 million and
$22.4 million for the same periods in 2003. Gross profit as a percentage of
revenues was 38% for the second quarter of 2004 compared to 27% in the second
quarter of 2003. Gross profit as a percentage of revenues was 33% for the six
months ended June 30, 2004 compared to 31% for the corresponding period in 2003.
The increase in gross margin during the three and six months ended June 30, 2004
as compared to the three and six months ended June 30, 2003 was
25
primarily due to a favorable product mix caused by a higher proportion of spares
sales and services revenue which have higher margins than systems as well as
reduction in certain manufacturing costs which was partially offset by $526,000
and $670,000, respectively, of inventory write-down during three and six months
ended June 30, 2004. During the quarter ended June 30, 2004, we sold $180,000 of
inventories that was previously written off.
RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the
quarter ended June 30, 2004 were $1.7 million, or 19% of net sales, compared
with $2.0 million or 13% of net sales for the same period in 2003. For the six
months ended June 30, 2004, expenses were $3.7 million or 18% of sales, compared
to $4.1 million or 13% of net sales for the first half of 2003. The decrease in
R&D expenses for the three and six months ended June 30, 2004 compared with
three and six months ended June 30, 2003 was primarily due to lower expenses
recoded for depreciation expenses and development materials in the three and six
months ended June 30, 2004.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses were $3.1 million and $6.2 million for the three and six months
ended June 30, 2004 compared to $2.9 million and $6.0 million in the
corresponding periods in 2003. As a percent of net sales, selling, general and
administrative expenses were 36% and 29% for the three and six months ended June
30, 2004 compared to 19% for the corresponding periods in 2003. The increase in
selling, general and administrative expenses during three and six months ended
June 30, 2004 as compared to the corresponding periods in 2003 was primarily
attributable to costs incurred related to Sarbanes Oxley section 404 readiness.
PROPOSED MERGER RELATED EXPENSE. In the second quarter of 2004, we incurred
legal and other professional expenses of $821,000 related to the proposed merger
with Aixtron.
INTEREST EXPENSE. Interest expenses for the three and six months ended June
30, 2004 was $415,000 and $848,000, respectively, compared to interest expense
of $477,000 and $907,000 for the corresponding periods in 2003. The decrease in
interest expenses during the three and six months ended June 30, 2004, compared
with the corresponding period in 2003 was primarily due to a decrease in
interest expenses related to short term bank borrowing from Silicon Valley Bank.
OTHER INCOME, NET. Other income, net for the three and six months ended
June 30, 2004 were $4,000 and $133,000 respectively compared to other income,
net of $42,000 and $49,000 for the corresponding periods in 2003. The increase
in other income during the six month period ended June 30, 2004 as compared to
the corresponding period in 2003 was primarily attributable to higher interest
earned on short term investment.
PROVISION FOR INCOME TAXES. We record tax provisions of $181,000 and
$199,000 for the three and six months ended June 30, 2004 respectively. The tax
provision is related to taxable income of our South Korean subsidiary. We did
not record any provision for income taxes in Japan, as we expect to incur loss
for this entity for the year ending December 31, 2004. We did not record any
provision for income taxes in the United States as we incurred losses in this
entity and we provided for a full valuation allowance against the tax benefit
26
associated with these losses given sufficient uncertainty as to realization of
any deferred tax assets.. We did not record any income tax expense for our South
Korean subsidiary for the three and six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2004, our cash and cash equivalents were $23.6 million, a decrease
of $18 million over cash and cash equivalents of $41.6 million held on December
31, 2003 and was primarily due to $12.2 million of cash invested in short term
investments during the six months ended June 30, 2004, and $6.5 million related
to net repayment of short term debt.
Cash generated by operating activities totaled $4.1 million for the six months
ended June 30, 2004, and consisted primarily of a decrease in customer accounts
receivables of $2.9 million, primarily due to lower sales, depreciation and
amortization expenses of $1.7 million, increased provision for excess and
obsolete inventory of $670,000, related to inventory charges recorded during
the six-month period ended June 30,2004 to reduce the carrying value to market
value, increase in provision for doubtful accounts of $72,000, amortization of
deferred finance costs of $477,000, increase in customer advances of $2.3
million, deferred revenue of $1.9 million, increase in accounts payable of
$301,000 and increase in accrued expenses of $382,000 partially offset by net
loss of $4.6 million, an increase of inventories of $2.0 million, for building
future shipments.
On June 30, 2003, our cash and cash equivalents were $10.9 million, a $600,000
decrease over cash and cash equivalents of $11.5 million held as of December 31,
2002. The reduction in cash and cash equivalent at June 30, 2003 as compared
with cash and cash equivalents balance at December 31, 2002 primarily resulted
from investment activities of $1.9 million, partially offset by cash provided by
financing activities of $1.1 million and cash provided by operations of
$568,000.
Cash generated by operating activities totaled $568,000 for the six months ended
June 30, 2003, and consisted primarily of net loss of $950,000, depreciation of
$1.6 million, increase in deferred revenues of $2.5 million, partially offset by
decreases in accounts payable of $2.5 million.
Investing activities used $16.0 million of cash during the six months ended June
30, 2004 and was primarily due to $12.2 million of cash invested in short term
investments. We made capital expenditures of $3.7 million for the six months
ended June 30, 2004. These expenditures were primarily related to purchase of
property, plant and equipment for our demo lab tools.
Financing activities used cash of $6.1 million for the six months ended June 30,
2004 and primarily
27
consists of payment of the short-term borrowings for a net of $6.5 million and
payment of long term debt of $133,000 partially offset by proceeds of $347,000
from stock option exercises and the issuance of the shares under the Genus
Employee Stock Purchase Plan and proceeds from shareholder note of $187,000.
Our primary source of funds at June 30, 2004 consisted of $23.6 million in cash
and cash equivalents, $12.2 million in short term investment and $6.7 million of
accounts receivable, and our credit line of up to $15 million with Silicon
Valley Bank, of which $0 balance was outstanding at June 30, 2004.
A summary of our contractual obligations as of June 30, 2004 is as follows
(amounts in thousands):
Less than After 5
Total 1 year 1-3 years 4-5 years years
------- ---------- ---------- ---------- --------
Citicapital 116 116 0 0 0
Convertible Notes* 6,975 0 6,975 0 0
Operating Leases 16,021 1,707 3,599 3,860 6,855
Purchase Commitments 6,100 6,100 0 0 0
------- ---------- ---------- ---------- --------
$29,212 $ 7,923 $ 10,574 $ 3,860 $ 6,855
======= ========== ========== ========== ========
*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%
As of June 30, 2004, our cash, and cash equivalents and short-term investments,
net of short-term debt, was $35.7 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.
The Company has an accumulated deficit of $116 million as of June 30, 2004 and a
net loss of $4.6 million during the six months ended June 30, 2004. The Company
is in the process of executing its business strategy and has plans to eventually
achieve profitable operations on an ongoing basis.
28
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 six months ended June 30, 2004 and 2003, the Company paid
$105,000 and $280,000, respectively, to Wilson Sonsini Goodrich & Rosati. At
June 30 2004, the Company owed approximately $337,000 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
29
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 does not believe that the adoption of EITF
03-6 will have a material impact on its computation of earnings per share.
SUBSEQUENT EVENTS
- - On July 2, 2004, we announced the execution of a definitive merger
agreement with Aixtron Aktiengesellschaft (the "Merger Agreement"). Upon the
closing of the transactions contemplated by the Merger Agreement, Genus will
become a wholly-owned subsidiary of Aixtron and each share of Genus common stock
will be converted into a right to receive 0.51 Aixtron American Depositary
Shares. Each Aixtron American Depositary Share represents an ownership interest
in one Aixtron ordinary share. The transaction is expected to close by the end
of 2004 and is subject to customary closing conditions, including receipt of
Genus and Aixtron shareholder approvals and U.S. regulatory clearance. Aixtron
plans to file a registration statement on Form F-4 with the Securities and
Exchange Commission, which will include a prospectus of Aixtron and a proxy
statement of Genus relating to the proposed transaction. During the second
quarter of 2004, we incurred $821,000 in expenses related to the merger.
- - Genus and its directors have been named as defendants in two putative
shareholder class action complaints filed on July 12, 2004 and July 19, 2004 in
the California Superior Court in Santa Clara County related to the Merger
Agreement and the merger. The complaints allege that the defendants breached
their fiduciary duties in connection with the Merger Agreement and seek to
enjoin the completion of the merger. The defendants believe that the lawsuits
are without merit and intend to contest them vigorously.
30
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.
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 $4.6 million during the six months ended June 30,
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.
31
SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE COMPANIES
In the six months ended June 30, 2004, Samsung Electronics Company, Ltd., HGST,
University of Albany and Western Digital, accounted for 74%, 5%, 3% and 3%, of
revenues, respectively. In six month period ended June 30, 2003, Samsung
Electronics Company, Ltd., Seagate Technologies, Inc., IBM, and Selete accounted
for 71%, 10%, 10%, and 5% of revenues, respectively.
In 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies, Inc.,
HGST (formerly 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.
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
32
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 85% of our total net sales for the six
months ended June 30, 2004 versus 87% for the six months ended June 30, 2003.
Net sales to our South Korean-based customers accounted for approximately 72% of
total net sales for the six months ended June 30, 2004 versus 71% of total net
sales for the six months ended June 30, 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:
- - 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.
33
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
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
34
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
35
proven system performance.
Once a semiconductor manufacturer selects a particular vendor's capital
equipment, the manufacturer generally relies for a significant period of time
upon equipment from this vendor of choice for the specific production line
application. To do otherwise creates risk for the manufacturer because the
manufacture of a semiconductor requires many process steps and a fabrication
facility will contain many different types of machines that must work cohesively
to produce products that meet the customers' specifications. If any piece of
equipment fails to perform as expected, the customer could incur significant
costs related to defective products, production line downtime, or low production
yields.
Since most new fabrication facilities are similar to existing ones,
semiconductor manufacturers tend to continue using equipment that has a proven
track record. Based on our experience with major customers like Samsung, we have
observed that once a particular piece of equipment is selected from a vendor,
the customer is likely to continue purchasing that same piece of equipment from
the vendor for similar applications in the future. Our customer list, though
limited, has expanded in recent months. Yet our broadening market share remains
at risk due to choices made by customers that continue to be influenced by
pre-existing installed bases by competing vendors. 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
36
substantial funds and management effort. The time between our first contact with
a customer and the customer placing its first order typically lasts from nine to
twelve months and is often longer. This lengthy sales cycle makes it difficult
to accurately forecast future sales and may cause our quarterly and annual
revenue and operating results to fluctuate significantly from period to period.
If anticipated sales from a particular customer are not realized in a particular
period due to this lengthy sales cycle, our operating results may be adversely
affected for that period.
IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER
PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED.
From time to time, we may receive notices from third parties alleging
infringement of patents or intellectual property rights. It is our policy to
respect all parties' legitimate intellectual property rights, and we will defend
against such claims or negotiate licenses on commercially reasonable terms where
appropriate. However, no assurance can be given that we will be able to
negotiate any such necessary licenses on commercially reasonable terms, or at
all, or that any litigation resulting from such claims would not have a material
adverse effect on our business and financial results.
Litigation is time consuming, expensive and its outcome is uncertain. We may not
prevail in any litigation in which we are involved. Should we be found to
infringe any of the patents asserted or any other intellectual property rights
of others, in addition to potential monetary damages and any injunctive relief
granted, we may need either to obtain a license to commercialize our products or
redesign our products so they do not infringe any third party's intellectual
property. If we are unable to obtain a license or adopt a non-infringing product
design, we may not be able to proceed with development, manufacture and sale 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 was completed on
July 12, 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
37
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 designand
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
38
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
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.
39
OUR INTERNAL CONTROL OVER FINANCIAL REPORTING MAY NOT BE CONSIDERED EFFECTIVE
RESULTING IN POSSIBLE REGULATORY SANCTIONS AND A DECLINE IN OUR STOCK PRICE
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our
Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will
be required to furnish a report on our internal control over financial
reporting. Such report will contain an assessment by our management of the
effectiveness of our internal control over financial reporting (including the
disclosure of any material weakness) and a statement that our auditors have
attested to and reported on management's evaluation of such internal controls.
We are currently in the process of upgrading controls and procedures to be fully
compliant with the new, more stringent requirement of Section 404 of the
Sarbanes-Oxley Act.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO)
provides a framework for companies to assess and improve their internal control
systems. While we feel that our key controls are currently effective, we face a
significant challenge to bring all of our operations up to the [level of
documentation, segregation of duty, enterprise resource planning, security
process discipline, and support systems] required under the COSO standard for
internal control. Although we are currently working towards completion of this
effort to meet our year-end deadline, we cannot be certain that all internal
control processes will be deemed effective based on COSO standards.
Our internal control over financial reporting may not be considered effective
if, among others:
* any material weaknesses in our internal control over financial reporting
exist
* we fail to evaluate key controls in a timely fashion
* we fail to remediate assessed deficiencies
Due to the number of controls to be examined, the complexity of the project, as
well as the subjectivity involved in determining effectiveness of controls we
cannot be certain that all of our controls will be considered effective by our
management or, if considered effective by our management, that our auditors will
agree with such assessment.
If we are unable to assert that our internal control over financial reporting is
effective, or if our auditors are unable to attest that our management's report
is fairly stated or they are unable to express an opinion on our management's
evaluation, we could be subject to regulatory sanctions or lose investor
confidence in the accuracy and completeness of our financial reports, either of
which could have an adverse effect on our stock price.
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.
40
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 June 30, 2004, we had approximately of 3,833,682 shares of common stock
underlying warrants and outstanding employee stock options. Of the stock
options, 2,120,452 shares were exercisable as of June 30,2004. There were
118,449 warrants outstanding as of June 30, 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.
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.
THE STOCK PRICE OF GENUS AND GENUS' RESULTS OF OPERATIONS MAY BE ADVERSELY
AFFECTED IF THE MERGER WITH AIXTRON IS NOT COMPLETED.
Completion of the merger with Aixtron is subject to several closing conditions,
including obtaining requisite regulatory and shareholder approvals, and Aixtron
and Genus may be unable to obtain such approvals on a timely basis or at all. If
the merger is not completed, the price of Genus common stock may decline to the
extent that the current market price of Genus common stock reflects a market
assumption that the merger will be completed. In addition, Genus' operations may
be harmed to the extent that investors and others believe that Genus cannot
effectively compete in the marketplace without the merger, or there is
uncertainty surrounding the future direction of the product offerings and
strategy of Genus on a standalone basis. Genus will also be required to pay
significant costs incurred in connection with the merger, including legal,
accounting and a portion of the financial advisory fees, whether or not the
merger is completed. Moreover, under specified circumstances described in the
merger agreement, Genus may be required to pay Aixtron a termination fee of $7
million in connection with the termination of the merger agreement.
Additionally, in the event that Aixtron terminates the merger agreement under
specified circumstances described in the merger agreement, Genus is required by
the agreement in principle to grant Aixtron a personal, non-transferable and
non-exclusive license or sublicense to certain ALD background technology owned
or licensed by Genus and all inventions created pursuant to the agreement in
principle based on its ALD background technology.
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
41
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 $5.4
million during the first six months 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.
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.
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. DISCLOSURE CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
as of the end of the period covered by this Quarterly Report on Form 10-Q, our
chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes
in our internal control over financial reporting or in other factors during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Refer to the Sections entitled "Contingencies" and " Subsequent Events" 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
THE COMPANY'S ANNUAL MEETING OF SHAREHOLDERS WAS HELD ON JUNE 10, 2004 IN
SUNNYVALE, CALIFORNIA. PROXIES FOR THE MEETING WERE SOLICITED PURSUANT TO
REGULATION 14A. AT THE COMPANY'S ANNUAL MEETING, THE SHAREHOLDERS APPROVED THE
FOLLOWING RESOLUTIONS:
(1) Election of the following persons as directors.
Director In Favor Withheld
-------------------- ---------- ---------
William W. R. Elder 33,345,168 727,463
G. Frederick Forsyth 31,932,126 2,140,505
Todd S. Myhre 33,530,412 542,219
Mario M. Rosati 33,410,762 661,869
Robert J. Richardson 33,501,442 571,189
(2) Ratification and appointment of PricewaterhouseCoopers LLP as independent
registered public accounting firm.
For: 33,473,054
Against: 488,809
Abstain: 110,768
Broker Non-Vote: 0
43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- -------- -----------
2.1 Agreement and Plan of Merger dated as of July 1, 2004 between
Aixtron Aktiengesellschaft and Registrant (1)
3.1 Second Amended and Restated Articles of Incorporation of
Registrant as filed June 25, 2003 3.2 By-laws of Registrant,
as amended (2)
4.1 Registration Rights Agreement, dated January 17, 2002, as
amended, amongst the Registrant and the Investors (3)
4.2 Securities Purchase Agreement dated July 31, 2002 among the
Company and the Purchasers signatory thereto. (4)
4.3 Resale Registration Rights Agreement dated August 14, 2002 among
the Company and the Purchasers signatory thereto. (4)
4.4 7% Convertible Subordinated Note Due 2005 dated August 14, 2002.
(4)
4.5 Stock Purchase and Registration Agreement dated November 7,
2003 (5)
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 Current Report on Form 8-K dated July 2, 2004.
(2) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
(3) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K dated January 25, 2002.
(4) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K dated August 20, 2002.
(5) Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement of Form S-3 filed November
26, 2003.
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(b) Report on Form 8-K
The Company furnished, but did not file, one Current Report on Form 8-K during
the fiscal quarter ended June 30, 2004. The report dated April 22, 2004
contained the Company's press release announcing its earnings for the fiscal
quarter ended March 31, 2004.
45
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: August 6th, 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)
46