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, 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 October 31, 2002: 27,740,162 ================================================================================
GENUS,INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and September 30, 2001 . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and September 30, 2001 . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . 26 Item 4: Controls & Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART II. OTHER INFORMATION Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 2:. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 4:. Submissions of Matters to Vote of Security Holders. . . . . . . . . . . . . . . . . . . . 28 Item 5:. Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Item 6:. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2 This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Genus, Inc. to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenue, synergies, accretion, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans; any statement concerning proposed new products, services, developments or industry rankings; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the performance of contracts by customers and partners; employee management issues; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; and other risks that are described herein and that are otherwise described from time to time in Genus' Securities and Exchange Commission reports. Genus assumes no obligation and does not intend to update these forward-looking statements. 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ----------- ----------- ---------- ----------- Net sales . . . . . . . . . . . . . . . . . . $ 12,153 $ 15,094 $ 28,487 $ 43,062 Costs and expenses: Cost of goods sold . . . . . . . . . . . . . 7,826 10,300 20,463 27,523 Research and development . . . . . . . . . . 2,127 2,592 6,079 8,838 Selling, general and administrative. . . . . 3,498 2,739 10,229 7,971 ----------- ----------- ---------- ----------- Loss from operations . . . . . . . . . . . . . (1,298) (537) (8,284) (1,270) Other income (expenses), net . . . . . . . . . (206) (207) (493) (127) ----------- ----------- ---------- ----------- Loss before income taxes . . . . . . . . . . . (1,504) (744) (8,777) (1,397) Provision for income taxes . . . . . . . . . . 71 0 159 69 ----------- ----------- ---------- ----------- Net loss . . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466) =========== =========== ========== =========== Net loss per share: Basic. . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07) Diluted. . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07) Shares used in per share calculation-basic . . 27,693 22,268 26,572 20,793 =========== =========== ========== =========== Shares used in per share calculation-diluted . 27,693 22,268 26,572 20,793 =========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 3
GENUS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) SEPTEMBER 30, DECEMBER 1, 2002 2001 --------------- ------------- ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 9,136 $ 3,043 Accounts receivable (net of allowance for doubtful accounts of $69 in 2002 and $69 in 2001). . . . . . . . 5,937 4,262 Inventories . . . . . . . . . . . . . . . . . . . . . . . . 8,137 12,648 Other current assets. . . . . . . . . . . . . . . . . . . . 980 1,221 --------------- ------------- Total current assets. . . . . . . . . . . . . . . . . . . 24,190 21,174 Equipment, furniture and fixtures, net. . . . . . . . . . . 12,159 14,573 Other assets, net . . . . . . . . . . . . . . . . . . . . . 1,161 155 --------------- ------------- Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 37,510 $ 35,902 =============== ============= LIABILITIES Current Liabilities: Short-term bank borrowings. . . . . . . . . . . . . . . . . $ 4,239 $ 4,481 Accounts payable. . . . . . . . . . . . . . . . . . . . . . 5,220 8,352 Accrued expenses. . . . . . . . . . . . . . . . . . . . . . 3,640 3,553 Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 2,938 7,388 Long term liabilities, current portion. . . . . . . . . . . 313 0 --------------- ------------- Total current liabilities . . . . . . . . . . . . . . . . 16,350 23,774 Convertible notes . . . . . . . . . . . . . . . . . . . . . 5,639 0 Long term liabilities . . . . . . . . . . . . . . . . . . . 320 0 --------------- ------------- Total liabilities . . . . . . . . . . . . . . . . . . . . 22,309 23,774 --------------- ------------- Contingencies (see note) SHAREHOLDERS' EQUITY Common stock, no par value: Authorized 50,000 shares; Issued and outstanding 27,740 shares at September 30, 2002 and 22,365 shares at December 31, 2001. . . . . . . . . . 122,638 110,753 Accumulated deficit . . . . . . . . . . . . . . . . . . . . (105,125) (96,189) Note receivable from shareholder. . . . . . . . . . . . . . (151) (151) Accumulated other comprehensive loss. . . . . . . . . . . . (2,161) (2,285) --------------- ------------- Total shareholders' equity. . . . . . . . . . . . . . . . 15,201 12,128 --------------- ------------- Total liabilities and shareholders' equity. . . . . . . . $ 37,510 $ 35,902 =============== =============
The accompanying notes are an integral part of these condensed consolidated financial statements 4
GENUS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 ----------- ---------- Cash flows from operating activities: . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (8,936) $ (1,466) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . 2,816 2,004 Amortization and accretion of non-cash interest on convertible notes . . . . . . . . . . . . . . . . . . 115 0 Stock-based compensation. . . . . . . . . . . . . . . . 0 44 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . (1,675) 3,438 Inventories . . . . . . . . . . . . . . . . . . . . . 4,511 9,893 Other assets. . . . . . . . . . . . . . . . . . . . . 67 (149) Accounts payable. . . . . . . . . . . . . . . . . . . (3,132) 457 Accrued expenses. . . . . . . . . . . . . . . . . . . 87 (249) Deferred revenue. . . . . . . . . . . . . . . . . . . (4,450) (14,172) ----------- ---------- Net cash used in operating activities . . . . . . . . (10,597) (200) ----------- ---------- Cash flows from investing activities: Acquisition of equipment, furniture and fixtures. . . . . (402) (7,737) ----------- ---------- Net cash used in investing activities . . . . . . . . (402) (7,737) ----------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock. . . . . . . . . . 9,591 7,530 Proceeds from short-term bank borrowings. . . . . . . . . 0 5,567 Payments for short-term bank borrowings . . . . . . . . . (242) (2,719) Proceeds from issuance of convertible notes and warrants, net of cash issuance costs of $ 814 . . . . . . . . . . 6,986 0 Proceeds from debt. . . . . . . . . . . . . . . . . . . . 1,200 0 Payments for debt . . . . . . . . . . . . . . . . . . . . (567) 0 ----------- ---------- Net cash provided by financing activities . . . . . . 16,968 10,378 ----------- ---------- Effect of exchange rate changes on cash . . . . . . . . . . 124 (63) ----------- ---------- Net increase in cash and cash equivalents . . . . . . . . . 6,093 2,378 Cash and cash equivalents, beginning of period. . . . . . . 3,043 3,136 ----------- ---------- Cash and cash equivalents, end of period. . . . . . . . . . $ 9,136 $ 5,514 =========== ========== Supplemental cash flow information Cash paid during the period for:. . . . . . . . . . . . . Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 198 $ 287 Income taxes. . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 473 Non cash transactions for the period Warrants issued in connection with convertible note . . . . $ 54 0
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 The Company is in the process of executing its business strategy and has plans to eventually achieve profitable operations. During August 2002, the Company raised an additional $7 million, net of issuance costs, through the sale of subordinated convertible notes and warrants. Management believes that the cash generated from this transaction, together with cash resources and borrowing capacity, will be sufficient to meet projected working capital, capital expenditures and other cash requirements for the next twelve months. 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 the Company or at all, which could have a material adverse effect on its 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. NET LOSS PER SHARE Basic net loss per share is computed by dividing net loss to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss to common shareholders by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). A reconciliation of the numerator and denominator of basic and diluted net loss per share is as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ---------- ------------ ----------- ---------- Basic: Net loss . . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466) ========== ============ =========== ========== Weighted average common shares outstanding 27,693 22,268 26,572 20,793 ========== ============ =========== ========== Basic net loss per share . . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07) ========== ============ =========== ========== Diluted: Net loss . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466) ========== ============ =========== ========== Weighted average common shares outstanding 27,693 22,268 26,572 20,793 ========== ============ =========== ========== Diluted net loss per share . . . . . . . . $ (0.06) $ (0.03) $ (0.34) $ (0.07) ========== ============ =========== ==========
6 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) Stock options, warrants and convertible debt shares to purchase approximately 12,675,000 shares of common stock were outstanding at September 30, 2002, but were not included in the computation of diluted net loss per share because the Company had a net loss for the three and nine months ended September 30, 2002. Stock options and warrants to purchase approximately 4,607,000 shares of common stock were outstanding at 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 and nine months ended September 30, 2001. REVENUE RECOGNITION. The Company's selling arrangements generally involve contractual customer acceptance provisions, and installation of the product occurs after shipment and transfer of title. As a result, effective January 1, 2000, to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, the Company defers recognition of revenue from such equipment sales until installation is complete and the product is accepted by the customer. Genus subsequently established verifiable objective evidence of fair value of installation services, a requirement to recognize revenue for multiple-element arrangements prior to completion of installation services. Accordingly, if Genus has met defined customer acceptance experience levels with both the customer and the specific type of equipment, then Genus recognizes equipment revenue upon shipment and transfer of title. A portion of revenue associated with installation-related tasks is recognized when the installation is completed and the customer accepts the product. For products that have not been demonstrated to meet product specifications for the customer prior to shipment, revenue is recognized when installation is complete and the product is accepted by the customer. Revenue from sale of spare parts and system upgrades are recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts. BORROWINGS 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, based on domestic eligible receivables and a foreign line of credit of $7.5 million, financed by EXIM bank, based on foreign eligible receivables and inventory. The initial term of the loan was 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 and subordinated debt issuances subsequent to March 8, 2002. In July 2002, the term of the credit was extended to June 30, 2003. As of September 30, 2002, there was $4.2 million outstanding under this credit facility. 7 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 September 30, 2002, the short-term portion of this loan was $313,000 and the long-term portion was $320,000. CONVERTIBLE NOTES AND WARRANTS On August 15, 2002, the Company raised $7 million, net of issuance costs, by issuing unsecured 7% convertible notes and warrants to purchase 2,761,000 shares of common stock. - $7.5 million convertible notes are convertible at a price of $1.42 per share of common stock and $300,000 convertible note is convertible at a price of $1.25 per share of common stock. All convertible notes accrue interest at 7% per annum, payable semi-annually each February 15 and August 15, in cash or, at the election of the company, in registered stock. The convertible notes are redeemable three years after issuance or may be converted into 5,521,000 shares of common stock prior to the redemption date at the election of the investors. - Warrants to purchase 2,641,000 shares of common stock have an exercise price of $1.42 per share of common stock and warrants to purchase 120,000 shares of common stock have an exercise price of $1.25 per share of common stock. All warrants are currently exercisable, expire on August 15, 2006 and are callable by the Company after one year if the common stock price exceeds 200% of the respective exercise prices. The Company determined the fair value of the warrants to be $1,312,000, using the Black Scholes option pricing model with a risk free intrest rate of 4.4 percent, volatility of 75%, a term of three years and no dividend yield. The Company classified the warrants as equity and allocated a portion of the proceeds from the convertible notes to the warrants, using the relative fair value method in accordance with APB No. 14. The allocation of proceeds to the warrants reduced the carrying value of the convertible notes. As a result, the fair value of the common stock issuable upon conversion of the notes exceeds the carrying value of the convertible notes, resulting in a beneficial conversion feature. The beneficial conversion feature is accreted over the stated term of the convertible notes in accordance with EITF No. 00-27. The gross proceeds from the issuance of the convertible notes and warrants were recorded as follows (in thousands): Convertible note $5,560 Detachable warrants 1,312 Beneficial conversion feature 928 ------ $7,800 ====== The $2.2 million difference between the $5.6 million carrying value of the notes and the $7.8 million face value of the notes, representing the value of the warrants and the beneficial conversion feature, has been recorded as equity and the corresponding debt discount will be accreted as interest expense over the three year term of the convertible notes, using the effective interest rate method. 8 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) The Company incurred issuance costs of approximately $868,000, representing cash obligations of $814,000 and the Black Scholes value of $54,000 of a warrant to purchase 79,000 shares of common stock at $1.42 per share issued in connection with the transaction. These warrants are currently exercisable and expire on August 15, 2006. Issuance costs are deferred and amortized as interest expense over the stated term of the convertible notes. In connection with the transaction, the Company entered into a registration rights agreement requiring the Company to file a registration statement and committing the Company to pay monthly interest of 1.5% of the face value of the notes if the Company does not maintain the effectiveness of the shelf registration for the common stock underlying the convertible notes and warrants throughout the stated term of the convertible notes. The registration statement on Form S-3 filed with the SEC was declared effective on September 26, 2002. In the event of a change of control of the Company, the note holders may elect to receive repayment of the notes at a premium of 10% over the face value of the notes. INVENTORIES Inventories comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2002 2001 -------------- ------------- Raw materials and purchased parts $ 4,793 $ 4,446 Work in process 1,049 2,499 Finished goods 339 630 Inventory at customers' locations 1,956 5,073 -------------- ------------- $ 8,137 $ 12,648 ============== =============
Inventory at customers' locations represent the cost of a system shipped to our customer, and related installation costs, for which we are awaiting customer acceptance. ACCRUED EXPENSES Accrued expenses comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2002 2001 -------------- ------------- System warranty . . . . . . . . . . . . $ 878 $ 803 Accrued commissions and incentives. . . 19 330 Accrued compensation and related items. 416 723 Federal, state and foreign income taxes 374 444 Other . . . . . . . . . . . . . . . . . 1,953 1,253 -------------- ------------- $ 3,640 $ 3,553 ============== =============
COMMON STOCK AND WARRANTS 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 net 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. 9 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) The January 25, 2002 transaction diluted the interests of certain investors in the May 2001 private placement transaction who had received warrants to purchase 1,270,891 shares of Company Common Stock (the "May 2001 Warrants"), at an exercise price of $3.50 per share. As a result of this dilution, and pursuant to the terms of the May 2001 Warrants, the Company reduced the exercise price for the May 2001 Warrants from $3.50 per share to $2.19 per share and increased the underlying shares to an aggregate of 2,031,094 shares. The May 2001 Warrants have now been exercised. May 2001 Warrants representing 610,872 shares were exercised for cash in an aggregate amount of approximately $1.3 million and the remaining 1,420,224 May 2001 Warrants were exercised on a cash-less basis. The Company issued a total of 642,295 shares as a result of the cash-less exercise of May 2001 Warrants pursuant to the terms therein. In August 2002, the Company completed a $7.8 million financing in a private placement of subordinated notes convertible into common stock and warrants convertible into or exercisable for common stock. Refer to the Convertible Notes and Warrants footnote. 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 three months ended September 30, 2002 and 2001, the Company incurred approximately $363,000 and $296,000 in legal costs, and paid approximately $655,000 and $0, respectively, to Wilson Sonsini Goodrich and Rosati. During the nine months ended September 30, 2002 and 2001, the Company incurred approximately $547,000 and $609,000 in legal costs, and paid approximately $913,000 and $57,000, respectively, to Wilson Sonsini Goodrich and Rosati. At September 30, 2002, the Company owed approximately $387,000 to Wilson Sonsini Goodrich and Rosati. COMPREHENSIVE LOSS The following are the components of comprehensive loss (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ---------- ------------ --------- ------------ Net loss . . . . . . . . . . . . . . . . . . . . . $ (1,575) $ (744) $ (8,936) $ (1,466) Change in foreign currency translation adjustment (57) (59) 124 (63) ---------- ------------ --------- ------------ Comprehensive loss . . . . . . . . . . . . . . $ (1,632) $ (803) $ (8,812) $ (1,529) ========== ============ ========= ============
The components of accumulated other comprehensive loss is as follows (in thousands): SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------ Cumulative translation adjustment . . . . . $ (2,161) $ (2,285) ============= ============ 10 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) CONTINGENCIES On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ("Genus"). 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 trial 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. On August 15, 2002, the Court issued a claim construction order regarding the '590, '365, and '568 patents. A claim construction hearing regarding the '165 Patent was held on September 26, 2002. On September 23, 2002, Genus filed motions for summary judgment of noninfringement regarding the '590 and '365 patents, and a hearing on these motions is scheduled for December 17, 2002. 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 are 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. 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. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities'" ("SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are 11 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. We will adopt SFAS No. 146 during the first quarter ended March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect on adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. 12 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. CRITICAL ACCOUNTING POLICIES For information related to our revenue recognition and other critical accounting policies, please refer to the "Critical Accounting Policies" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission. Revenue Recognition The Company's selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. As a result, effective January 1, 2000, to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, the Company defers recognition of revenue from such equipment sales until installation is complete and the product is accepted by the customer. Genus subsequently established verifiable objective evidence of fair value of installation services, a requirement to recognize revenue for multiple-element arrangements prior to completion of installation services. Accordingly, if Genus has met defined customer acceptance experience levels with both the customer and the specific type of equipment, then Genus recognizes equipment revenue upon shipment and transfer of title. A portion of revenue associated with installation-related tasks is recognized when the installation is completed and the customer accepts the product. For products that have not been demonstrated to meet product specifications for the customer prior to shipment, revenue is recognized when installation is complete and the product is accepted by the customer. Revenues from sale of spare parts and system upgrades are recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts. Revenues can fluctuate significantly as a result of the timing of customers' acceptances. At September 30, 2002 and December 31, 2001, the Company had deferred revenue of $ 2.9 million and $7.4 million, respectively. RESULTS OF OPERATIONS NET SALES. Net sales for the three and nine months ended September 30, 2002 were $ 12.2 million and $28.5 million, which represented decreases of 19% and 34% when compared to net sales of $15.1 million and $43.1 million for the corresponding periods in 2001. The decreases were attributable to the slow-down in the technology industry and orders being postponed by our customers. One 200 mm CVD system, two 200 mm ALD systems and one 200 mm ALD upgrade were accepted in the third quarter of 2002, compared to three ALD systems and two CVD systems accepted during the third quarter of 2001. During the nine months ended September 30, 2002, eight systems and an upgrade were accepted compared to ten systems and several upgrades accepted in the first nine months of 2001. 13 We recorded a low level of bookings in the three months ended September 30, 2002 of approximately $3.0 million. In October 2002, we have received purchase orders of approximately $10.0 million and letters of intent (subject to cancellation) for an additional $16.0 million. The purchase orders and letters of intent received in October include both 200mm and 300mm for CVD and ALD systems and additional system purchases for Thin Film Head manufacturing. COST OF GOODS SOLD. Cost of goods sold for the three and nine months ended September 30, 2002 were $7.8 million and $20.5 million, compared to $10.3 million and $27.5 million for the same periods in 2001. Gross profit as a percentage of revenues was 35.6% for the third quarter of 2002 compared to 31.8% in the third quarter of 2001. Gross profit as a percentage of revenues was 28.2% for the nine months ended September 30, 2002 compared to 36.1% for the corresponding period in 2001. The higher gross profit percentages in the third quarter of 2002 were due to higher proportion of ALD systems which have a higher margin than CVD systems when compared to 2001. The lower gross profit in the year to date 2002 results was due to lower production volumes that resulted in lower manufacturing absorption in Q2 2002. The Company expects gross profit percentage to increase with anticipated increases in production volumes. Severance costs in cost of sales was approximately $155,000 in the three months ended September 30, 2002. RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the quarter ended September 30, 2002 were $2.1 million, or 17.5% of net sales, compared with $2.6 million or 17.2% of net sales for the same period in 2001. For the nine months ended September 30, 2002, expenses were $6.1 million or 21.3% of sales, compared to $8.8 million or 20.5% of net sales for the first nine months of 2001. The dollar decrease of research and development expenses in 2002 was due to cost saving measures implemented beginning in the fourth quarter of 2001, including reduced use of outside consultants. In 2001, the higher level of research and development expenses was due to the addition of significant capacity in our demonstration lab, which enables us to complete customer requests for demos of wafers in 15 to 30 days. Severance costs in R&D was approximately $129,000 in the three months ended September 30, 2002. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses were $3.5 million and $10.2 million for the three and nine months ended September 30, 2002 compared to $2.7 million and $8.0 million in the corresponding periods in 2001. As a percent of net sales, selling, general and administrative expenses were 28.8% and 35.9% for the three and nine months ended September 30, 2002 compared to 18.1% and 18.5% for the corresponding periods in 2001. The increase in selling, general and administrative expenses in 2002 was mainly due to higher legal expenses of approximately $638,000 and $2.2 million for the three months and nine months ended September 30, 2002, respectively, related to the lawsuit. In addition, during 2001, the Company received income from a government SBIR grant that amounted to $400,000 and subleasing revenue of $312,000 that was offset against 2001 selling, general and administrative expenses. The Company had minimal government grants and no subleasing income in 2002. Severance costs in SG&A was approximately $156,000 in the three months ended September 30, 2002. OTHER INCOME (EXPENSE), NET. Other expenses for the three and nine months ended September 30, 2002 were $206,000 and $493,000 respectively compared to other expense of $207,000 and $127,000 for the corresponding periods in 2001. Other expense in the nine months ended September 30, 2002 includes approximately $183,000 related to the convertible notes, partially offset by net exchange gains of $150,000. Cash interest cost on convertible notes was approximately $68,000 and non-cash interest expense on convertible notes was $115,000 in the three months ended September 30, 2002. In connection with the convertible note, the Company expects to incur cash interest expense of approximately $136,000 a quarter and additional 14 non-cash expense on convertible notes of $159,000 a quarter. These non-cash expenses relate primarily to the accretion of beneficial conversion feature and amortization of issuance costs related to the convertible notes. PROVISION FOR INCOME TAXES. We recorded income tax expenses of $70,000 and $159,000 for our South Korean subsidiary for the three and nine months ended September 30, 2002, compared to none and $69,000 recorded for the corresponding periods in 2001. We did not record any provision for income taxes in the United States and Japan for the three and nine months ended September 30, 2002 as we recorded losses in these entities. We provide for a full valuation allowance against the tax benefit associated with these losses. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, our cash and cash equivalents were $9.1 million, an increase of $6.1 million over cash and cash equivalents of $3.0 million held as of December 31, 2001. 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 at September 30, 2002 was $5.9 million, an increase of $1.7 million from $4.3 million as of December 31, 2001. The increase relates to shipment of systems during the third quarter of 2002. Accounts receivable at September 30, 2001 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 $10.6 million for the nine months ended September 30, 2002, and consisted primarily of net loss of $8.9 million, increase in accounts receivable of $1.7 million, decreases in accounts payable of $3.1 million and a decrease in deferred revenue of $4.5 million, partially offset by depreciation of $2.8 million and a decrease in inventories of $4.5 million. Inventory reductions were primarily related to decreases in inventory held at customer sites from $5.1 million to $2.0 million. 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. We made capital expenditures of $402,000 for the nine months ended September 30, 2002 compared to $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. Financing activities provided cash of $17.0 million for the nine months ended September 30, 2002. In the first nine months of 2002, we received approximately $9.6 million of proceeds from a sale of common stock and warrants to purchase common stock. In the third quarter of 2002, we received $7 million, net of issuance costs, from the sale of subordinated convertible notes and warrants. Financing activities provided cash of $10.4 million for the nine months ended September 30, 2001. In May 2001, we received approximately $7.5 million of proceeds from a private placement and from issuance of common stock under the stock plans of 2.5 million shares of our common stock. Additionally, we increased our net short-term borrowings by $2.8 million. Our primary source of funds at September 30, 2002 consisted of $9.1 million in cash and cash equivalents, $6.0 million of accounts receivable, and our 15 credit facilities with Silicon Valley Bank. 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. A summary of our contractual obligations as of September 30, 2002 is as follows (in thousands):
Less than After Total Revolving 1 year 2-3 years 4-5 years 5 years ------- ---------- ------- ---------- ---------- -------- Silicon Valley Bank $ 4,239 $ 4,239 $ 0 $ 0 $ 0 $ 0 Citicapital 633 N/A 313 320 0 0 Operating Leases 18,475 N/A 1,610 3,257 3,389 10,219 Convertible Notes* 7,800 N/A 0 7,800 0 0 ------- ---------- ------- ---------- ---------- -------- $31,147 $ 4,239 $ 1,923 $ 11,377 $ 3,389 $ 10,219 ======= ========== ======= ========== ========== ========
*In the event of a change of control in the Company, the note holder may elect to receive repayment of the notes at a premium of 10%. We are actively marketing our existing and new products, which we believe will ultimately lead to profitable operations. Management believes that the cash resources and borrowing capacity will be sufficient to meet projected working capital, capital expenditures and other cash requirements for the next twelve months. 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 or at all, 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 three months ended September 30, 2002 and 2001, the Company incurred approximately $363,000 and $296,000 in legal costs, and paid approximately $655,000 and $0, respectively, to Wilson Sonsini Goodrich and Rosati. During the nine months ended September 30, 2002 and 2001, the Company incurred approximately $547,000 and $609,000 in legal costs, and paid approximately $913,000 and $57,000, respectively, to Wilson Sonsini Goodrich and Rosati. At September 30, 2002, the Company owed approximately $387,000 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. 16 In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities'" ("SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. We will adopt SFAS No. 146 during the first quarter ended March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146. The effect on adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. RISK FACTORS You should consider the risks described below before making an investment decision. We believe that the risks and uncertainties described below are the principal material risks facing our company as of the date of this Form 10-Q. In the future, we may become subject to additional risks that are not currently known to us. Our business, financial condition or results of operations could be materially adversely affected by any of the following risks. The trading price of our common stock could decline due to any of the following risks. WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY We experienced losses of $6.7 million for fiscal year 2001 and losses of $9.6 million for the fiscal year ended 2000. At September 30, 2002, our net loss was $8.9 million. While we believe our cash position is sufficient for the next twelve months, we cannot provide assurances that future cash flows from operations will be sufficient to meet operating requirements and allow us to service debt and repay any underlying indebtedness at maturity. If we do not achieve the cash flows that we anticipate, we may not be able to meet our planned product release schedules and our forecast sales objectives. In such event we will require additional financing to fund on-going and planned operations and may need to implement further expense reduction measures, including, but not limited to, the sale of assets, the consolidation of operations, workforce reductions, and/or the delay, cancellation or reduction of certain product development, marketing, licensing, or other operational programs. Some of these measures would require third-party consents or approvals, including that of our bank, and we cannot provide assurances that these consents or approvals will be obtained. There can be no assurance that we will be able to make additional financing arrangements on satisfactory terms, if at all, and our operations and liquidity would be materially adversely affected. We cannot assure our shareholders and investors that we will achieve profitability in fiscal 2003 and beyond, nor can we provide assurances that we will achieve the sales necessary to avoid further expense reductions in the future. 17 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 Hightech, Inc. accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In the first nine months of 2002, Samsung Electronics accounted for 51% of our net revenues and Seagate accounted for 23% of our net revenues. The semiconductor manufacturing industry generally is comprised 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. 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 current 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; - technological breakthroughs; - 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. For the first nine months of 2002, export sales accounted for approximately 71% of total net sales. 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 in Asia; - 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 18 the risks associated with unexpected changes in exchange rates, which could increase the cost of our products to our customers and could lead these customers to delay or defer their purchasing decisions. Wherever currency devaluations occur abroad, our goods become more expensive for our customers in that 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. However, the 2001 downturn in the industry marked a corresponding decline in unit production, as well as price reduction. We expect that our revenues will continue to be further impacted by the continued downturn in the semiconductor industry and global economy, which may make it more difficult to increase our revenues and to achieve profitability. OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW PRODUCTS AND MARKET ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE PRODUCTS We believe that our future growth will depend in large part upon the acceptance of our new thin films and processes, especially our atomic layer deposition technology. As a result, we expect to continue to invest in research and development in these new thin films and the systems that use these films. There can be no assurance that the market will accept our new products or that we will be able to develop and introduce new products or enhancements to our existing products and processes in a timely manner to satisfy customer needs or achieve market acceptance. The failure to do so, or even a delay in our introduction of new products or enhancements, could harm our business, financial condition and results of operations. We must manage product transitions successfully, as introductions of new products could harm sales of existing products. We derive our revenue primarily from the sale of equipment used to chemically deposit tungsten silicide in the manufacture of memory chips. We estimate that the life cycle for these tungsten silicide deposition systems is three-to-ten years. There is a risk that future technologies, processes or product developments may render our product offerings obsolete and we may not be able to develop and introduce new products or enhancements to our existing products in a timely manner or at all. 19 WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES The semiconductor manufacturing capital equipment industry is highly competitive. We face substantial competition throughout the world. We believe that to remain competitive, we will require significant financial resources to develop new products, offer a broader range of products, establish and maintain customer service centers and invest in research and development. Many of our existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing, customer service capabilities and greater name recognition. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. If our competitors enter into strategic relationships with leading semiconductor manufacturers covering thin film products similar to those sold by us, it would materially adversely affect our ability to sell our products to such manufacturers. In addition, to expand our sales we must often replace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that will offer price or performance features that are superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their product lines. We may not be able to maintain or expand our sales if our resources do not allow us to respond effectively to such competitive forces. WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven system performance. Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this vendor of choice for the specific production line application. To do otherwise creates risk for the manufacturer because the manufacture of a semiconductor requires many process steps and a fabrication facility will contain many different types of machines that must work cohesively to produce products that meet the customers' specifications. If any piece of equipment fails to perform as expected, the customer could incur significant costs related to defective products, production line downtime, or low production yields. Since most new fabrication facilities are similar to existing ones, semiconductor manufacturers tend to continue using equipment that has a proven track record. Based on our experience with major customers like Samsung, we have observed that once a particular piece of equipment is selected from a vendor, the customer is likely to continue purchasing that same piece of equipment from the vendor for similar applications in the future. Our customer list, though limited, has expanded in recent months. Yet our broadening market share remains at risk due to choices made by customers that continue to be influenced by pre-existing installed bases by competing vendors. 20 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 OUR INTELLECTUAL PROPERTY. 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 developing 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. 21 On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ("Genus"). 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 trial 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. On August 15, 2002, the Court issued a claim construction order regarding the '590, '365, and '568 patents. A claim construction hearing regarding the '165 Patent was held on September 26, 2002. On September 23, 2002, Genus filed motions for summary judgment of noninfringement regarding the '590 and '365 patents, and a hearing on these motions is scheduled for December 17, 2002. We intend to defend our position vigorously. Litigation is time consuming, expensive, and its outcome is uncertain. We may not prevail in any litigation in which we are involved. Should we be found to infringe any of the patents asserted, 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 are unable to obtain a license or adopt a non-infringing product design, we may not be able to proceed with development, manufacture and sale 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 22 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 We rely on third parties to manufacture the components used in our products. Some of our suppliers are sole or limited source. In addition, some of these suppliers are relatively small-undercapitalized companies that may have difficulties in raising sufficient funding to continue operations. There are risks associated with the use of independent suppliers, including unavailability of or delays in obtaining adequate supplies of components and potentially reduced control of quality, production costs and timing of delivery. We may experience difficulty identifying alternative sources of supply for certain components used in our products. In addition, the use of alternate components may require design alterations, which may delay installation and increase product costs. We have some long term or volume purchase agreements with our suppliers and currently purchase components on a purchase order basis. These components may not be available in the quantities required, on reasonable terms, or at all. Financial or other difficulties faced by our suppliers or significant changes in demand for these components or materials could limit their availability. Any failures by these third parties to adequately perform may impair our ability to offer our existing products, delay the submission of products for regulatory approval, and impair our ability to deliver products on a timely basis or otherwise impair our competitive position. Establishing our own capabilities to manufacture these components would be expensive and could significantly decrease our profit margins. Our business, results of operations and financial condition would be adversely affected if we were unable to continue to obtain components in the quantity and quality desired and at the prices we have budgeted. WE DEPEND UPON SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US 23 We currently sell and support our thin film products through direct sales and customer support organizations in the United States, Europe, South Korea and Japan and through six independent sales representatives and distributors in the United States, 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, 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 affect the market price of our common stock. 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 September 30, 2002, we had a total of approximately 7,059,000 shares of common stock underlying warrants and outstanding employee stock options. Of the stock options, approximately 2,069,000shares were exercisable as of September 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. 24 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 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 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 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 25 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 would make our products more expensive and, therefore, could 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. ITEM 4. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our "disclosure controls and procedures" (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures need improvement. (See Item 4(b) below) (b) Management and the Audit Committee are aware of conditions that were considered to be a "material weakness" for the year ended December 31, 2001 under standards established by the American Institute of Certified Public Accountants. In particular, the Company needed to (i) perform regular detailed reconciliations of general ledger accounts to supporting documentation (ii) regularly reconcile cash accounts to bank statements and investigate any differences, and (iii) improve policies and procedures for tracking work-in-progress, construction-in-progress and demonstration equipment. Management and the Audit Committee have taken actions with respect to the material weakness, including the hiring of new, more experienced and qualified finance staff and has made certain operational changes in policies and procedures and additional procedures are being implemented to expand the scope of detailed reconciliations, including reconciliations of subsidiary accounts. Management believes that the Company will successfully implement procedures addressing all material weakness by December 31, 2002. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS With respect to the ongoing intellectual property litigation with ASM America, Inc., as previously disclosed in the company's Annual Report on Form 10-K filed April 1, 2002, the following events transpired in Q3: - On August 15, 2002, the Court issued a claim construction order regarding U.S Patents Nos. 6,015,590, 5,916,365, and 5,294,568. - A claim construction hearing regarding the U.S. Patent No. 4,798,165 was held on September 26, 2002. - On September 23, 2002, Genus filed motions for summary judgment of noninfringement regarding U.S. Patent Nos. 6,015,590 and 5,916,365, and a hearing on these motions is scheduled for December 17, 2002. - ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Recent Sales of Unregistered Securities On July 31, 2002 and August 14, 2002, we entered into Securities Purchase Agreements with certain investors (together, the "Purchasers"). Pursuant to the Securities Purchase Agreements, we agreed to issue and sell to the Purchasers, in a private placement, an aggregate of $7.8 million principal amount of 7% convertible subordinated notes due 2005 (the "Notes") together with related four-year warrants (the "Warrants") to purchase shares of our common stock. Summary of the Transaction On August 14, 2002, we issued to the Purchasers the Notes convertible into an aggregate of 5,521,341 shares of common stock and the Warrants to purchase an aggregate of 2,760,669 shares of common stock in a private placement. The conversion price of the Notes and the exercise price of the Warrants is based on a premium of 105.19% to the average closing bid price for the five trading days preceding the execution of the Securities Purchase Agreements for this transaction. For those investors who committed to the private placement on July 31, 2002, the conversion price for the Notes and the exercise price for the Warrants is $1.42 per share. For the investor who committed to the private placement on August 14, 2002, the conversion price for the Notes and the exercise price for the Warrants is $1.2518 per share. In addition to the issuances specified above, a warrant for 79,225 shares was issued to SG Cowen as placement agent to Genus for the transaction closing August 14, 2002. This warrant has an exercise price of $1.42 and contains the identical terms as those warrants issued to the Purchasers. Each Note is convertible into, and each Warrant is exercisable to purchase, shares of our common stock at any time beginning August 14, 2002 and ending after a term of three years and four years, respectively. 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 exercise price of the Warrants. After August 14, 2003, we may require the holders of the Warrants issued in the private placement to exercise them if the closing bid price per share of our common stock is greater than 200% of the exercise price for twenty of the thirty trading days immediately preceding the date we give notice to the holders of our decision to effect the exercise and upon satisfaction of the other requirements specified in the Warrants. Under the terms of this mandatory exercise provision, 27 a holder can choose not to exercise such holder's Warrants, although such holder would then forfeit all rights under the Warrants to the extent that such holder fails to exercise within thirty business days of receiving our notice. The Notes and Warrants issued to the Purchasers include antidilution provisions, including provisions that call for adjustments in the number of shares of stock issued upon exercise of the Warrants and adjustments to the conversion price of the Notes to prevent dilution to the Purchasers because of dividends or distributions in common stock, reclassifications of the common stock, the issuance of new stock at less than the exercise price of the Warrants or conversion price of the Notes, and similar types of issuances. Restrictions on Conversion and Exercise Under the terms of the Notes and the Warrants, the Purchasers may not convert the Notes, or exercise the Warrants, to the extent such conversion or exercise would cause the Purchaser, together with its affiliates, to have acquired a number of shares of common stock which would exceed 4.99% of our then outstanding common stock, excluding for purposes of such determination shares of common stock issuable upon conversion of the Notes which have not been converted and upon exercise of the Warrants which have not been exercised. Use of Proceeds A placement fee of 7% of the consideration received for the transaction plus expenses was paid to the Company's placement agent, SG Cowen Securities Corporation. We intend to use the proceeds from the private placement for general corporate purposes, including growth initiatives, capital expenditures and potential acquisitions. As of November 1, 2002, we have used the proceeds for working capital. Exemption In executing and delivering the Notes and the Warrants, we relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. Our reliance on this exemption was based on representations made by each Purchaser that such Purchaser is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D. Resale Registration On September 11, 2002, Genus filed a resale registration statement on Form S-3 (the "Registration Statement") with the SEC pursuant to the terms of the Registration Rights Agreements dated August 14, 2002 by and among Genus and the Purchasers. The Registration Statement covers the shares underlying the Notes and the Warrants. On September 26, 2002 the SEC rendered the Registration Statement effective. ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ------- ----------- 2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian Associates, Inc. and Registrant and exhibits thereto (15) 3.1 Amended and Restated Articles of Incorporation of Registrant as filed June 6, 1997 (11) 3.2 By-laws of Registrant, as amended (13) 4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between Registrant and Bank of America, N.T. and S.A., as Rights Agent (4) 4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.3 Registration Rights Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.4 Certificate of Determination of Rights, Preferences and Privileges of Series A Convertible Preferred Stock (14) 4.5 Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Preferred Stock (17) 4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the Registrant and the Investors (17) 4.7 Securities Purchase Agreement dated July 31, 2002 among the Company and the Purchasers signatory thereto. (19) 4.8 Resale Registration Rights Agreement dated August 14, 2002 among the Company and the Purchasers signatory thereto. (19) 4.9 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (19) 10.1 Lease, dated December 6, 1985, for Registrant's facilities at 4 Mulliken Way, Newburyport, Massachusetts, and amendment and extension of lease, dated March 17, 1987 (1) 10.2 Assignment of Lease, dated April 1986, for Registrant's facilities at Unit 11A, Melbourn Science Park, Melbourn, Hertz, England (1) 10.3 Registrant's 1989 Employee Stock Purchase Plan, as amended (5) 10.4 Registrant's 1991 Incentive Stock Option Plan, as amended (10) 10.5 Registrant's 2000 Stock Plan 10.6 Distributor/Representative Agreement, dated August 1, 1984, between Registrant and Aju Exim (formerly Spirox Holding Co./You One Co. Ltd.) (1) 10.7 Exclusive Sales and Service Representative Agreement, dated October 1, 1989, between Registrant and AVBA Engineering Ltd. (3) 10.8 Exclusive Sales and Service Representative Agreement, dated as of April 1, 1990, between Registrant and Indosale PVT Ltd. (3) 10.9 License Agreement, dated November 23, 1987, between Registrant and Eaton Corporation (1) 10.10 Exclusive Sales and Service Representative Agreement, dated May 1, 1989, between Registrant and Spirox Taiwan, Ltd. (2) 10.11 Lease, dated April 7, 1992, between Registrant and The John A. and Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive, Sunnyvale, California (6) 10.12 Asset Purchase Agreement, dated May 28, 1992, by and between the Registrant and Advantage Production Technology, Inc. (7) 10.13 License and Distribution Agreement, dated September 8, 1992, between the Registrant and Sumitomo Mutual Industries, Ltd. (8) 10.14 Lease Agreement, dated October 1995, for Registrant's facilities at Lot 62, Four Stanley Tucker Drive, Newburyport, Massachusetts (9) 29 10.15 International Distributor Agreement, dated July 18, 1997, between Registrant and Macrotron Systems GmbH (12) 10.16 Credit Agreement, dated August 18, 1997, between Registrant and Sumitomo Bank of California (12) 10.18 Settlement Agreement and Mutual Release, dated April 20, 1998, between Registrant and James T. Healy (16) 10.19 Form of Change of Control Severance Agreement (16) 10.20 Settlement Agreement and Mutual Release, dated January 1998, between the Registrant and John Aldeborgh (18) 10.21 Settlement Agreement and Mutual Release, dated May 1998, between the Registrant and Mary Bobel (18) 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------------------------- (1) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10, 1988, and December 15, 1988, which Registration Statement became effective November 10, 1988. (2) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and amended May 24, 1989, which Registration Statement became effective May 24, 1989. (3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (4) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. (7) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K dated June 12, 1992. (8) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 21, 1992. (9) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (11) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (12) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (13) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (14) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated February 12, 1998. (15) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated April 15, 1998. (16) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1997. 30 (17) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated July 29, 1998. (18) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998. (19) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated August 20, 2002. (b) Report on Form 8-K On August 20, 2002, the company filed a current report on Form 8-K announcing the close of a private placement of 7% subordinated convertible notes due 2005 and warrants to purchase company common stock on August 14, 2002. On September 25, 2002, the company filed a current report on Form 8-K regarding its filing of motions for summary judgment with the court regarding the pending ASM America, Inc. litigation. The motions apply to U.S. Patent No. 6,015,590 and U.S. Patent No. 5,916,365 and move that the court make a decision on non-infringement without going to trial on the basis of the court's claim construction ruling and evidence produced in the litigation. 31 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 12, 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) 32 Sarbanes-Oxley Section 302(a) Certifications I, William W.R. Elder, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Genus, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ William W. R. Elder ------------------------ William W.R. Elder Chief Executive Officer 33 I, Shum Mukherjee, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Genus, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Shum Mukherjee -------------------- Shum Mukherjee Chief Financial Officer 34