-----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, PpCQBUeEpshXc+geZcBrFE05OjKuuEaZCJfSu+UulLdLTcLnB+/EQ0f7cd9wHuh7 5Gl5/nZsnMtDvWW3yIFpbQ== 0001015402-02-001821.txt : 20020515 0001015402-02-001821.hdr.sgml : 20020515 20020515160420 ACCESSION NUMBER: 0001015402-02-001821 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02652297 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 March 31, 2002 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 April 30, 2002: 26,407,952 ---------- ================================================================================
GENUS, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and March 31, 2002. . . . . . . . . . 3 Condensed Consolidated Balance Sheets as of March 31, 2001 and March 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and March 31, 2002. . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk . 22 PART II. OTHER INFORMATION Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 2: Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . 23 Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 23 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENUS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31, 2002 2001 -------- ------- Net sales . . . . . . . . . . . . . . . . . . . $ 9,591 $14,309 Costs and expenses: Cost of goods sold . . . . . . . . . . . . 7,467 8,603 Research and development . . . . . . . . . 2,185 3,004 Selling, general and administrative. . . . 3,436 2,518 -------- ------- Income (loss) from operations . . . . . . . . . (3,497) 184 Other income (expenses), net. . . . . . . . . . (255) 2 -------- ------- Loss before income taxes. . . . . . . . . . . . (3,752) 186 Provision for income taxes. . . . . . . . . . . - 55 -------- ------- Net income/(loss) . . . . . . . . . . . . . . . $(3,752) $ 131 ======== ======= Net income (loss) per share: Basic. . . . . . . . . . . . . . . . . . . $ (0.15) $ 0.01 Diluted. . . . . . . . . . . . . . . . . . $ (0.15) $ 0.01 Shares used in per share calculation - basic. . 25,249 19,379 ======== ======= Shares used in per share calculation - diluted. 25,249 19,926 ======== ======= The accompanying notes are an integral part of these condensed consolidated financial statements.
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GENUS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) MARCH 31, DECEMBER 31, 2002 2001 ----------- -------------- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . $ 9,456 $ 3,043 Accounts receivable (net of allowance for doubtful accounts of $69 in 2002 and $69 in 2001) . . . . 3,203 4,262 Inventories . . . . . . . . . . . . . . . . . . . . 8,675 12,648 Other current assets. . . . . . . . . . . . . . . . 825 1,221 ----------- -------------- Total current assets . . . . . . . . . . . . . . 22,159 21,174 Equipment, furniture and fixtures, net. . . . . . . 13,953 14,573 Other assets, net . . . . . . . . . . . . . . . . . 336 155 ----------- -------------- Total assets . . . . . . . . . . . . . . . . . . $ 36,448 $ 35,902 =========== ============== LIABILITIES Current Liabilities: Short-term bank borrowings. . . . . . . . . . . . . $ 3,848 $ 4,481 Accounts payable. . . . . . . . . . . . . . . . . . 5,609 8,352 Accrued expenses. . . . . . . . . . . . . . . . . . 2,709 3,553 Deferred revenue and customer deposits. . . . . . . 6,914 7,388 Deferred revenue and customer deposits. . . . . . . 536 - ----------- -------------- Total current liabilities. . . . . . . . . . . . 19,616 23,774 Long-term liabilities. . . . . . . . . . . . . . 436 - ----------- -------------- Total liabilities. . . . . . . . . . . . . . . . . . . 20,052 23,774 ----------- -------------- Contingencies (see note on legal proceeding) SHAREHOLDERS' EQUITY Common stock, no par value: Authorized 50,000 shares; Issued and outstanding 26,321 shares in 2002 and 22,365 in 2001. . . . . . . . . . . . . 118,724 110,753 Accumulated deficit . . . . . . . . . . . . . . . . (99,941) (96,189) Note receivable from shareholder. . . . . . . . . . (151) (151) Accumulated other comprehensive loss. . . . . . . . (2,236) (2,285) ----------- -------------- Total shareholders' equity . . . . . . . . . . . 16,396 12,128 ----------- -------------- Total liabilities and shareholders' equity . . . . . . $ 36,448 $ 35,902 =========== ============== The accompanying notes are an integral part of these condensed consolidated financial statements.
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GENUS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2002 2001 -------- -------- Cash flows from operating activities: Net income (loss). . . . . . . . . . . . . . . . . . . . $(3,752) $ 131 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . 895 534 Stock-based compensation . . . . . . . . . . . . . . . - 36 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . 1,059 3,445 Inventories. . . . . . . . . . . . . . . . . . . . . 3,973 2,706 Other assets . . . . . . . . . . . . . . . . . . . . 215 (8) Accounts payable . . . . . . . . . . . . . . . . . . (2,743) 732 Accrued expenses . . . . . . . . . . . . . . . . . . (844) (284) Deferred revenue and customer deposits . . . . . . . (474) (3,889) -------- -------- Net cash provided by (used in) operating activities. (1,671) 3,403 -------- -------- Cash flows from investing activities: Acquisition of equipment, furniture and fixtures . . . . (275) (3,606) -------- -------- Net cash used in investing activities. . . . . . . . (275) (3,606) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock . . . . . . . . . 7,971 123 Proceeds (payments) from short-term bank borrowings. . . (633) 70 Proceeds from debt . . . . . . . . . . . . . . . . . . . 1,200 - Payments for debt. . . . . . . . . . . . . . . . . . . . (228) - -------- -------- Net cash provided by financing activities. . . . . . 8,310 193 -------- -------- Effect of exchange rate changes on cash. . . . . . . . . . 49 (34) -------- -------- Net increase (decrease) in cash and cash equivalents . . . 6,413 (44) Cash and cash equivalents, beginning of period . . . . . . 3,043 3,136 -------- -------- Cash and cash equivalents, end of period . . . . . . . . . $ 9,456 $ 3,092 ======== ======== Supplemental cash flow information Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 60 Income taxes . . . . . . . . . . . . . . . . . . . . . . $ - $ 273 The accompanying notes are an integral part of these condensed consolidated financial statements.
5 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared in accordance with SEC requirements for interim financial statements. These financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Company's 2001 Annual Report on Form 10-K. The information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of financial position, results of operations and cash flows for the interim periods. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year. LIQUIDITY During the quarter ended March 31, 2002, the Company is in the process of executing its business strategy and has plans to eventually achieve profitable operations. Management believes that existing cash and available financing will be sufficient to meet projected working capital, capital expenditures and other cash requirements for the next twelve months. Accordingly, these financial statements have been prepared on a going concern basis. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). A reconciliation of the numerator and denominator of basic and diluted net income (loss) per share is as follows (in thousands, except per share data): THREE MONTHS ENDED MARCH 31, 2002 2001 -------- ------- Basic: Net income (loss). . . . . . . . . . $(3,752) $ 131 ======== ======= Weighted average common shares outstanding. . . . . . . . . . . 25,249 19,379 ======== ======= Basic net income (loss) per share. $ (0.15) $ 0.01 ======== ======= 6 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2002 2001 -------- ------- Diluted: Net income (loss). . . . . . . . . $(3,752) $ 131 Weighted average common shares outstanding. . . . . . . . . . . 25,249 19,379 Effect of dilutive stock options . - 544 Effect of dilutive warrants. . . . - 3 -------- ------- 25,249 19,926 ======== ======= Diluted net income (loss) per share. $ (0.15) $ 0.01 ======== ======= Stock options and warrants to purchase approximately 5,678,959 shares of common stock were outstanding during the three months ended March 31, 2002, but were not included in the computation of diluted net loss per share because the Company had a net loss for the three months ended March 31, 2002. Stock options to purchase approximately 1,826,867 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. SHORT-TERM BANK BORROWINGS In July 2001, our 100% owned subsidiary in Japan, Genus Japan Inc., negotiated a financing arrangement, secured by customer receivables, with Aozora Bank, Ltd. in Tokyo. The interest rate for borrowings under this agreement was 6.5%. As of March 31, 2002, there was $1.5 million outstanding under this line of credit. The agreement expired on April 30, 2002, and all amounts outstanding at that time were repaid. In December 2001, the Company replaced the $10.0 million line of credit with Venture bank with a $10.0 million line of credit from Silicon Valley bank. The Silicon Valley bank agreement includes a domestic revolving line of credit of $7.5 million, secured against domestic eligible receivables and a foreign line of credit of $7.5 million, financed by EXIM bank, secured against foreign eligible receivables and inventory. The initial term of the loan is 12 months ending December 20, 2002. Total availability under both lines at any given point in time is limited to $10.0 million. The interest rate for borrowings under both the domestic and foreign lines is prime plus 1.75% per annum calculated on the basis of a 360-day year. The loan agreement is collateralized by a first priority perfected security interest in the Company's assets and has a covenant requiring the Company to maintain a minimum tangible net worth of $12.0 million plus 50% of consideration for subsequent equity issuances and 50% of net income of future quarters. The minimum tangible net worth requirement is reduced by any losses in a subsequent quarter, but will not be reduced to less than $12.0 million. On March 27, 2002, we amended our line of credit with Silicon Valley Bank to increase the funds available under both lines of credit to $15.0 million, to extend the initial term of the loan to 15 months ending March 19, 2003 and to reset the covenant to $12.0 million plus 50% of consideration for equity issuances subsequent to March 8, 2002. As of March 31, 2002, there were $2.3 million outstanding under this credit facility. 7 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) On January 4, 2002, the Company received gross proceeds of $1.2 million under a secured loan with CitiCapital, a division of Citigroup. The loan is payable over 36 months, accrues interest of 8.75% per annum and is secured by two systems in our demonstration lab. As of March 31, 2002, the short-term portion of this loan was $536,000 and the long-term portion was $436,000. INVENTORIES Inventories comprise the following (in thousands): MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------- Raw materials and purchased parts $ 4,206 $ 4,446 Work in process . . . . . . . . . 475 2,499 Finished goods. . . . . . . . . . 530 630 Inventory at customers' locations 3,464 5,073 ---------- ------------- $ 8,675 $ 12,648 ========== ============= Inventory at customers' locations represent the cost of systems shipped to customers for which we are awaiting customer acceptance. ACCRUED EXPENSES Accrued expenses comprise the following (in thousands): MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------- System warranty . . . . . . . . . . . . $ 968 $ 803 Accrued commissions and incentives. . . 46 330 Accrued compensation and related items. 683 723 Federal, state and foreign income taxes 443 444 Other . . . . . . . . . . . . . . . . . 569 1,253 ---------- ------------- $ 2,709 $ 3,553 ========== ============= COMMON STOCK On January 25, 2002, the Company sold 3,871,330 shares of our common stock, and warrants to purchase up to 580,696 of additional shares of common stock, for aggregate proceeds of approximately $7.8 million. The warrants issued to the purchasers in the private placement are exercisable for $3.23 per share and the warrants have a five-year term. As a result of the January 25, 2002 transaction, the Company adjusted the warrants issued to certain investors in May 2001 (the "2001 Warrants") to comply with the anti-dilution component of the 2001 Warrants. The adjustment increased the total number of shares underlying the 2001 Warrants from 1,270,891 shares to 2,031,094 shares. In addition, the exercise price of the 2001 Warrants was reduced from $3.50 to $2.19 per share. 8 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) LEGAL PROCEEDINGS On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to own or exclusively license. The Complaint seeks monetary and injunctive relief. Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are invalid, unenforceable, and not infringed by Genus; and (3) antitrust violations. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the Court issued an order granting ASM leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery and trail of Genus' antitrust claims until after the trial of the patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's amended complaint and counterclaimed against ASM for declaratory judgment that the '165 Patent is invalid, unenforceable, and not infringed by Genus. The Claim Construction Hearings regarding these claims are set for June 17, 2002 ( '590 and '365 Patents), June 24, 2002 ( '568 Patent), and September 26, 2002 ('165 Patent). 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 licenses 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. RELATED PARTY TRANSACTIONS Mario Rosati, a board member of the Company, is also a partner of Wilson Sonsini Goodrich and Rosati, the general counsel of the Company. During the first quarters of 2001 and 2002, the Company paid $21,000 and $108,000, respectively, to Wilson Sonsini Goodrich and Rosati. At March 31, 2002, the Company owed approximately $784,000 to Wilson Sonsini Goodrich and Rosati. 9 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) COMPREHENSIVE INCOME (LOSS) The following are the components of comprehensive income (loss) (in thousands): THREE MONTHS ENDED MARCH 31, 2002 2001 ----------- ------------ Net income (loss). . . . . . . . . . . . $ (3,752) $ 131 Foreign currency translation adjustment. 49 (34) ----------- ------------ Comprehensive income (loss) $ (3,703) $ 97 =========== ============ The components of accumulated other comprehensive loss is as follows (in thousands): MARCH 31 DECEMBER 31 2002 2001 ---------- ------------- Cumulative translation adjustment $ (2,236) $ (2,285) ========== ============= RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standard Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of long-lived assets, except for certain obligations of leases. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, stature, ordinance or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our results of operations. 10 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 months ended March 31, 2002 of $9.6 million represented a decrease of 33% when compared to net sales of $14.3 million for the same quarter of 2001, but increased 69% sequentially from $5.7 million in the fourth quarter of 2001. One 300 mm CVD system, one 300 mm ALD system and one 200 mm CVD system were accepted in the first quarter of 2002. First quarter of 2001 revenues consisted of two 200 mm CVD systems and a significant number of upgrades that were accepted by the customer. In the fourth quarter of 2001, only one 300 mm CVD system and an upgrade were accepted by the customer. COST OF GOODS SOLD. Cost of goods sold for three months ended March 31, 2002 was $7.5 million, compared to $8.6 million for the same period in 2001. Cost of goods was $5.0 million in the fourth quarter of 2002. Gross profit as a percentage of revenues was 22 % in the first quarter of 2002 compared to 40% in the same period of 2001. Gross profit as a percentage of revenue was 12% in the fourth quarter of 2001. The lower gross profit percentages in the first quarter of 2002 and fourth quarter of 2001 were a direct result of lower production volumes and product mix that resulted in unfavorable manufacturing absorption compared to the first quarter of 2001. First quarter 2002 cost of sales also included $368,000 of additional inventory reserves. RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the quarter ended March 31, 2002 was $2.2 million, or 23% of net sales, compared with $3.0 million or 21% of net sales for the same period in 2001. Research and development expenses for the fourth quarter of 2001 were $3.3 million. As a percent of net sales, research and development expenses were 23%, 21% and 58% in the first quarter of 2002, first quarter of 2001 and fourth quarter of 2001, respectively. The dollar decrease in the first quarter of 2002 when compared to 2001 was due to less usage of outside consultants. The higher dollar amount in the fourth quarter of 2001 was due to the reconfiguration of demonstration equipment. In 2001, we added significant capacity in our demonstration lab and are now able to turnaround customer requests for demos in 15 to 30 days. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses were $3.4 million in the first quarter of 2002 compared to $2.5 million in the first quarter of 2001 and $2.4 million in the fourth quarter of 2002. As a percent of net sales, selling, general and administrative expenses were 36%, 18% and 42 % in the first quarter of 2002, first quarter of 2001 and fourth quarter of 2001, respectively. The increase in selling, general and administrative expenses in the first quarter of 2002 when compared to the first quarter of 2001 was due to the delay in receiving a government research grant ($400,000), and delay in subleasing extra factory space ($144,000). 11 OTHER INCOME (EXPENSE), NET. Other expenses for the first quarter of 2002 and fourth quarter of 2001 were $255,000 and $209,000, respectively, primarily reflecting interest charges on bank loans, compared to other income of $2,000, reflecting interest income from cash deposits, in the first quarter of 2001. PROVISION FOR INCOME TAXES. We did not record any provision for income taxes for the three months ended March 31, 2002 as we recorded losses in the U.S and Japan and have minimum income in South Korea. We provide for a full valuation allowance against the tax benefit associated with these losses. In the three months ended March 31, 2001, we recorded income tax expenses of $55,000 related to profits generated in our South Korean subsidiary. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, our cash and cash equivalents were $9.5 million, an increase of $6.4 million over cash and cash equivalents of $3.0 million held as of December 31, 2001. Accounts receivable was $3.2 million, a decrease of $1.1 million from $4.3 million as of December 31, 2001. The decrease relates to the collection of a receivable from a customer of our Japan subsidiary. Cash used by operating activities totaled $1.7 million for the three months ended March 31, 2002, and consisted primarily of net loss of $3.8 million and decreases in accounts payables of $2.7 million, partially offset by depreciation of $895,000 and reductions in working capital, primarily receivables of $1.1 million and inventories of $4.0 million. Inventory reductions were primarily related to improved supply chain management and decreases in inventory held at customer sites from $5.1 million to $3.5 million. Financing activities provided cash of $8.3 million for the three months ended March 31, 2002. In January 2002, we received approximately $7.8 million of proceeds from a sale of common stock and warrants to purchase common stock. We made capital expenditures of $275,000 for the three months ended March 31, 2002. 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 March 31, 2002 consisted of $9.5 million in cash and cash equivalents, $3.2 million of accounts receivable, and our credit facilities with Silicon Valley Bank. A summary of our contractual obligations as of March 31, 2002 is as follows (in thousands):
Less than After Total Revolving 1 year 1-3 years 4-5 years 5 years ---------- --------- ---------- ---------- --------- ------- Silicon Valley Bank $ 3,848 $ 3,848 $ - $ - $ - $ - Citicapital 972 N/A 536 436 - - Operating Leases 18,838 N/A 1,159 3,257 3,317 11,105 ---------- --------- ---------- ---------- --------- ------- $ 23,658 $ 3,848 $ 1,695 $ 3,693 $ 3,317 $11,105 ========== ========= ========== ========== ========= =======
12 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. RELATED PARTY TRANSACTIONS Mario Rosati, a board member of the Company, is also a partner of Wilson Sonsini Goodrich and Rosati, the general counsel of the Company. During the first quarters of 2001 and 2002, the Company paid $21,000 and $108,000, respectively, to Wilson Sonsini Goodrich and Rosati. At March 31, 2002, the Company owed approximately $784,000 to Wilson Sonsini Goodrich and Rosati. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standard Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of long-lived assets, except for certain obligations of leases. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, stature, ordinance or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our results of operations. RISK FACTORS Certain section 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 and Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth above in Management's Discussion and Analysis and 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 $6.7 million, $9.6 million and $1.6 million for 2001, 2000 and 1999, 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 an annual basis, or achieve and maintain consistent profitability on an annual basis. 13 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 revenues. For example, in 2001 Samsung Electronics Company, Ltd., Read-Rite Corporation, NEC, Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In the first three months of 2002, Samsung Electronics accounted for 70% of our net revenues and Selete accounted for 27% of our net revenues. 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. 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 93%, 98% and 86% of our total net sales in 2001, 2000 and 1999, respectively. We anticipate that international sales, including sales to South Korea, will continue to account for a significant portion of our net sales. As a result, a significant portion of our net sales will be subject to risks, including: - unexpected changes in 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. 14 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 is presently occurring. The sharp and severe industry downturn in 2001 was the largest in the industry's history. Almost all previous downturns have been solely due to pricing declines. The 2001 downturn in the industry marked a corresponding decline in unit production. Genus recently reported a loss for our 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. 15 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. 16 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. There can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted there under 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. 17 On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to own or exclusively license. The Complaint seeks monetary and injunctive relief. Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are invalid, unenforceable, and not infringed by Genus; and (3) antitrust violations. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the Court issued an order granting ASM leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery and trail of Genus' antitrust claims until after the trial of the patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's amended complaint and counterclaimed against ASM for declaratory judgment that the '165 Patent is invalid, unenforceable, and not infringed by Genus. The Claim Construction Hearings regarding these claims are set for June 17, 2002 ( '590 and '365 Patents), June 24, 2002 ( '568 Patent), and September 26, 2002 ('165 Patent). 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. 18 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. 19 THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR TO SECURITIES LITIGATION Our common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in our, our competitors or our customers' actual or anticipated financial results, our competitors or our customers' announcements of technological innovations, revenue recognition policies, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which we do business, may adversely affect the market price of our common stock. 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 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 is primarily located in or near our principal headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake fault zone. Although our facilities are designed to be fault tolerant, the systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events. Although we maintain general business insurance against interruptions such as fires and floods, there can be no assurance that the amount of coverage will be adequate in any particular case. WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR CAUSE OUR STOCK PRICE TO DROP As of April 30, 2002, we have a total of 6,283,666 shares of common stock underlying warrants and outstanding employee stock options. Of the stock options, 2,027,205 shares are exercisable as of April 30, 2002. All of the shares underlying the warrants are currently exercisable. Some warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that we issue new shares at a price lower than the exercise price of the warrants, where we make a distribution of common stock to our shareholders or effect a reclassification. If all of the shares underlying the exercisable options and warrants were exercised and sold in the public market, the value of your current holdings in Genus may decline 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 20 Pursuant to a preferred stock rights 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% or m ore 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 acquirer 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 10-Q report that may not prove to be accurate. This 10-Q report contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding, among other items, our business strategy, growth strategy and anticipated trends in our business. We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission or otherwise. When we use the words "believe," "expect," "anticipate," "project" and similar expressions, this should alert you that this is a forward-looking statement. We base these forward-looking statements on our expectations. They are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this 10-Q report, and in documents incorporated into this 10-Q 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 10-Q report will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. Statements in this report, 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. 21 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. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to own or exclusively license. The Complaint seeks monetary and injunctive relief. Genus served its Answer to ASMA's complaint on August 1, 2001. Also on August 1, 2001, Genus counterclaimed against ASMA and ASM International, N.V. ("ASMI") for (1) infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide"; (2) declaratory judgment that the '365 and '590 Patents are invalid, unenforceable, and not infringed by Genus; and (3) antitrust violations. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the Court issued an order granting ASM leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery and trail of Genus' antitrust claims until after the trial of the patent claims. On February 4, 2002, Genus served its Amended Answer to ASM's amended complaint and counterclaimed against ASM for declaratory judgment that the '165 Patent is invalid, unenforceable, and not infringed by Genus. The Claim Construction Hearings regarding these claims are set for June 17, 2002 ( '590 and '365 Patents), June 24, 2002 ( '568 Patent), and September 26, 2002 ('165 Patent). ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On January 25, 2002, the Company sold 3,871,330 shares of common stock, and warrants to purchase 580,696 shares of common stock, for gross proceeds of approximately $8.7 million or net aggregate proceeds of $7.8 million. As a result of the January 25, 2002 transaction, the Company adjusted the warrants issued to certain investors in May 2001 (the "2001 Warrants") to comply with the anti-dilution component of the 2001 Warrants. The adjustment increased the total number of shares underlying the 2001 Warrants from 1,270,891 shares to 2,031,094 shares. In addition, the exercise price of the 2001 Warrants was reduced from $3.50 to $2.19 per share. 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 January 28, 2002. 23 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 14, 2002 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) 24 -----END PRIVACY-ENHANCED MESSAGE-----