10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___ to ___ Commission file number 0-17139 GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-279080 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1139 KARLSTAD DRIVE, SUNNYVALE, CALIFORNIA 94089 (Address of principal executive offices) (Zip code) (408) 747-7120 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common shares outstanding at May 8, 2001: 19,431,323 ------------ 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2001 2000 ------------------- --------- Net sales . . . . . . . . . . . . . . . . . . . . $ 14,309 $ 3,826 Costs and expenses: Cost of goods sold. . . . . . . . . . . . . . . 8,603 2,844 Research and development. . . . . . . . . . . . 3,004 1,760 Selling, general and administrative . . . . . . 2,518 2,825 ------------------- --------- Income (loss) from operations . . . . . . . . . . 184 (3,603) Other income (expenses), net. . . . . . . . . . . 2 286 ------------------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle. . . . 186 (3,317) Provision for income taxes. . . . . . . . . . . . 55 250 ------------------- --------- Income (loss) before cumulative effect of change in accounting principle. . . . . . . . . 131 (3,567) Cumulative effect of change in accounting principle. . . . . . . . . . . . . . -- (6,770) ------------------- --------- Net income (loss) . . . . . . . . . . . . . . . . $ 131 $(10,337) =================== ========= Income (loss) per share before cumulative effect of change in accounting principle: Basic . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.19) Diluted . . . . . . . . . . . . . . . . . . . . 0.01 (0.19) Net income (loss) per share: Basic . . . . . . . . . . . . . . . . . . . . . 0.01 (0.56) Diluted . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.56) Shares used in per share calculation - basic. . . 19,379 18,569 =================== ========= Shares used in per share calculation - diluted. . 19,926 18,569 =================== =========
The accompanying notes are an integral part of the consolidated financial statements. 2 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ----------- -------------- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . $ 3,092 $ 3,136 Accounts receivable (net of allowance for doubtful accounts of $363 in 2001 and $363 in 2000). . . . 5,034 8,479 Inventories . . . . . . . . . . . . . . . . . . . . 19,143 21,849 Other current assets. . . . . . . . . . . . . . . . 689 675 ----------- -------------- Total current assets. . . . . . . . . . . . . . . 27,958 34,139 Equipment, furniture and fixtures, net. . . . . . . 13,279 10,207 Other assets, net . . . . . . . . . . . . . . . . . 183 189 ----------- -------------- Total assets. . . . . . . . . . . . . . . . . . . $ 41,420 $ 44,535 =========== ============== LIABILITIES Current Liabilities: Short-term bank borrowings. . . . . . . . . . . . . $ 2,789 $ 2,719 Accounts payable. . . . . . . . . . . . . . . . . . 9,379 8,647 Accrued expenses. . . . . . . . . . . . . . . . . . 3,031 3,315 Deferred revenue and customer deposits. . . . . . . 14,673 18,562 ----------- -------------- Total current liabilities . . . . . . . . . . . . 29,872 33,243 ----------- -------------- Contingencies (see notes) SHAREHOLDERS' EQUITY Common stock, no par value: Authorized 50,000,000 shares; Issued and outstanding 19,426,656 shares at March 31, 2001 and 19,319,000 shares at December 31, 2000 . . . . . . . . . . . . . . . . 102,996 102,837 Accumulated deficit . . . . . . . . . . . . . . . . (89,392) (89,523) Accumulated other comprehensive loss. . . . . . . . (2,056) (2,022) ----------- -------------- Total shareholders' equity. . . . . . . . . . . . 11,548 11,292 ----------- -------------- Total liabilities and shareholders' equity. . . . $ 41,420 $ 44,535 =========== ==============
The accompanying notes are an integral part of the consolidated financial statements. 3 GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2001 2000 -------- --------- Cash flows from operating activities: Net income (loss) $ 131 $(10,337) Adjustments to reconcile net income (loss) to net cash from operating activities: Cumulative effect of change in accounting principle. . -- 6,770 Depreciation . . . . . . . . . . . . . . . . . . . . . 534 414 Stock-based compensation . . . . . . . . . . . . . . . 36 82 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . 3,445 (3,633) Inventories. . . . . . . . . . . . . . . . . . . . . 2,706 (4,125) Other assets . . . . . . . . . . . . . . . . . . . . (8) (105) Accounts payable . . . . . . . . . . . . . . . . . . 732 1,745 Accrued expenses . . . . . . . . . . . . . . . . . . (284) 351 Deferred revenue and customer deposits . . . . . . . (3,889) 6,835 ----------- -------- Net cash provided by (used in) operating activities. 3,403 (2,003) ----------- -------- Cash flows from investing activities: Acquisition of equipment, furniture and fixtures . . . . (3,606) (769) ----------- -------- Net cash used in investing activities. . . . . . . . (3,606) (769) ----------- -------- Cash flows from financing activities: Proceeds from issuance of common stock . . . . . . . . . 123 665 Proceeds from short-term bank borrowings . . . . . . . . 70 4,000 ----------- -------- Net cash provided by financing activities. . . . . . 193 4,665 ----------- -------- Effect of exchange rate changes on cash (34) 21 ----------- -------- Net increase (decrease) in cash and cash equivalents (44) 1,914 Cash and cash equivalents, beginning of period 3,136 6,739 ----------- -------- Cash and cash equivalents, end of period $ 3,092 $ 8,653 =========== ========
The accompanying notes are an integral part of these financial statements. 4 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) Basis of Presentation. The accompanying 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 consolidated financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K. The information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of financial position, results of operations and cash flows for the interim periods. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year. Net Income (Loss) Per Share. Basic net income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing income (loss) available to common shareholders, adjusted for convertible preferred dividends and after-tax interest expense on convertible debt, if any, by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). Net Income (Loss) Per Share A reconciliation of the numerator and denominator of basic and diluted net income (loss) per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31, 2001 2000* ---------------- --------- Basic: Net income (loss) $ 131 $(10,337) ================ ========= Weighted average common shares outstanding. . . . . . . . . . . 19,379 18,569 ================ ========= Basic net income (loss) per share $ 0.01 $ (0.56) ================ ========= Diluted: Net income (loss) $ 131 $(10,337) ================ ========= Weighted average common shares outstanding. . . . . . . . . . . 19,379 18,569 Effect of dilutive stock options . 544 0 Effect of dilutive warrants. . . . 3 0 ---------------- --------- 19,926 18,569 ================ ========= Diluted net income (loss) per share $ 0.01 $ (0.56) ================ =========
*Restated to reflect change in accounting principle. 5 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) Stock options to purchase approximately 1,893,304 weighted shares of common stock were excluded from the computation of diluted net income per share for the quarter ended March 31, 2001, because the exercise price of the options exceeded the average fair market value of the stock for the three months ended March 31, 2001. Stock options to purchase approximately 2,242,375 shares of common stock were outstanding during the three months ended March 31, 2000 but were not included in the computation of diluted loss per share because the Company had a net loss for the three months ended March 31, 2000. Warrants to purchase 400,000 shares of common stock were outstanding during the three months ended March 31, 2000 but were not included in the computation of diluted loss per share because the Company had a net loss for the three months ended March 31, 2000. Statement of Cash Flow Information (amounts in thousands):
THREE MONTHS ENDED MARCH 31, 2001 2000 ------ ------ Supplemental cash flow information: Cash paid during the period for: Interest. . . . . . . . . . . . $ 60 $ 0 Income taxes. . . . . . . . . . $ 273 $ 68
Line of Credit. On March 28, 2001, we converted our existing $10 million Venture Bank line of credit to an asset-based line of credit. Amounts available under the line are based on 80% of eligible accounts receivable, and borrowings under the line are secured by all corporate assets and bear interest at 9.6% per annum and an administrative fee of a quarter of one percent on all advances. This line does not have accounts receivable customer concentration limitations, does allow borrowing against foreign receivables, and has no financial covenants. It will expire in March, 2002. There is an outstanding balance of $2,789,000 against this line of credit. INVENTORIES Inventories comprise the following (in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ---------- ------------- Raw materials and purchased parts $ 6,411 $ 6,081 Work in process . . . . . . . . . 4,022 5,624 Finished goods. . . . . . . . . . 956 647 Inventory at customers' locations 7,754 9,497 ---------- ------------- $ 19,143 $ 21,849 ========== =============
6 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) ACCRUED EXPENSES Accrued expenses comprise the following (in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ---------- ------------- System warranty . . . . . . . . . . . . $ 730 $ 757 Accrued commissions and incentives. . . 146 242 Accrued compensation and related items. 738 615 Federal, state and foreign income taxes 589 828 Other . . . . . . . . . . . . . . . . . 828 873 ---------- ---------- $ 3,031 $ 3,315 ========== ==========
LEGAL PROCEEDINGS In July 1999, we were named as a co-defendant in a claim filed at the Superior Court of the state of California for the county of Santa Clara, involving an automobile accident by one of our former employees which resulted in the death of an individual. Significant general, punitive and exemplary damages are being sought by the plaintiffs. Recently, a demand was placed by the plaintiff that is within our insurance policy limits. While we believe we are not at fault in this matter, we have instructed our insurance carrier to pay the demand in an effort to avoid the costs associated with going to trial. Although the outcome of this matter is not presently determinable, we do not believe that resolution of this matter will have a material adverse effect on our financial position or results of operations. COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" establishes rules for the reporting and display of comprehensive income and its components. The following are the components of comprehensive income (loss) (in thousands):
THREE MONTHS ENDED MARCH 31, 2001 2000* ----------- --------- Net income (loss). . . . . . . . . . . . $ 131 $(10,337) Foreign currency translation adjustment. (34) 21 ----------- --------- Comprehensive income (loss). . . . . . $ 97 $(10,316) =========== =========
*Restated to reflect change in accounting principle. 7 GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) The components of accumulated other comprehensive income, are as follows (in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ----------- -------------- Cumulative translation adjustments $ (2,056) $ (2,022) =========== ==============
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Boards ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" which deferred the effective date until the first fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS 133." SFAS No. 138 amends certain terms and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be recognized at fair value as either assets or liabilities in the statement of the financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. We adopted SFAS No. 133, as amended, on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's consolidated financial statements. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this report which express "belief", anticipation" or "expectation" as well as other statements which are not historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under "Risk Factors" in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in or incorporated by reference into this report. The following discussion should be read in conjunction with the Company's Financial Statements and Notes thereto included in this report. RESULTS OF OPERATIONS NET SALES. Net sales for the quarter ended March 31, 2001 were $14.3 compared to net sales of $3.8 million for the corresponding period in 2000. First quarter revenue consisted of two systems and a significant number of system upgrades that were accepted by the customer. Under SAB 101, we believe customer acceptance is required for revenue recognition purposes on orders where Genus is required to provide installation services. In the first quarter of 2000, only one system was accepted by the customer. COST OF GOODS SOLD. Cost of goods sold for the quarter ended March 31, 2001 was $8.6 million compared to $2.8 million for the same period in 2000. Gross profit as a percentage of net sales for the quarter ended March 31, 2001 was 40% compared to 26% in the first quarter of 2000. The primary reason for the increase in gross margin percent was the higher production volumes that allowed for better absorption of our fixed operations expenses. Our gross profits have historically been affected by variations in average selling prices, configuration differences, changes in the mix of product sales, unit shipment levels, the level of foreign sales and competitive pricing pressures. RESEARCH AND DEVELOPMENT. Research and development expenses for the quarter ended March 31, 2001 were $3.0 million, representing 21% of net sales, compared with $1.8 million or 47% of net sales for the same period in 2000. These spending increases are primarily associated with the acceleration of our 300mm development program that began in the middle of last year. This is in addition to our continued investments in our ALD technology, particularly new films and applications, productivity improvements, and new tungsten products. We continue to pursue non-semiconductor applications for ALD, including magnetic disk drives, telecommunications, and inkjet printers. We expect our research and development spending levels to continue to increase throughout 2001. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses were $2.5 million, or 18% of sales, for the first quarter of 2001, compared with $2.8 million, or 74% of sales, for the first quarter of 2000. This was primarily due to lower commission and bonus accruals. General and administrative headcount and spending remain frozen until there is better visibility in the business outlook. OTHER INCOME (EXPENSE), NET. Other income for the first quarter of 2001 was $2,000 compared to other income of $286,000 for the same period in 2000. This was due to higher interest income and foreign currency exchange gains reported last year. PROVISION FOR INCOME TAXES. Income taxes for the quarter ended March 31, 2001 were $55,000 compared to $250,000 in the same 2000 period. Income taxes are related to the profit generated from our South Korean subsidiary. 9 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, our cash and cash equivalents were $3.1 million, a decrease of $44,000 from December 31, 2000. Accounts receivable was $5 million, a decrease of $3.4 million from December 31, 2000. This decrease was due to a delay in the shipment of a system to allow the customer time to address facilities issues, and for additional time to test and source inspect the system. Cash provided by operating activities totaled $3.4 million for the quarter ended March 31, 2001, and consisted primarily of net income of $131,000, decreases in accounts receivable of $3.4 million and inventory of $2.7 million, and an increase in accounts payable of 732,000, offset by a decrease in deferred revenue of $3.9 million. The decrease in accounts receivable was due to the system delay. Inventory reductions were primarily related to lower inventory at customer sites due to system and upgrade acceptances by customers, which allowed revenue to be recognized under SAB 101. For the same reason deferred revenue decreased, as the net value of systems accepted by customers exceeded the value of shipments that were deferred during the quarter. Accounts payable increased as we continue to manage cash very tightly. Financing activities provided cash of $193,000 for quarter ended March 31, 2001, from the issuance of common stock from our incentive stock option plan and an increase in short term bank borrowings. We made capital expenditures of $3.6 million for the quarter ended March 31, 2001. These expenditures were primarily related to the continuing program of upgrading existing equipment in our development and applications laboratories to meet our most advanced system capabilities and specifications, especially for our ALD processes. This will improve our product and film development capabilities, and increase our customer demonstration capabilities, which is critical in the sales process. We anticipate making additional capital investments during the remainder of 2001, but will be looking to vendors or third parties to finance some of these purchases, with the remainder funded through working capital. Our primary source of funds at March 31, 2001 consisted of $3.1 million in cash and cash equivalents, and $5.0 million of accounts receivable, most of which we expect to collect or to have been collected during 2001. On March 28, 2001, we converted our existing $10 million Venture Bank line of credit to an asset-based line of credit. Amounts available under the line are based on 80% of eligible accounts receivable, and borrowings under the line are secured by all corporate assets and bear interest at 9.6% per annum and an administrative fee of a quarter of one percent on all advances. This line does not have accounts receivable customer concentration limitations, does allow borrowing against foreign receivables, and has no financial covenants. It will expire in March, 2002. 10 On April 9, 2001, we announced plans for a private placement of common stock to raise additional working capital, strengthen our cash position and meet our growth expectations for 2001. We expect to close this deal by the end of May, 2001. The terms of the private placement will be announced in a company press release at the time of the closing. We believe that our existing working capital and our $10 million line of credit will be sufficient to satisfy our cash needs for the next 12 months. There can be no assurance that any required additional funding, if needed, will be available on terms attractive to us, which could have a material adverse affect on our business, financial condition and results of operations. Any additional equity financing may be dilutive to shareholders, and any additional debt financing, if available, may involve restrictive covenants. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date until the first fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be recognized at fair value as either assets or liabilities in the statement of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether is has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. We adopted SFAS No. 133, as amended, on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on our financial statements. RISK FACTORS Certain sections of Management's Discussion and Analysis contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth above in Management's Discussion and Analysis and this Risk Factors section. The discussion of these factors is incorporated by this reference as if said discussion was fully set forth in Management's Discussion and Analysis. 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 $9.6 million, $1.6 million and $29.5 million for 2000, 1999 and 1998, respectively. We may not be able to attain or sustain consistent future revenue growth on a quarterly or annual basis, or achieve and maintain consistent profitability on a quarterly or annual basis. As a result, our business could be materially harmed. 11 SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS Historically, we have relied on a small number of customers for a substantial portion of our net sales. For example, Samsung Electronics Company, Ltd. and Micron Technology, Inc. accounted for 91% and 5% of our net sales in 2000. Samsung Electronics Company, Ltd. and Infineon Technologies accounted for 90% and 6% of total shipments made in 2000, which would have been recorded as revenue under the historical accounting method. Samsung Electronics Company, Ltd accounted for 95% of our net sales during the first quarter of 2001. In addition, Samsung Electronics Company, Ltd., and Infineon Technologies represented 92% of accounts receivable at December 31, 2000. Samsung Electronics Company, Ltd represented 88% of accounts receivable at March 31, 2001. The semiconductor manufacturing industry generally consists of a limited number of larger companies. We consequently expect that a significant portion of our future product sales will be concentrated within a limited number of customers. None of our customers has entered into a long-term agreement with us requiring them to purchase our products. In addition, sales to these customers may decrease in the future when they complete their current semiconductor equipment purchasing requirements. If any of our customers were to encounter financial difficulties or become unable to continue to do business with us at or near current levels, our business, results of operations and financial condition would be materially adversely affected. 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. OUR QUARTERLY FINANCIAL RESULTS FLUCTUATE SIGNIFICANTLY AND MAY FALL SHORT OF ANTICIPATED LEVELS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE Our net sales and operating results may fluctuate significantly from quarter to quarter. We derive our revenue primarily from the sale of a relatively small number of high-priced systems, many of which may be ordered and shipped during the same quarter. Our results of operations for a particular quarter could be materially adversely affected if anticipated orders, for even a small number of systems, were not received in time to enable shipment during the quarter, anticipated shipments were delayed or canceled by one or more customers or shipments were delayed due to manufacturing difficulties. At our current revenue level, each sale, or failure to make a sale, could have a material effect on us. Our lengthy sales cycle, coupled with our customers' competing capital budget considerations, make the timing of customer orders uneven and difficult to predict. In addition, our backlog at the beginning of a quarter typically does not include all orders required to achieve our sales objectives for that quarter. As a result, our net sales and operating results for a quarter depend on us shipping orders as scheduled during that quarter as well as obtaining new orders for systems to be shipped in that same quarter. Any delay in scheduled shipments or in shipments from new orders would materially and adversely affect our operating results for that quarter, which could cause our stock price to decline. OUR FINANCIAL REPORTING ACTIVITIES WILL CONTINUE TO BE IMPACTED BY SAB 101 RULES FOR REVENUE RECOGNITION. 12 In December 1999, the SEC issued Staff Accounting Bulletin No. 101. SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Prior to SAB 101, we generally recognized revenue upon shipment of a system. Applying the requirements of SAB 101 to the selling arrangements we had used for the sale of semiconductor production equipment required a change in our accounting policy for revenue recognition and deferral of the recognition of revenue from such equipment sales until installation is complete and accepted by the customer. The effect of such a change had to be recognized as a cumulative effect of a change in accounting no later than the quarter ending December 31, 2000. Although SAB 101 applies to every company within our industry, there are risks that our stock price may be materially and adversely impacted by SAB 101 going forward. Since revenue is no longer recognized when a system ships but when installation is complete and customer acceptance occurs, any delays in acceptance, either by the customer or by Genus, may have a material adverse effect on our results of operations. In addition, the adoption of SAB 101 and its impact on our historical and projected financial performance may not be fully understood by our investors and analysts, and this may have a material adverse effect on the price of our stock. WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES. Export sales accounted for approximately 98%, 86% and 56% of our total net sales in 2000, 1999 and 1998, respectively, and accounted for 98% of our net sales during the first quarter of 2001. Net sales to our South Korean-based customers accounted for approximately 92%, 84% and 30% of total net sales, respectively during the same year-end periods, and accounted for 95% of our net sales in the first quarter of 2001. 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 certain risks, including: - unexpected changes in law or regulatory requirements; - exchange rate volatility; - tariffs and other barriers; - political and economic instability; - 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 affect the price of our products. In the past, turmoil in the Asian financial markets resulted in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. For example, prices fell dramatically in 1998 as some integrated circuit manufacturers sold DRAMs at less than cost in order to generate cash. Currency devaluations make dollar-denominated goods, such as ours, more expensive for international customers. 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 13 orders. As a result of any or all these factors, our business, financial condition and results of operations may be materially harmed. 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 ALD technology to non-semiconductor markets such as magnetic thin film heads, flat panel displays, MEMS and inkjet printers, we are still very dependent on the semiconductor market. The semiconductor industry is cyclical and experiences periodic downturns both of which reduce the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have significantly decreased our revenues, operating margins and results of operations in the past. There is a risk that our revenues and operating results will be materially harmed by any future downturn in the semiconductor industry. OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW THIN FILMS AND MARKET ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE THIN FILMS We believe that our future growth will depend in large part upon the acceptance of our new thin films and processes, especially ALD. 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 could have a material adverse effect on our business, financial condition and results of operations. In addition, we must manage product transitions successfully, as introductions of new products could harm sales of existing products. We derive our revenue primarily from the sale of our tungsten silicide CVD systems. We estimate that the life cycle for these systems is three-to-five 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. 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 in order 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 14 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 competition increases and we are not able to respond effectively. WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven financial 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. In addition, the 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 materially adversely affected. OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF OUR REVENUE Sales of our systems depend upon the decision of a prospective customer to increase manufacturing capacity. That decision typically involves a significant capital commitment by our customers. Accordingly, the purchase of our systems typically involves time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers' manufacturing facilities. For many potential customers, an evaluation as to whether new semiconductor manufacturing equipment is needed typically occurs infrequently. Following an evaluation by the customer as to whether our systems meet its qualification criteria, we have experienced in the past and expect to experience in the future delays in finalizing system sales while the customer evaluates and receives approval for the purchase of our systems and constructs a new facility or expands an existing facility. Due to these factors, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort. The time between our first contact with a customer and the customer placing its first order typically lasts from nine to twelve months and is often even 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. WE ARE DEPENDENT ON OUR INTELLECTUAL PROPERTY AND RISK LOSS OF A VALUABLE ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSE IF WE CANNOT ADEQUATELY PROTECT IT Our success depends in part on our proprietary technology. There can be no assurance that we will be able to protect our technology or that competitors will not be able to develop similar technology independently. We currently have a number of United States and foreign patents and patent applications. 15 There can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with competitive advantages. From time to time, we have received notices from third parties alleging infringement of such parties' patent rights by our products. In such cases, it is our policy to defend against the claims or negotiate licenses on commercially reasonable terms where appropriate. However, no assurance can be given that we will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our business and financial results. WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES We are highly dependent on key personnel to manage our business, and their knowledge of business, management skills and technical expertise would be difficult to replace. Our success depends upon the efforts and abilities of Dr. William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E. Seidel, our chief technology officer, and other key managerial and technical employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel or other key employees could limit or delay our ability to develop new products and adapt existing products to our customers' evolving requirements and would also result in lost sales and diversion of management resources. None of our executive officers are bound by a written employment agreement, and the relationships with our officers are at will. Because of competition for additional qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products. Our growth depends on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, technical, financial, sales and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. Competition for such personnel is intense, particularly 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. Restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses. WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT IN INCREASED COST OR DELAYS IN MANUFACTURE AND SALE OF OUR PRODUCTS Certain of the components and sub-assemblies included in our products are obtained from a single supplier or a limited group of suppliers. Disruption or termination of these sources could have an adverse effect on our operations. We believe that alternative sources could be obtained and qualified to supply 16 these products, if necessary. Nevertheless, a prolonged inability to obtain certain components could have a material adverse effect on our business, financial condition and results of operations. WE DEPEND UPON SIX 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 U.S., Europe, South Korea and Japan and through six independent sales representatives and distributors in the U.S., Europe, Taiwan, Singapore, China and Malaysia. We do not have any long-term contracts with our sales representatives and distributors. Any disruption or termination of our existing distributor relationships could have an adverse effect on our business, financial condition and results of operations. WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE We terminated our relationship with our distributor, Innotech Corp. in Japan in 1998. In 2000, we invested significant resources in Japan by establishing a direct sales organization, Genus-Japan, Inc. Although we continue to invest significant resources in our Japan office, we may not be able to attract sufficient new customers in the Japanese marketplace, and as a result, we may fail to yield a profit or return on our investment in Japan. THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR TO SECURITIES LITIGATION Our common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in our, our competitors or our customers actual or anticipated financial results, our competitors or our customers announcements of technological innovations, revenue recognition policies, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which we do business, may adversely effect the market price of our common stock. In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company's stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. 17 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. Further, our facilities in the State of California are currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations of our affected facilities. Although we maintain general business insurance against fires, floods and some general business interruptions, there can be no assurance that the amount of coverage will be adequate in any particular case. FORWARD-LOOKING STATEMENTS Some of the information in this Quarterly Report on Form 10-Q and in any documents that are incorporated by reference, including the risk factors, contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of these terms and other comparable terminology. These statements are only predictions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including the risks faced by us described above and elsewhere in this Quarterly Report on Form 10-Q. We believe it is important to communicate our expectations to our shareholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors listed above, as well as any cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as our business practices evolve and could seriously harm our financial results. All of our international sales, except spare parts and service sales made by our subsidiary in South Korea, are currently denominated in U.S. dollars. All spare parts and service sales made by the South Korean subsidiary are won denominated. An increase in the value of the U.S. dollar relative to foreign currencies 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. 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. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In July 1999, we were named as a co-defendant in a claim filed at the Superior Court of the state of California for the county of Santa Clara, involving an automobile accident by one of our former employees which resulted in the death of an individual. Significant general, punitive and exemplary damages are being sought by the plaintiffs. Recently, a demand was placed by the plaintiff that is within our insurance policy limits. While we believe we are not at fault in this matter, we have instructed our insurance carrier to pay the demand in an effort to avoid the costs associated with going to trial. Although the outcome of this matter is not presently determinable, we do not believe that resolution of this matter will have a material adverse effect on our financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Report on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2001. 19 GENUS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 15, 2001 GENUS, INC. /s/ William W.R. Elder ------------------------------------ William W.R. Elder, President, Chief Executive Officer and Chairman /s/ Kenneth Schwanda ------------------------------------ Kenneth Schwanda Chief Financial Officer (Principal Financial Officer, and Principal Accounting Officer)