-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CE2Y39iaqyaUxsLWs45AO2zGDLQYAKjSuE71Hphim8ihllddgKmKRk/87cFoVGXv TnNspzGoFC1OtbFZRRvLCw== 0000837913-01-500052.txt : 20020410 0000837913-01-500052.hdr.sgml : 20020410 ACCESSION NUMBER: 0000837913-01-500052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENUS INC CENTRAL INDEX KEY: 0000837913 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942790804 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17139 FILM NUMBER: 1788956 BUSINESS ADDRESS: STREET 1: 1139 KARLSTAD DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 BUSINESS PHONE: 4087477120 MAIL ADDRESS: STREET 1: 1139 KARLSTAD DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 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 September 30, 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 November 8, 2001: 22,271,895 ---------- ================================================================================ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ----------- -------- -------- ------- Net sales . . . . . . . . . . . . . . . . . . . $ 15,094 $14,543 $ 43,062 $ 24,955 Costs and expenses: Cost of goods sold. . . . . . . . . . . . . . 10,300 8,044 27,523 15,063 Research and development. . . . . . . . . . . 2,592 2,034 8,838 5,762 Selling, general and administrative . . . . . 2,739 2,820 7,971 8,043 -------- --------- -------- -------- Income/(loss) from operations . . . . . . . . . (537) 1,645 (1,270) (3,913) Other income (expenses), net. . . . . . . . . . (207) 101 (127) 383 -------- --------- -------- -------- Loss before income taxes and cumulative effect of change in accounting principle. . . (744) 1,746 (1,397) (3,530) Provision for income taxes. . . . . . . . . . . -- 100 69 450 -------- -------- -------- -------- Loss before cumulative effect of change in accounting principle. . . . . . . . (744) 1,646 (1,466) (3,980) Cumulative effect of change in accounting principle. . . . . . . . . . . . . -- -- -- (6,770) --------- --------- -------- -------- Net income/(loss) . . . . . . . . . . . . . . . $ (744) $ 1,646 $ (1,466) $ (10,750) ========= ======== ======== ======== Net income (loss) per share before cumulative effect of change in accounting principle: Basic . . . . . . . . . . . . . . . . . . . . $ (0.03) $ 0.09 $ (0.07) $ (0.21) Diluted . . . . . . . . . . . . . . . . . . . (0.03) 0.08 (0.07) (0.21) Net income (loss) per share: Basic . . . . . . . . . . . . . . . . . . . . (0.03) 0.09 (0.07) (0.57) Diluted . . . . . . . . . . . . . . . . . . . $ (0.03) $ 0.08 $ (0.07) $ (0.57) Shares used in per share calculation - basic. . 22,268 19,126 20,793 18,845 ========= ========= ======== ======== Shares used in per share calculation - diluted. 22,268 20,593 20,793 18,845 ========= ========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2001 2000 --------------- -------------- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . $ 5,514 $ 3,136 Accounts receivable (net of allowance for doubtful accounts of $335 in 2001 and $363 in 2000). . . . 5,041 8,479 Inventories . . . . . . . . . . . . . . . . . . . . 11,956 21,849 Other current assets. . . . . . . . . . . . . . . . 763 675 --------------- -------------- Total current assets. . . . . . . . . . . . . . . 23,274 34,139 Equipment, furniture and fixtures, net. . . . . . . 15,940 10,207 Other assets, net . . . . . . . . . . . . . . . . . 250 189 --------------- -------------- Total assets. . . . . . . . . . . . . . . . . . . $ 39,464 $ 44,535 =============== ============== LIABILITIES Current Liabilities: Short-term bank borrowings. . . . . . . . . . . . . $ 5,567 $ 2,719 Accounts payable. . . . . . . . . . . . . . . . . . 9,104 8,647 Accrued expenses. . . . . . . . . . . . . . . . . . 3,066 3,315 Deferred revenue and customer deposits. . . . . . . 4,390 18,562 --------------- -------------- Total current liabilities . . . . . . . . . . . . 22,127 33,243 --------------- -------------- Contingencies (see notes) SHAREHOLDERS' EQUITY Common stock, no par value: Authorized 50,000,000 shares; Issued and outstanding 22,272,000 shares at September 30, 2001 and 19,319,000 shares at December 31, 2000 . . . . . . . . . . . . . . . . 110,411 102,837 Accumulated deficit . . . . . . . . . . . . . . . . (90,989) (89,523) Accumulated other comprehensive loss. . . . . . . . (2,085) (2,022) --------------- -------------- Total shareholders' equity. . . . . . . . . . . . 17,337 11,292 --------------- -------------- Total liabilities and shareholders' equity. . . . $ 39,464 $ 44,535 =============== ==============
The accompanying notes are an integral part of the consolidated financial statements. GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 -------- -------- Cash flows from operating activities: Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (1,466) $ (10,750) Adjustments to reconcile net loss to net cash from operating activities: Cumulative effect of change in accounting principle . -- 6,770 Depreciation. . . . . . . . . . . . . . . . . . . . . 2,004 1,080 Stock-based compensation. . . . . . . . . . . . . . . 44 490 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . 3,438 1,943 Inventories . . . . . . . . . . . . . . . . . . . . 9,893 ( 9,979) Other assets. . . . . . . . . . . . . . . . . . . . (149) (232) Accounts payable. . . . . . . . . . . . . . . . . . 457 3,540 Accrued expenses. . . . . . . . . . . . . . . . . . (249) (40) Deferred revenue and customer deposits. . . . . . . (14,172) 11,618 -------------- --------- Net cash provided by (used in) operating activities (200) 4,520 -------------- --------- Cash flows from investing activities: Acquisition of equipment, furniture and fixtures. . . . (7,737) (3,325) -------------- --------- Net cash used in investing activities . . . . . . . (7,737) (3,325) -------------- --------- Cash flows from financing activities: Proceeds from issuance of common stock. . . . . . . . . 7,530 1,150 Proceeds from short-term bank borrowings. . . . . . . . 5,567 4,000 Payments of short-term bank borrowings. . . . . . . . . (2,719) (4,000) -------------- --------- Net cash provided by financing activities . . . . . 10,378 1,150 -------------- --------- Effect of exchange rate changes on cash (63) 21 -------------- --------- Net increase in cash and cash equivalents 2,378 2,366 Cash and cash equivalents, beginning of period 3,136 6,739 -------------- --------- Cash and cash equivalents, end of period $ 5,514 $ 9,105 ============== ========= Supplemental cash flow information Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 287 $ 118 Income taxes. . . . . . . . . . . . . . . . . . . . . . $ 473 $ 152
5 The accompanying notes are an integral part of these consolidated financial statements. GENUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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/A2. 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 incurred losses from continuing operations for the year ended December 31, 2000 of approximately $9.7 million, after taking into account the cumulative adverse effect of the change in accounting principle of $6.8 million, and for the three- and nine-month periods ended September 30, 2001 of approximately $744,000 and $1.5 million, respectively. The Company is actively marketing its existing and new products, which it believes will ultimately lead to profitable operations. However, no assurance can be given that the currently available funds will meet the Company's cash requirements in the future. 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). A reconciliation of the numerator and denominator of basic and diluted net loss per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ------------------------------------------------------- Basic: Net income (loss). . . . . . . . . . $ (744) $ 1,646 $ (1,466) $(10,750) ============ ============= ======== ========= Weighted average common shares outstanding. . . . . . . . . . . . 22,268 19,126 20,793 18,845 ============ ============ ======== ========= Basic net income (loss) per share. $ (0.03) $ 0.09 $ (0.07) $ (0.57) ============ ============ ======== ========= Diluted: Net income (loss). . . . . . . . . $ (744) $ 1,646 $ (1,466) $(10,750) ============ =========== ======== ========= Weighted average common shares outstanding. . . . . . . . . . . . 22,268 20,593 20,793 18,845 ============ ============ ======== ========= Diluted net income (loss) per share. $ (0.03) $ 0.08 $ (0.07) $ (0.57) ============ ============= ======== =========
Stock options and warrants to purchase approximately 3,899,000 weighted shares of common stock were outstanding during the nine months ended September 30, 2001, but were not included in the computation of diluted net loss per share because the Company had a net loss for the nine months ended September 30, 2001. Stock options and warrants to purchase approximately 3,079,000 weighted shares of common stock were outstanding during the nine months ended September 30, 2000 but were not included in the computation of diluted net loss per share because the Company had a net loss for the nine months ended September 30, 2000. Stock options and warrants to purchase 4,590,000 weighted shares of common stock were outstanding during the three months ended September 30, 2001 but were not included in the computation of diluted net loss per share because the Company had a net loss for the three months ended September 30, 2001. Stock options to purchase 550,000 weighted shares of common stock were excluded in the computation of diluted net income per share for the three months ended September 30, 2000, because these shares would have been anti-dilutive. LINES OF CREDIT On March 28, 2001, we converted our then existing $10 million Venture Bank line of credit to an asset-based line of credit. Amounts available under the line are based on 80 percent of eligible accounts receivable, and borrowings under the line are secured by all corporate assets and bear interest at 9.6 percent 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. As of September 30, 2001, there was an outstanding balance of $2.6 million on this line of credit. On July 15, 2001, our 100 percent owned subsidiary in Japan, Genus-Japan Inc., negotiated a $3.0 million line of credit secured by customer receivables with Aozora Bank, Ltd. in Tokyo. As of September 30, 2001, there was an outstanding balance of $3.0 million under this line of credit. INVENTORIES Inventories comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- Raw materials and purchased parts $ 5,194 $ 6,081 Work in process . . . . . . . . . 2,475 5,624 Finished goods. . . . . . . . . . 78 647 Inventory at customers' locations 4,209 9,497 -------------- ------------- $ 11,956 $ 21,849 ============== =============
Inventory at customers' locations represent the cost of systems shipped to customers for which we are awaiting customer acceptance. ACCRUED EXPENSES Accrued expenses comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------ System warranty $ 1,058 $ 757 Accrued commissions and incentives 155 242 Accrued compensation and related items 767 615 Federal, state and foreign income taxes 715 828 Other 371 873 ----------- ---------- $ 3,066 $ 3,315 ========== =========
COMMON STOCK On May 17, 2001, we sold in a private transaction 2,541,785 shares of our common stock, and warrants to purchase up to 1,270,891 of additional shares of common stock, for aggregate proceeds of approximately $7.6 million. Additional warrants were issued to Burnham Securities and Wells Fargo Van Kasper, for their services as placement agents in the transaction, for an additional 190,634 shares of our common stock. The warrants issued to the purchasers in the private placement are exercisable for $3.50 per share. The placement agents have an aggregate of 69,375 shares underlying their warrants that are exercisable for $3.00 per share and an aggregate of 121,259 shares underlying their warrants that are exercisable for $5.24 per share. The warrants expire on May 13, 2006. STOCK COMPENSATION In 1998 and 1999, the Company granted options to outside consultants to purchase 23,000 and 5,000 shares of common stock, respectively. These options have exercise prices between $0.875 and $3.03 per share. The options vest over three years and expire between February 2001 and March 2002. The work is to be conducted over a three-year period coinciding with the vesting of the options. Unvested options are to be forfeited if the consultants cease performing their work. The Company accounts for consultants' options in accordance with EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In accordance with this standard, changes in the estimated fair value of these options will be recognized as compensation expense in the period of the change. The Company recorded $16,000 and $232,000 for the nine months ended September 30, 2001 and 2000, respectively. In addition, the Company recorded $28,000 and $194,000 for the nine months ending September 30, 2001 and 2000 respectively, resulting from a shortfall in shares approved for the ESPP. Aggregate compensation resulting from the shortfall of approximately $400,000 is being amortized through December 2001. The calculation and recording of expense was made in accordance with EITF 97-12, "Accounting for Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25." In accordance with this consensus, a compensation charge is calculated for the amount by which the quoted stock price on the date of shareholder approval, less a 15 percent discount, exceeds the price at which options were granted under the ESPP. The compensation charge so determined is amortized over the term of the options issued under the ESPP that remains after shareholder approval of additional shares. 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 were being sought by the plaintiffs. In June, 2001, the plaintiffs settled with our insurance carrier for an amount within our insurance policy limits. On June 6, 2001, ASM America, Inc. filed suit against us in the U.S. District Court for the Northern District of California asserting that our atomic layer products infringe claims of U.S. Patent Nos. 6,015,590 and 5,916,365. The complaint sought unspecified monetary damages and equitable relief. On August 1, 2001, we filed our response in the patent infringement case initiated by ASM denying ASM's allegation that Genus infringes patents that ASM claims to have acquired. In our response, we deny ASM's allegations and maintain that ASM's claims based on these patents are improper. Additionally, we filed a counterclaim against ASM International N.V., charging ASM with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective Etching Native Oxide," and with committing antitrust violations designed to harm the atomic layer deposition market. ASM has filed a motion asking the court to dismiss our claim that ASM committed inequitable conduct in obtaining its patents, to dismiss our antitrust claim, and to sever and stay our antitrust claim if not dismissed. A hearing on ASM's motion is scheduled for December 11, 2001. In addition, claims construction hearings have been scheduled for June 2002 on all of the patents in suit. COMPREHENSIVE 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 loss (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 -------------------------------------------------------- Net income (loss). . . . . . . . . . . . $ (744) $ 1,646 $ (1,466) $ (10,750) Foreign currency translation adjustment. (59) 1 (63) 21 ----------- ----------- -------- --------- Comprehensive income (loss). . . . . . $ (803) $ 1,647 $ (1,529) $ (10,729) =========== =========== ========= =========
The components of accumulated other comprehensive loss is as follows (in thousands): SEPTEMBER 30, DECEMBER 31, 2001 2000 ------- ------- Cumulative translation adjustments $ (2,085) $ (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. In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe the adoption of SFAS No. 141 will not have a significant impact on our financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We believe the adoption of SFAS No. 142 will not have a significant impact on our financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and provides further guidance regarding the accounting and disclosure of long-lived assets. The Company is required to adopt SFAS 144 effective January 1, 2002, and has not yet determined the impact, if any, of adoption. 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 three and nine months ended September 30, 2001 were $15.1 and $43.1 million, which represented increases of 4 percent and 73 percent compared to the net sales of $14.5 million and $25.0 million for the corresponding periods in 2000. Five systems were accepted by our customers during the third quarter of 2001, compared to four systems during the third quarter of 2000. Three of these systems were our new atomic level deposition (ALD) product while the other two were our current generation chemical vapor deposition (CVD) products. During the nine months ended September 30, 2001, eleven systems and five upgrades were accepted, compared to seven systems and two upgrade kits in the first nine months of 2000. COST OF GOODS SOLD. Cost of goods sold for three and nine months ended September 30, 2001 was $10.3 million and $27.5 million, compared to $8.0 million and $15.1 million for the same period in 2000. Gross profit as a percentage of revenues was 32 percent for the quarter compared to 45 percent in the prior year quarter. In absolute dollars, gross profit was down $1.7 million from the prior year quarter and was adversely impacted by three factors: - - First, inventory write-offs and other one-time adjustments of approximately $500,000; - - Second, unfavorable manufacturing variances of approximately $1.1 million (in June, we initiated a number of initiatives in our plant to improve workflow, reduce inventories, and significantly increase production capacity in our new multi-product, multi-film, multi-customer environment and, although these actions helped us reduce inventories by $8 million and increase our shop floor capacity to produce 15 systems a quarter, they also resulted in higher manufacturing variances); and - - Third, service costs were $150,000 higher than in the third quarter of 2000 due to our investment in service centers in Japan and Korea. These three factors more than offset the favorable impact of earning a higher proportion of revenues from ALD systems which enjoy higher margins than CVD systems. 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 (R&D) expenses for the quarter ended September 30, 2001 were $2.6 million, or 17 percent of net sales, compared with $2.0 million or 14 percent of net sales for the same period in 2000. For the nine months ended September 30, 2001, expenses were $8.8 million, or 21 percent of sales, compared to $5.8 million, or 23 percent of sales for the same period in 2000. The increases in both quarter and year-to-date expenses were primarily associated with the development costs of our 300-millimeter product, the Lynx3, which shipped in the third quarter of 2001. Over the past six quarters, we have made significant investments in our ALD technology, particularly in new films and productivity improvements, and new CVD products, including tungsten films. We have also invested in semiconductor applications for ALD, and additionally for magnetic disk drives, telecommunications, and inkjet printers. We believe these investments will enable us compete effectively in the marketplace over the next 12 to 18 months. In August we started scaling back on our R&D expenses by eliminating a number of contract positions and implementing salary cuts of up to 20 percent for our entire workforce in order to respond to the downturn in the industry. In October, we took additional cost-cutting actions by implementing a restructuring program in which we further reduced contractor positions. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses were $2.7 million, or 18 percent of sales, for the quarter ended September 30, 2001, compared with $2.8 million or 19 percent of sales for the second quarter of 2000. Although headcount related to SG&A activities was 15 percent higher than in the prior year quarter, overall SG&A expenses were kept lower due to salary cuts, temporary plant shutdowns and stricter cost controls. Also, we received approximately $200,000 from our sub-lessee for early lease termination that was recorded as an offset to SG&A expenses in the September 2001 quarter. Year-to-date expenses were $8.0 million, slightly below the level recorded in the nine months ended September 2000. As a percentage of sales, year-to-date SG&A expenses in 2001 was 19 percent of sales, lower than last year's 32 percent of sales due to the increased sales volumes. OTHER INCOME (EXPENSE), NET. Other expenses for the third quarter of 2001 were $207,000, primarily reflecting interest charges on bank loans, compared to other income of $101,000, reflecting interest income from cash deposits, for the same period in 2000. During the nine months ended September 30, 2001, other expenses were $127,000, compared to income of $383,000 which was primarily due to interest received from Samsung and foreign currency exchange gains recorded during the first half of 2000. PROVISION FOR INCOME TAXES. We did not record any provision for income taxes for the three months ended September 30, 2001 as we recorded losses in our U.S and foreign subsidiaries. We provide for a full valuation allowance against the tax benefit associated with these losses. In the three months ended September 30, 2000 we recorded income tax expenses of $100,000 related to profits generated in our South Korean subsidiary. For the nine months ended September 30, we recorded a provision of $69,000 compared to $450,000 in the corresponding prior year period. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, our cash and cash equivalents were $5.5 million, an increase of $2.4 million over cash and cash equivalents of $3.1 million held as of December 31, 2000. Accounts receivable was $5.0 million, a decrease of $3.4 million from $8.4 million as of December 31, 2000, as we were able to collect on most of our overdue receivables. Cash used by operating activities totaled $200,000 for the nine months ended September 30, 2001, and consisted primarily of net loss of $1.5 million and decreases in deferred revenues of $14.2 million, partially offset by depreciation of $2.0 million and reductions in working capital, primarily receivables of $3.4 million and inventories of $9.9 million. Inventory reductions were primarily related to improved supply chain management, decreases in inventory held at customer sites from $9.5 million to $4.2 million. Financing activities provided cash of $10.4 million for the nine months ended September 30, 2001. In May, we received approximately $7.5 million of proceeds from a private placement and from issuance of common stock under the stock option plans of 2.5 million shares of our common stock. Additionally, we increased our net short-term borrowings by $2.8 million. We made capital expenditures of $7.7 million for the nine months ended September 30, 2001. These expenditures were primarily related to the continuing program of upgrading existing equipment in our development and applications laboratories to meet our most advanced system capabilities and specifications, especially for our ALD processes. This has improved our product and film development capabilities, and increased our customer demonstration capabilities, which is critical in the sales process. Our primary source of funds at September 30, 2001 consisted of $5.5 million in cash and cash equivalents, and $5.0 million of accounts receivable, some of which has been collected and most of which we expect will have been collected during the three months ending December 31, 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 percent of eligible accounts receivable, including funds owed by customers for shipments that have not yet been accepted. Borrowings under the line are secured by all corporate assets and bear interest at 9.6 percent 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. Borrowings under this line were $2.6 million as of September 30, 2001. On July 15, 2001, our 100 percent owned subsidiary in Japan, Genus Japan Inc., negotiated a $3.0 million line of credit, secured by customer receivables, with Aozora Bank, Ltd. in Tokyo. As of September 30, 2001, there was an outstanding balance of $3.0 million under this line of credit. We are actively marketing our existing and new products, which we believe will ultimately lead to profitable operations. However, there can be no assurance the currently available funds will meet the company's cash requirements in the future, or, that any required additional funding will be available on terms attractive to us, 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. In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe the adoption of SFAS No. 141 will not have a significant impact on our financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We believe the adopting of SFAS 142 will not have a significant impact on our financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and provides further guidance regarding the accounting and disclosure of long-lived assets. The Company is required to adopt SFAS 144 effective January 1, 2002, and has not yet determined the impact, if any, of adoption. 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 $2.9 million, $3.2 million and $26.0 million for 2000, 1999 and 1998, respectively. These numbers have been restated to reflect the retroactive application of the change in accounting principle under SAB 101. 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. 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 Infineon Technologies accounted for approximately 91 percent and 5 percent of our net sales in 2000. In the first nine months of 2001, Samsung Electronics Company, Ltd., Read-Rite and Infineon Technologies accounted for approximately 72 percent, 8 percent and 6 percent, respectively, of our net sales. Samsung Electronics and Read-Rite represented approximately 34 percent of accounts receivables at September 30, 2001. 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 customers through our strategy of product and customer diversification None of our customers has entered into a long-term agreement with us requiring them to purchase our products. In addition, sales to these customers may decrease in the future when they complete their current semiconductor equipment purchasing requirements. If any of our customers were to encounter financial difficulties or become unable to continue to do business with us at or near current levels, our business, results of operations and financial condition would be materially harmed. Customers may delay or cancel orders or may stop doing business with us for a number of reasons including: - customer departures from historical buying patterns; - general market conditions; - 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. For example, in the year 2000, our quarterly revenues ranged from $3.8 million to $15.7 million with the bottom line ranging from a loss of $10.3 million to a profit of $1.6 million. 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, makes the timing of customer orders uneven and difficult to predict. 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 harm our operating results for that quarter, which could cause our stock price to decline. 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 percent, 86 percent and 56 percent of our total net sales in 2000, 1999 and 1998, respectively, and accounted for 92 percent of our total net sales during the first nine months of 2001. Net sales to our South Korean-based customers accounted for approximately 92 percent, 84 percent and 30 percent of total net sales in 2000, 1999, and 1998, respectively, and accounted for 72 percent of our total net sales in the first nine months 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 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 because integrated circuit manufacturers sold dynamic random access memory chips, called DRAMs, at less than cost in order to generate cash. The cash shortfall caused Asian semiconductor companies to defer or cancel investments in new production facilities, thereby reducing our anticipated sales of our semiconductor manufacturing equipment in Asia in 1998. Also during this time, the value of the WON, the currency of South Korea, declined significantly against the U.S. dollar. As a result, purchases of U.S. manufactured products became very costly. Since most of our sales were made to South Korean customers, these circumstances adversely impacted our customers' ability to invest in new facilities and equipment that reduced our shipments and profitability in 1998. Wherever currency devaluations occur abroad, our goods become more expensive for our customers in that region. Difficult economic conditions may limit capital spending by our customers. These circumstances may also affect the ability of our customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO FAIL TO ACHIEVE ANTICIPATED SALES Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. Although we are marketing our atomic layer deposition technology to non-semiconductor markets such as markets in magnetic thin film heads, flat panel displays, micro-electromechanical systems and inkjet printers, we are still dependent on the semiconductor market. The semiconductor industry is cyclical and experiences periodic downturns both of which reduce the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have significantly decreased our revenues, operating margins and results of operations in the past. During the industry downturn in 1998, several of our customers delayed or cancelled investments in new manufacturing facilities and equipment due to declining DRAM prices, the Asian economic downturn, and general softening of the semiconductor market. This caused our sales in 1998 to be significantly lower than in the prior three years. After the dramatic industry boom for semiconductor equipment that peaked early in the year 2000, another cyclical downturn that is extraordinarily deep is presently occurring. Industry reports anticipate a fall of 45 percent in 2001 compared to 2000. This sharp and severe industry downturn is the largest in the industry's history and it is occurring with a slowdown of the U.S. economy overall. Almost all previous downturns have been solely due to pricing declines. The current downturn in the industry marks a corresponding decline in unit production. Genus recently reported a loss for our third quarter 2001 financial results. There is a risk that our revenues and operating results will continue to be further impacted by the continued downturn in the semiconductor industry and global economy. 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 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 could harm our business, financial condition and results of operations. We must manage product transitions successfully, as introductions of new products could harm sales of existing products. We derive our revenue primarily from the sale of equipment used to chemically deposit tungsten silicide in the manufacture of memory chips. We estimate that the life cycle for these tungsten silicide deposition systems is three-to-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 superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their product lines. We may not be able to maintain or expand our sales if our resources do not allow us to respond effectively to such competitive forces. WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven 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. 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 to choices made by customers that continue to be influenced by pre-existing installed bases by competing vendors. A semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, we may face narrow windows of opportunity to be selected as the "vendor of choice" by potential new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are not able to achieve broader market acceptance of our systems and technology, we may be unable to grow our business and our operating results and financial condition will be harmed. OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF OUR REVENUE Sales of our systems depend upon the decision of a prospective customer to increase manufacturing capacity. That decision typically involves a significant capital commitment by our customers. Accordingly, the purchase of our systems typically involves time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers' manufacturing facilities. For many potential customers, an evaluation as to whether new semiconductor manufacturing equipment is needed typically occurs infrequently. Following an evaluation by the customer as to whether our systems meet its qualification criteria, we have experienced in the past and expect to experience in the future delays in finalizing system sales while the customer evaluates and receives approval for the purchase of our systems and constructs a new facility or expands an existing facility. Due to these factors, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort. The time between our first contact with a customer and the customer placing its first order typically lasts from nine to twelve months and is often longer. This lengthy sales cycle makes it difficult to accurately forecast future sales and may cause our quarterly and annual revenue and operating results to fluctuate significantly from period to period. If anticipated sales from a particular customer are not realized in a particular period due to this lengthy sales cycle, our operating results may be adversely affected for that period. OUR INTELLECTUAL PROPERTY IS IMPORTANT TO US AND WE RISK LOSS OF A VALUABLE ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSES IF WE CANNOT ADEQUATELY PROTECT 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. On August 1, 2001, we filed a counterclaim against ASM International N.V., charging ASM with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective Etching Native Oxide," and with committing antitrust violations designed to harm the atomic layer deposition market. ASM has filed a motion asking the court to dismiss our claim that ASM committed inequitable conduct in obtaining its patents, to dismiss our antitrust claim, and to sever and stay our antitrust claim if not dismissed. A hearing on ASM's motion is scheduled for December 11, 2001. In addition, claims construction hearings have been scheduled for June 2002 on all of the patents in suit. 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. IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED. From time to time, we may receive notices from third parties alleging infringement of patents or intellectual property rights. It is our policy to respect all parties' legitimate intellectual property rights, and we will defend against such claims or negotiate licenses on commercially reasonable terms where appropriate. However, no assurance can be given that we will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our business and financial results. On June 6, 2001, ASM America, Inc. filed suit against us in the U.S. District Court for the Northern District of California asserting that our atomic layer products infringe claims of U.S. Patent Nos. 6,015,590 and 5,916,365. The complaint sought unspecified monetary damages and equitable relief. On August 1, 2001, we filed our response in the patent infringement case initiated by ASM denying ASM's allegation that Genus infringes patents that ASM claims to have acquired. In our response, we deny ASM's and maintain that ASM's claims based on these patents are improper. We intend to defend our position vigorously. The outcome of any litigation is uncertain, however, and we may not prevail. Should we be found to infringe any of the patents asserted, in addition to potential monetary damages and any injunctive relief granted, we would need either to obtain a license from ASM to commercialize our products or redesign our products so they do not infringe any of these patents. If we were unable to obtain a license or adopt a non-infringing product design, we may not be able to proceed with development, manufacture and sale of our atomic layer products. In this case our business may not develop as planned, and our results could materially suffer. WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES We are highly dependent on key personnel to manage our business, and their knowledge of business, management skills and technical expertise would be difficult to replace. Our success depends upon the efforts and abilities of Dr. William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E. Seidel, our chief technology officer, and other key managerial and technical employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel or other key employees could limit or delay our ability to develop new products and adapt existing products to our customers' evolving requirements and would also result in lost sales and diversion of management resources. None of our executive officers are bound by a written employment agreement, and the relationships with our officers are at will. Because of competition for additional qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products. Our growth depends on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, technical, financial, sales and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. Competition for such personnel is intense, particularly in the San Francisco Bay Area where we are based. If we are unable to retain our existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to customers, or fail to meet delivery commitments or experience deterioration in service levels or decreased customer satisfaction. OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL LIABILITY TO US We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations. If we fail to comply with present or future regulations, we could be subject to substantial liability for clean up efforts, property damage, personal injury and fines or suspension or cessation of our operations. We use the following regulated gases at our manufacturing facility in Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen. We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The city of Sunnyvale, California, imposes high environmental standards to businesses operating within the city. Genus has met the city's stringent requirements and has received an operating license from Sunnyvale. Presently, our compliance record indicates that our methods and practices successfully meet standards. Moving forward, if we fail to continuously maintain high standards to prevent the leakage of any toxins from our facilities into the environment, restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses. WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS 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 these products, if necessary. Nevertheless, a prolonged inability to obtain components could have a material adverse effect on our operating results. 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 U.S., Europe, South Korea and Japan and through six independent sales representatives and distributors in the U.S., Europe, South Korea, Taiwan, China and Malaysia. We do not have any long-term contracts with our sales representatives and distributors. Any disruption or termination of our existing distributor relationships could negatively impact sales and revenue. WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE We terminated our relationship with our distributor, Innotech Corp. in Japan in 1998. In 2000, we invested significant resources in Japan by establishing a direct sales organization, Genus-Japan, Inc. Although we continue to invest significant resources in our Japan office and have received orders from two new Japanese customers in 2001, we may not be able to attract new customers in the Japanese semiconductor industry, and as a result, we may fail to yield a profit or return on our investment in Japan. THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR TO SECURITIES LITIGATION Our common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in our, our competitors or our customers' actual or anticipated financial results, our competitors or our customers' announcements of technological innovations, revenue recognition policies, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which we do business, may adversely 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. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, acts of political terrorists 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 could be subject to electrical blackouts as a consequence of a shortage of available electrical power. If such blackouts were to occur, they could disrupt the operations of our affected facilities. Although we maintain general business insurance against interruptions such as fires and floods, there can be no assurance that the amount of coverage will be adequate in any particular case. WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR CAUSE OUR STOCK PRICE TO DROP. As of September 30, 2001 we have a total of 4,606,568 shares of common stock underlying warrants and outstanding employee stock options. Of the stock options, 1,869,519 shares are currently exercisable. All of the shares underlying the warrants are currently exercisable. There are 1,461,525 shares of our common stock underlying the warrants issued to the shareholders. Of these shares, 1,270,891 have an exercise price of $3.50; 69,375 have an exercise price of $3.00; and 121,259 have an exercise price of $5.24. In addition, Venture Banking Group, a division of Cupertino National Bank, holds a warrant, issued October 14, 1999, to purchase 25,000 shares of our common stock at an exercise price of $2.39. The 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 as a result of dilution to your percentage ownership in Genus or as a result of a reduction in the per share value of our stock resulting from the increase in the number of Genus shares available on the market, if such availability were to exceed the demand for our stock. WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR PERCENTAGE OWNERSHIP OF GENUS STOCK Our Preferred Stock Rights Agreement is our primary anti-takeover device. Pursuant to the agreement, our board of directors has declared a dividend of one right for each share of our common stock that was outstanding as of October 13, 2000. The rights trade with the certificates for the common stock until a person or group acquires beneficial ownership of 15 percent or more of our common stock. After such an event, we will mail rights certificates to our shareholders and the rights will become transferable apart from the common stock. At that time, each right, other than rights owned by an acquiror or its affiliates, will entitle the holder to acquire, for the exercise price, a number of shares of common stock having a then-current market value of twice the exercise price. In the event that circumstances trigger the transferability and exercisability of rights granted in our preferred stock rights agreement, your current holdings in Genus may decline as a result of dilution to your percentage ownership in Genus or as a result of a reduction in the per share value of our stock resulting from the increase in the number of outstanding shares available. FORWARD-LOOKING STATEMENTS We make forward-looking statements in this report that may not prove to be accurate. This report contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding, among other items, our business strategy, growth strategy and anticipated trends in our business. We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission or otherwise. When we use the words "believe," "expect," "anticipate," "project" and similar expressions, this should alert you that this is a forward-looking statement. We base these forward-looking statements on our expectations. They are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this report, and in documents incorporated into this report, including those set forth above in "Risk Factors," describe factors, among others, that could contribute to or cause these differences. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as our business practices evolve and could seriously harm our financial results. All of our international sales, except spare parts and service sales made by our subsidiary in South Korea, are currently denominated in U.S. dollars. All spare parts and service sales made by the South Korean subsidiary are WON denominated. An increase in the value of the U.S. dollar relative to foreign currencies 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. 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 were being sought by the plaintiffs. In June, 2001, the plaintiffs settled with our insurance carrier for an amount within our insurance policy limits. On June 6, 2001, ASM America, Inc. filed suit against us in the U.S. District Court for the Northern District of California asserting that our atomic layer products infringe claims of U.S. Patent Nos. 6,015,590 and 5,916,365. The complaint sought unspecified monetary damages and equitable relief. On August 1, 2001, we filed our response in the patent infringement case initiated by ASM denying ASM's allegation that Genus infringes patents that ASM claims to have acquired. In our response, we deny ASM's allegations and maintain that ASM's claims based on these patents are improper. Additionally, we filed a counterclaim against ASM International N.V., charging ASM with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective Etching Native Oxide," and with committing antitrust violations designed to harm the atomic layer deposition market. ASM has filed a motion asking the court to dismiss our claim that ASM committed inequitable conduct in obtaining its patents, to dismiss our antitrust claim, and to sever and stay our antitrust claim if not dismissed. A hearing on ASM's motion is scheduled for December 11, 2001. In addition, claims construction hearings have been scheduled for June 2002 on all of the patents in suit. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 17, 2001, we sold in a private transaction 2,541,785 shares of our common stock, and warrants to purchase up to 1,270,891 of additional shares of common stock, for aggregate proceeds of approximately $7.6 million. We also issued an aggregate of 190,634 warrants to Burnham Securities, Inc. and Wells Fargo Van Kasper as partial compensation for their services as placement agents in the transaction. The warrants issued to the purchasers in the private placement are exercisable for $3.50 per share. The placement agents have an aggregate of 69,375 shares underlying their warrants that are exercisable for $3.00 per share and an aggregate of 121,259 shares underlying their warrants that are exercisable for $5.24 per share. Each warrant is exercisable to purchase one share of our common stock at any time until May 13, 2006. The warrants include a net exercise provision permitting the holders to pay the exercise price by cancellation of a number of shares with a fair market value equal to the price of the warrants. We may request the holders of the warrants issued to the purchasers in the private placement to exercise them if the closing price per share of our common stock is greater than $5.25 for each of the ten trading days immediately preceding the date we give notice to the holders of our decision to effect the exercise. Under the terms of this mandatory exercise provision, a holder can choose not to exercise his or her warrants, although such holder would then forfeit rights, title and interest under the warrants to the extent that he or she fails to exercise within thirty calendar days of receiving our notice. The warrants issued to the purchasers in the private placement include antidilution provisions under section 5, including provisions that call for adjustments in the number of shares of stock issued upon exercise of the warrants to prevent dilution to the holders of the warrants because of (i) dividends or distributions in common stock; (ii) reclassifications of the common stock; or (iii) the issuance of new stock at less than the exercise price of the warrants. The warrants issued to the placement agents differ from the warrants issued to the investors in the private placement in that the warrants issued to the placement agents (i) have no mandatory exercise provision; and (ii) require a more relaxed adjustment, called a broad-based adjustment, which requires fewer additional shares to be issued to the shareholders to prevent dilution if Genus issues new stock at less than the exercise price of the warrant. If all the warrants are exercised for cash and converted to common stock, the additional net proceeds would total $5.0 million. The net proceeds from the private placement are being used to fund inventory, sales and sales support to address new customers, working capital and general corporate matters. We entered into a registration rights agreement with the purchasers in connection with the private transaction that required us register the securities for resale under the Securities Act of 1933 by filing a registration statement a Form S-3. Accordingly, we made such a filing and Amendment 4 to the Genus, Inc. S-3 Registration Statement became effective with the Securities and Exchange Commission on August 17, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Report on Form 8-K The company filed a Current Report on Forms 8-K, on August 16, 2001. GENUS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2001 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) -----END PRIVACY-ENHANCED MESSAGE-----