UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _________
COMMISSION FILE NUMBER 0-17139
GENUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-279080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1139 KARLSTAD DRIVE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices) (Zip code)
(408) 747-7120
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares outstanding at November 8, 1999: 18,281,897
----------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------
1999 1998 1999 1998
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 8,818 $ 9,804 $ 22,736 $ 27,312
Costs and expenses:
Cost of sales 5,021 5,889 13,120 22,554
Research and development 1,474 1,517 4,018 7,788
Selling, general and administrative 2,072 2,347 5,954 12,253
Special charge 0 0 0 13,216
----------- ----------- --------- ---------
Income (loss) from operations 251 51 (356) (28,499)
Other, net 62 (11) 237 (404)
----------- ----------- --------- ---------
Net income (loss) 313 40 (119) (28,903)
Deemed dividends on preferred stock 0 0 0 (1,903)
----------- ----------- --------- ---------
Net income (loss) available to common shareholders $ 313 $ 40 $ (119) $(30,806)
=========== =========== ========= =========
Basic and diluted net income (loss) available to
common shareholders per common share and
per common share assuming dilution $ 0.02 $ 0.00 $ (0.01) $ (1.79)
=========== =========== ========= =========
Shares used in per share calculation
Basic shares 18,267 17,361 18,083 17,216
=========== =========== ========= =========
Diluted shares 18,943 17,413 18,083 17,216
=========== =========== ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,534 $ 8,125
Accounts receivable (net of allowance for doubtful
accounts of $499 in 1999 and $500 in 1998) 12,081 13,008
Inventories 5,561 5,338
Other current assets 418 379
-------------------- -------------------
Total current assets 23,594 26,850
Property and equipment, net 4,496 4,659
Other assets, net 332 318
-------------------- -------------------
Total assets $ 28,422 $ 31,827
==================== ===================
LIABILITIES
Current liabilities:
Short-term bank borrowings $ 0 $ 4,000
Accounts payable 3,767 2,193
Accrued expenses 3,870 4,908
-------------------- -------------------
Total current liabilities 7,637 11,101
-------------------- -------------------
Redeemable Series B Convertible Preferred
Stock, no par value:
Authorized 28,000 shares;
Issued and outstanding, none (1999) and
16,000 shares (1998), liquidation preference,
none (1999) and $50 per share (1998) 0 773
-------------------- -------------------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized 50,000,000 shares;
Issued and outstanding 18,281,897 shares at
September 30, 1999 and 17,361,162 shares at
December 31, 1998 100,787 99,849
Accumulated deficit (78,374) (78,255)
Accumulated other comprehensive loss (1,628) (1,641)
-------------------- -------------------
Total shareholders' equity 20,785 19,953
-------------------- -------------------
Total liabilities, redeemable preferred stock,
and shareholders' equity $ 28,422 $ 31,827
==================== ===================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (119) $(28,903)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 1,327 2,315
Special charge 0 13,216
Changes in assets and liabilities:
Accounts receivable 927 9,027
Inventories (223) (1,721)
Other assets (53) 721
Accounts payable 1,574 (7,340)
Accrued expenses (1,038) (3,966)
Other, net 0 (643)
----------- ---------
Net cash provided by (used in) operating activities 2,395 (17,294)
----------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (1,164) (442)
Sales of Ion Technology Products 0 23,150
----------- ---------
Net cash used in investing activities (1,164) 22,708
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 165 120
Proceeds from issuance of preferred stock and warrants, net 0 4,816
Redemption of preferred stock 0 (4,725)
Payments of short-term bank borrowings (4,000) (7,200)
Payments of long-term debt 0 (870)
----------- ---------
Net cash provided by (used in) financing activities (3,835) (7,859)
----------- ---------
Effect of exchange rate changes on cash 13 153
----------- ---------
Net increase (decrease) in cash and cash equivalents (2,591) (2,292)
Cash and cash equivalents, beginning of period 8,125 8,700
----------- ---------
Cash and cash equivalents, end of period $ 5,534 $ 6,408
=========== =========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with SEC requirements for interim financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K.
The information furnished reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for
the fair statement of financial position, results of operations and cash flows
for the interim periods. The results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the full
year.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing income (loss) available to common shareholders, adjusted for
convertible preferred dividends and after-tax interest expense on convertible
debt, if any, by the sum of the weighted average number of common shares
outstanding and potential common shares (when dilutive).
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share is as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------
1999 1998 1999 1998
----------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Numerator-basic:
Net income (loss) $ 313 $ 40 $ (119) $(28,903)
Deemed dividends on preferred stock 0 0 0 (1,903)
----------- ---------- -------- ---------
Net income (loss) available to
common shareholders $ 313 $ 40 $ (119) $(30,806)
=========== ========== ======== =========
Denominator-basic:
Weighted average common shares
outstanding 18,267 17,361 18,083 17,216
=========== ========== ======== =========
Basic net income (loss) per share $ 0.02 $ 0.00 $ (0.01) $ (1.79)
=========== ========== ======== =========
Numerator-diluted:
Net income (loss) $ 313 $ 40 $ (119) $(28,903)
Deemed dividends on preferred stock 0 0 0 (1,903)
----------- ---------- -------- ---------
Net income (loss) available to
common shareholders $ 313 $ 40 $ (119) $(30,806)
=========== ========== ======== =========
Denominator-diluted:
Weighted average common shares
outstanding 18,267 17,361 18,083 17,216
Effect of dilutive securities: stock
options 676 52 0 0
----------- ---------- -------- ---------
18,943 17,413 18,083 17,216
=========== ========== ======== =========
Diluted net income (loss) per share $ 0.02 $ 0.00 $ (0.01) $ (1.79)
=========== ========== ======== =========
</TABLE>
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
Stock options to purchase approximately 2,189,122 shares of common stock were
outstanding during the nine months ended September 30, 1999 but were not
included in the computation of diluted income per share because the Company has
a net loss for the nine months ended September 30, 1999. Warrants to purchase
400,000 shares of common stock were outstanding during the nine months ended
September 30, 1999 but were not included in the computation of diluted income
per share because the Company has a net loss for the nine months ended September
30, 1999.
Stock options to purchase approximately 1,856,043 shares of common stock were
outstanding during the nine months ended September 30, 1998 but were not
included in the computation of diluted loss per share because the Company has a
net loss for the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Statement of Cash Flow Information
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 0 $ 183
Income taxes 0 1
Non-cash financing activities:
Deemed dividends on preferred stock related
to beneficial conversion feature $ 0 $1,903
Conversion of Series A Convertible Preferred
Stock to common stock 0 124
</TABLE>
Line of Credit
The Company's secured Accounts Receivable Purchase Agreement expired on
September 30, 1999. The Company is in the process of negotiating a $10 million
revolving line of credit with Venture Bank that will provide the Company with
any required short-term funding, as well as the liquidity to support the future
growth expected in 2000 and beyond. It is expected that the line will have a
maturity of 2 years, and be based on 80% of eligible accounts receivable, with
an interest rate of prime plus 0.25%.
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
INVENTORIES
Inventories comprise the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
Raw materials and parts $ 4,849 $ 5,094
Work in process 712 244
-------------- -------------
$ 5,561 $ 5,338
============== =============
</TABLE>
<TABLE>
<CAPTION>
ACCRUED EXPENSES
Accrued expenses comprise the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
System installation and warranty $ 870 $ 583
Accrued commissions and incentives 395 538
Accrued payroll and related items 545 536
Restructuring reserves 263 1,240
Income taxes 456 456
Other 1,609 1,555
-------------- -------------
$ 4,138 $ 4,908
============== =============
</TABLE>
In 1998, the Company recorded a special charge of approximately $12,707.
Included in this special charge were personnel charges of $1,746 associated with
the Company's reduction in workforce as well as $5,400 in inventory write-downs,
and $1,113 in leasehold improvement write-offs. In addition, this charge
included $1,402 for expenses associated with the closing of several sales
offices and transaction losses as a result of the sale of the ion implant
products to Varian Associates, Inc. ("Varian") and $1,053 for legal, accounting,
and banking fees associated with the Varian transaction. Finally, the special
charge included a $1,993 write-off of ion implant inventory that is currently a
matter of dispute with Varian in connection with the Asset Sale. The Company and
Varian are in the process of resolving the dispute through arbitration to
determine whether the Company or Varian has rights to this ion implant sale and
related inventory. If the Company prevails in the arbitration, any adjustments
to the Company's financial statements will be made in the quarter in which the
decision is rendered and the collection of the amount in question is probable.
The Company is not conceding any rights to the disputed sale.
During the third quarter of 1999, $597 of payroll, legal and transaction costs
were charged against the restructuring reserve.
At September 30, 1999, the following components of the restructuring reserve
associated with the special charge remain unpaid: $141 in payroll costs
associated with the reduction in force and $122 in transaction costs. The
Company expects these amounts to be paid by the end of the fourth quarter of
1999.
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
ISSUANCE OF PREFERRED STOCK AND WARRANTS
Warrants
In connection with the issuance of the Series A Convertible Preferred Stock
(Series A Stock), the Company issued warrants for 400,000 shares of the
Company's common stock to the holders of the Series A Stock. The warrants are
exercisable at any time until February 2001 for 300,000 shares of common stock
at a price of $3.67 per share and for 100,000 shares at a price of $4.50 per
share.
LEGAL PROCEEDINGS
The Company and Varian Associates, Inc. (Varian) are in the process of resolving
a dispute through arbitration as required by the Asset Purchase Agreement. The
original dispute was in regard to whether Genus or Varian has rights to one ion
implant sale and inventory. Subsequently, Genus also made claims against Varian
with respect to the earnout provision in the Asset Purchase Agreement, which
requires Varian to pay Genus one-third of all revenue recorded in excess of $30
million during calendar year 1998. Varian then expanded its claim to include two
other ion implant shipments that Varian contends did not meet revenue
recognition requirements. These two systems, valued at $7 million, were recorded
as revenue by Genus prior to the closing of the Asset Purchase Agreement. If the
Company prevails in the arbitration, any adjustments to the Company's financial
statements will be made in the quarter in which the decision is rendered and the
collection of the amount in question is probable. The Company is not conceding
any rights to the disputed sales and believes that it will prevail in the
arbitration.
The Company has been named as a defendant in a claim involving an automobile
accident by a former employee of the Company, which resulted in the death of an
individual. General, punitive, and exemplary damages are being sought by the
plaintiffs. The Company believes it is not at fault in this matter, and has
appointed legal council to defend the claim.
<PAGE>
GENUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components.
The following are the components of comprehensive loss:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 313 $ 40 $ (119) $(30,806)
Foreign currency translation adjustments 52 (82) 13 2,255
---------- ---------- --------- ---------
Comprehensive income (loss) $ 365 $ (42) $ (106) $(28,551)
========== ========== ========= =========
</TABLE>
The components of accumulated other comprehensive income, net of related tax are
as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
SEPTEMBER 30 DECEMBER 31
1999 1998
-------------- -------------
<S> <C> <C>
Cumulative translation adjustments $ (1,628) $ (1,641)
============== =============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", anticipation" or "expectation"
as well as other statements which are not historical fact are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or anticipated
results, including those set forth under "Risk Factors" in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in or incorporated by reference into this report. The following
discussion should be read in conjunction with the Company's Financial Statements
and Notes thereto included in this report.
Results of Operations
Net sales for the three and nine months ended September 30, 1999 were $8.8
million and $22.7 million, respectively, compared to net sales of $9.8 million
and $27.3 million for the corresponding periods in 1998, which included
shipments of both ion implant and thin film products. Revenue for the current
quarter included thin film system shipments to Asia, while approximately 50% of
the revenue from the quarter ending September 30, 1998 was from ion implant
products. Quarterly thin film revenue has doubled over the past 12 months.
Year-to-date thin film revenue is more than three times greater than the
year-to-date 1998 figures.
Gross margin for the three and nine months ended September 30, 1999 was 43% and
42%, respectively, compared to 40% and 17% for the same periods in 1998. Fixed
operations and service overhead costs remained flat throughout 1999, and
variable material and warranty costs have been consistent as a percentage of
sales. In 1998, the Company was structured to support much higher revenue levels
than were achieved. This resulted in a severe underabsorption of fixed
operations and service overhead expenses. During the second quarter of 1998, the
Company implemented cost reduction measures which significantly decreased these
fixed overhead expenses. The Company believes that the current organization is
more properly sized to achieve reasonable gross margins going forward, assuming
revenue targets are met.
Research and development expenses (R&D) for the third quarter of 1999 were $1.5
million, or 17% of sales, compared to $1.5 million reported in the third quarter
of 1998. R&D spending for the first three quarters of 1999 was $4.0 million,
compared to $7.8 million during the first three quarters of 1998. This reduction
was primarily attributed to R&D expenses associated with the ion implant product
line which was sold to Varian in July of 1998. The Company expects spending
levels to remain consistent for 1999. In July of 1999, the Company introduced
its RInG (Rapidly Integrated Gate) product, which increases the access speed of
the DRAM, and ALD (Atomic Layer Deposition) product, which can deposit films an
order of magnitude thinner than current technology.
Selling, General and Administrative expenses (SG&A) were $2.1 million for the
third quarter of 1999, a decrease of $275,000 from the $2.3 million of SG&A for
the third quarter of 1998. Year-to-date SG&A expenses were $5.9 million,
compared to $12.3 million for 1998. The expense reductions were related to costs
associated with the ion implant product line, and a $1.4 million write-off of a
receivable from Innotech Corporation, formerly the Company's Japanese
distributor, during the second quarter of 1998. SG&A expenses for the third
quarter of 1999 were higher than the previous quarter due to costs associated
with the successful implementation of the Company's new ERP system, BAAN, and
other Y2K compliance expenses on October 1, 1999. The Company believes that the
major internal Y2K issues have now been addressed.
For the third quarter of 1999, other income was $62,000, compared to other
expense of $11,000 in the third quarter of 1998. For the first three quarters of
1999, other income was $237,000, while other expense for the first three
quarters of 1998 was $404,000. Other income consists mainly of interest income,
while other expense for 1998 included interest expenses associated with capital
leases, short-term borrowings and foreign exchange losses.
The net income for the quarter ended September 30, 1999 was $313,000 compared to
net income of $40,000 for the third quarter of 1998. The net loss for the first
nine months of 1999 was $119,000, compared to net loss of $30.8 million for the
same period in 1998. Included in the first nine months of 1998 was a $13.2
million special charge for costs associated with reorganizing the Company and
selling the ion implant product line to Varian, and deemed dividends of $1.9
million on the $5 million worth of Series A Convertible Preferred Stock, all of
which has been retired.
Liquidity and Capital Resources
During the three months ended September 30, 1999, the Company's cash and cash
equivalents were $5.5 million compared to $8.1 million at December 31, 1998. The
Company collected $6 million of outstanding receivables during the third quarter
of 1999. Two systems, which shipped during the second quarter and were valued at
$5 million, were given extended payment terms and are scheduled to be collected
in December of 1999. Total cash collected in 1999 was $20.5 million. Accounts
receivable was $12.1 million at September 30, 1999, compared to $13 million at
December 31, 1998. Several systems that shipped with extended payment terms in
1998 were collected during the first nine months of 1999. The current balance
includes third quarter shipments valued at $6.5 million and second quarter
shipments with extended payment terms valued at $5 million.
Operating activities. Operating activities provided cash of $2.4 million for
the nine month period ended September 30, 1999, compared to cash used of $17.3
million for the corresponding period ended September 30, 1998. The cash provided
by operating activities for the nine month period ended September 30, 1999,
consisted of a net decrease in working capital of $1.2 million and depreciation
and amortization of $1.3 million, partially offset by our net loss of $119,000.
The cash used in operating activities for the nine months ended September 30,
1998, consisted of a net loss of $28.9 million and an increase in working
capital of $3.9 million, partially offset by depreciation and amortization of
$2.3 million and a special charge of $13.2 million. Accounts receivable declined
by $927,000 for the nine-month period ended September 30, 1999, compared to an
increase of $9 million for the same period of 1998. The decrease in accounts
receivable compared to the increase in the prior year is due to lower sales in
1999 compared to 1998, offset by the accounts receivable balance at September
30, 1999, which included two systems with extended payment terms. Inventories
decreased by $223,000 in the nine-month period ended September 30, 1999,
compared to a decrease of $1.7 million in the prior year due to the shipment of
a thin film system to Samsung in the third quarter of 1998, which had been
originally scheduled to ship in the fourth quarter of 1997. The material
required to build this system was purchased in 1997. Accounts payable increased
by $1.6 million in the nine-month period ended September 30, 1999, compared to a
decrease of $7.3 million in the same period in 1998. The increase in accounts
payable in 1999 was due to an increase in inventory purchases during the third
quarter, and not processing vendor checks during the last 2 weeks of September
due to the Company's conversion to a new ERP system, BAAN. The decrease in 1998
accounts payable was primarily due to final payments made to ion implant vendor
accounts with proceeds from the Asset Sale to Varian. Accrued expenses declined
$1 million in the nine-month period ended September 30, 1999, compared to a
decrease of $4 million in the same period in 1998. The 1999 decrease was due to
charges against the restructuring reserve, and the 1998 reduction was primarily
due to the transfer of warranty and installation reserves related to the ion
implant product line to Varian as part of the Asset Sale in July of 1998.
Investing activities. Investing activities used cash of $1.2 million for the
nine-month period ended September 30, 1999. For the nine months ended September
30, 1999, investing activities provided cash of $22.7 million. Capital
expenditures were $1.2 million for the current nine-month period, compared to
$442,000 for the same period of 1998. The increase in capital expenditures
related primarily to demo system upgrades, the new ERP system, and other
computer related purchases. We anticipate an additional $250,000 to $500,000 in
capital expenditures before the end of 1999.
Financing activities. Financing activities used cash of $3.8 million during the
nine months ended September 30, 1999. This was primarily related to the $4
million repayment of the short-term bank borrowings offset by $165,000 from the
proceeds of the employee stock purchase plan and the exercise of employee stock
options.
The Company believes that its existing working capital and cash generated from
operations will be sufficient to satisfy its cash needs going forward.
Currently, cash not required for operating purposes is invested in short-term
money market funds. There can be no assurance that any required additional
funding, if needed, will be available on terms attractive to the Company, which
could have a material adverse effect on the Company's business, financial
condition, and results of operations. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants.
Risk Factors
Certain sections of Management's Discussion and Analysis contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth above in
Management's Discussion and Analysis and this Risk Factors section. The
discussion of these factors is incorporated by this reference as if said
discussion was fully set forth in Management's Discussion and Analysis.
Historical Performance. The Company has experienced losses of $29.5 million,
$19.3 million, and $9.2 million for the years ended December 31, 1998, 1997 and
1996, respectively. In addition, the Company experienced a net loss of $119,000
in the first nine months of 1999. As a result of the Company's volatile sales
and operating results in recent years, there can be no assurance that the
Company will be able to attain or sustain consistent future revenue growth on a
quarterly or annual basis, or that the Company will be able to attain or
maintain consistent profitability on a quarterly or annual basis.
Reliance on International Sales. Export sales accounted for approximately 56%,
74% and 84% of total net sales in the years ended 1998, 1997 and 1996,
respectively. In addition, net sales to South Korean customers accounted for
approximately 34%, 50% and 59%, respectively, of total net sales during the same
periods. In the first nine months of 1999, export sales to South Korea accounted
for approximately 86% of total sales, including 98% in the first quarter, 70% in
the second quarter and 95% in the third quarter. The Company anticipates that
sales to one customer in Korea will continue to account for a significant
portion of net sales. As a result, a significant portion of the Company's sales
will be subject to certain risks, including unexpected changes in regulatory
requirements, tariffs and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations and potentially adverse tax consequences. Although the
Company's foreign system sales are primarily denominated in U.S. dollars and the
Company does not engage in hedging transactions, the Company's foreign sales are
subject to the risks associated with unexpected changes in exchange rates, which
could have the effect of making the Company's products more or less expensive.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Further, the Company has a wholly owned South Korean subsidiary providing
service and support to the installed base of customers and whose functional
currency is the won. There can be no assurance that the Company will not incur
currency losses or gains in future quarters as the currency fluctuates.
A substantial portion of the Company's sales is in Asia, bringing certain risks
to the Company. Currency devaluation may make dollar-denominated goods, such as
the Company's, more expensive for Asian clients. Asian manufacturers may limit
capital spending. Furthermore, the uncertainty of the DRAM market may cause
manufacturers everywhere to delay capital spending plans. These circumstances
may also affect the ability of Company customers to meet their payment
obligations, resulting in the cancellations or deferrals of existing orders and
the limitation of additional orders. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on a Small Number of Customers and Concentration of Credit Risk.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. In 1998, three customers, Samsung
Electronics Company, Ltd., M/A Com and SGS Thomson, accounted for 68%, 8% and
5%, respectively, of the Company's thin films net sales. During the first three
quarters of 1999, Samsung accounted for 85% of sales. For the first quarter of
1999, Samsung accounted for 98% of total sales, during the second quarter,
Samsung and a new U.S. customer accounted for 80% and 14%, respectively, of
total sales, and during the third quarter, Samsung accounted for 88% of total
sales. Additionally, Samsung accounted for an aggregate of 90% of thin films
accounts receivable at December 31, 1998. Because the semiconductor
manufacturing industry is concentrated in a limited number of generally larger
companies, the Company expects that a significant portion of its future product
sales will be concentrated within a limited number of customers. None of these
customers has entered into a long-term agreement requiring it to purchase the
Company's products. Furthermore, sales to certain of these customers may
decrease in the future when those customers complete their current semiconductor
equipment purchasing requirements for new or expanded fabrication facilities.
The loss of a significant customer or any reduction in orders from a significant
customer, including reductions due to customer departures from recent buying
patterns, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing ICs, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is dependent on a small number of customers. Accordingly, the
Company is subject to concentration of credit risk. If a major customer were to
encounter financial difficulties and become unable to meet its obligations, the
Company would be adversely impacted.
Cyclical Nature of the Semiconductor Industry. The Company's business depends
upon the capital expenditures of semiconductor manufacturers, which in turn
depend on the current and anticipated market demand for ICs and products
utilizing ICs. The semiconductor industry is cyclical and experiences periodic
downturns, which have an adverse effect on the semiconductor industry's demand
for semiconductor manufacturing capital equipment. Semiconductor industry
downturns have adversely affected the Company's revenues, operating margins and
results of operations. There can be no assurance that the Company's revenues and
operating results will not continue to be materially and adversely affected by
future downturns in the semiconductor industry. In addition, the need for
continued investment in R&D, substantial capital equipment requirements and
extensive ongoing worldwide customer service and support capability limits the
Company's ability to reduce expenses. Accordingly, there is no assurance that
the Company will be able to attain profitability in the future.
Fluctuations in Quarterly Operating Results. The Company's revenue and operating
results may fluctuate significantly from quarter-to-quarter. The Company derives
its revenue primarily from the sale of a relatively small number of high-priced
systems, many of which may be ordered and shipped during the same quarter. The
Company's results of operations for a particular quarter could be adversely
affected if anticipated orders, for even a small number of systems, were not
received in time to enable shipment during the quarter, anticipated shipments
were delayed or canceled by one or more customers or shipments were delayed due
to manufacturing difficulties. The Company's revenue and operating results may
also fluctuate due to the mix of products sold and the channel of distribution.
Competition. The semiconductor manufacturing capital equipment industry is
highly competitive. Genus faces substantial competition throughout the world.
The Company believes that to remain competitive, it will require significant
financial resources in order to offer a broader range of products, to maintain
customer service and support centers worldwide and invest in product and process
R&D. Many of the Company's existing and potential competitors have substantially
greater financial resources, more extensive engineering, manufacturing,
marketing and customer service and support capabilities, as well as greater name
recognition than the Company. The Company expects its 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 the Company's competitors enter into strategic relationships
with leading semiconductor manufacturers covering thin film products similar to
those sold by the Company, it would materially adversely effect the Company's
ability to sell its products to these manufacturers. There can be no assurance
that the Company will continue to compete successfully in the United States or
worldwide. The Company faces direct competition in Chemical Vapor Deposition
(CVD) tungsten silicide (WSiX) from Applied Materials, Inc. and Tokyo Electron,
Ltd. In addition, the Company faces direct competition in Atomic Layer
Deposition (ALD) with ASM International. There can be no assurance that these or
other competitors will not succeed in developing new technologies, offering
products at lower prices than those of the Company or obtaining market
acceptance for products more rapidly than the Company.
Dependence on New Products and Processes. The Company believes that its future
performance will depend in part upon its ability to continue to enhance its
existing products and their process capabilities and to develop and manufacture
new products with improved process capabilities. As a result, the Company
expects to continue to invest in R&D. The Company also must manage product
transitions successfully, as introductions of new products could adversely
effect sales of existing products. There can be no assurance that the market
will accept the Company's new products or that the Company will be able to
develop and introduce new products or enhancements to its existing products and
processes in a timely manner to satisfy customer needs or achieve market
acceptance. The failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
if the Company is not successful in the development of advanced processes or
equipment for manufacturers with whom it has formed strategic alliances, its
ability to sell its products to those manufacturers would be adversely affected.
Product Concentration; Rapid Technological Change. Semiconductor manufacturing
equipment and processes are subject to rapid technological change. The Company
derives its revenue primarily from the sale of its WSiX CVD systems. The Company
estimates that the life cycle for these systems is generally three to five
years. The Company believes that its future prospects will depend in part upon
its ability to continue to enhance its existing products and their process
capabilities and to develop and manufacture new products with improved process
capabilities. As a result, the Company expects to continue to make significant
investments in R&D. The Company also must manage product transitions
successfully, as introductions of new products could adversely effect sales of
existing products. There can be no assurance that future technologies, processes
or product developments will not render the Company's product offerings obsolete
or that the Company will be able to develop and introduce new products or
enhancements to its existing and future processes in a timely manner to satisfy
customer needs or achieve market acceptance. The failure to do so could
adversely effect the Company's business, financial condition and results of
operations. Furthermore, if the Company is not successful in the development of
advanced processes or equipment for manufacturers with whom it currently does
business, its ability to sell its products to those manufacturers would be
adversely affected.
Dependence on Patents and Proprietary Rights. The Company's success depends in
part on its proprietary technology. While the Company attempts to protect its
proprietary technology through patents, copyrights and trade secret protection,
it believes that the success of the Company will depend on more technological
expertise, continuing the development of new systems, market penetration and
growth of its installed base and the ability to provide comprehensive support
and service to customers. There can be no assurance that the Company will be
able to protect its technology or that competitors will not be able to develop
similar technology independently. The Company currently has a number of United
States and foreign patents and patent applications. There can be no assurance
that any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.
From time-to-time, the Company has received notices from third parties alleging
infringement of such parties' patent rights by the Company's products. In such
cases, it is the policy of the Company to defend against the claims or negotiate
licenses on commercially reasonable terms where considered appropriate. However,
no assurance can be given that the Company 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 the
Company's business and financial results.
Dependence on Key Suppliers. Certain of the components and sub-assemblies
included in the Company's products are obtained from a single supplier or a
limited group of suppliers. Disruption or termination of these sources could
have a temporary adverse effect on the Company's operations. The Company
believes that alternative sources could be obtained and qualified to supply
these products, if necessary. Nevertheless, a prolonged inability to obtain
certain components could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Independent Distributors. The Company currently sells and supports
its thin film products through direct sales and customer support organizations
in the U.S., Western Europe and South Korea and through seven exclusive,
independent sales representatives and distributors in the U.S., Europe, Japan,
South Korea, Taiwan, China and Malaysia. The Company does not have any long-term
contracts with its sales representatives and distributors. Although the Company
believes that alternative sources of distribution are available, the disruption
or termination of its existing distributor relationships could have a temporary
adverse effect on the Company's business, financial condition and results of
operations.
Volatility of Stock Price. The Company's common stock has experienced
substantial price volatility, particularly as a result of quarter-to-quarter
variations in the actual or anticipated financial results of, or announcements
by, the Company, its competitors or its customers, announcements of
technological innovations or new products by the Company or its competitors,
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 the
Company does business, may adversely effect the market price of the Company's
Common Stock. In addition, the occurrence of any of the events described in
these "Risk Factors" could have a material adverse effect on such market price.
Readiness for Year 2000. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. These
computer systems and applications could fail or create erroneous results unless
corrected so that they can process data related to the Year 2000. The Company
relies on its systems, applications and devices in operating and monitoring all
major aspects of its business, including financial systems (such as general
ledger, accounts payable and payroll modules), customer service, infrastructure,
embedded computer chips, networks and telecommunications equipment and end
products. The Company also relies on external systems of business enterprises
such as customers, suppliers, creditors, financial organizations, and of
governments both domestically and globally, directly for accurate exchange of
data and indirectly.
The Company has nearly completed its Year 2000 readiness project, and most of
the mission critical issues have already been closed. The director of operations
and facilities chairs the project team and it includes project managers from the
finance, information technology, facilities, engineering, and customer support
organizations. The team meets regularly, and has conducted a thorough analysis
to identify systems that will possibly be impacted by the Year 2000 problem.
These systems have been classified into four major segments: facilities, mission
critical business operations systems, non-mission critical business operations
systems and general office equipment. The project team has assigned one of its
members to be the project manager for each segment, and each of these segment
project managers has identified an implementation manager for each system
identified as part of their segment. Each implementation manager has developed a
detailed plan that includes an assessment of Year 2000 compliance, followed by
phases to define a contingency plan, evaluate alternatives, select a solution,
design and implement the solution and, finally, to test and verify compliance.
Some of the critical systems already addressed are discussed in the following
paragraphs.
End Products. The control systems for each of the Company's products are
computer driven. Thorough testing of these products was completed during 1998.
Testing addressed not only the Company designed elements of the system, but also
the embedded controls in manufactured components integrated into the end
products. Each product requires a software upgrade, and the oldest systems in
the product line require a control system computer replacement as well. The
Company is charging a nominal amount for these upgrades on the older generation
systems, while upgrades for the current Lynx2 products are supplied at no
charge. The design and testing of each of these product upgrades have been
completed, and the upgrades have been shipped and installed at some of the
Company's customer's sites worldwide. The Company has contacted and offered this
upgrade to all of its customers, but some customers have decided not to upgrade
their systems. The Company is in the process of securing a written release from
customers who have decided not to purchase the upgrade for their installed
systems.
Enterprise Resources Program. The Company's Year 2000 project plan included
implementation of a new Baan enterprise resources program system. The cutover
from the existing system to the new system was completed October 1, 1999. The
Company is still working through minor implementation follow-up items, but is
effectively running operations with the new system. The Baan product has been
certified as Year 2000 compliant, and this product is running at many major
manufacturing companies worldwide. The system was considered to be the most
critical internal Company resource at risk to the Year 2000 problem, so timely
implementation was essential.
Supplier Readiness. Each implementation manager is responsible for assessing the
readiness of the suppliers who support their systems to ensure there will be no
lapses in service that may interrupt operations. This is in addition to
addressing readiness of the hardware and software products provided by these
suppliers. The Company started surveying suppliers of inventory material for the
Company's products during the second quarter of 1999. This is one of the
projects under the mission critical business operations systems segment.
Readiness of the supplier's products has already been established under the end
product project, but addressing potential disruptions of the supply pipeline due
to supplier business readiness is on-going. The Company has yet to identify any
key suppliers who are not diligently ensuring their Y2K readiness.
Computer Resources. All of the Company's computer network resources have been
upgraded in the last nine months to ensure Year 2000 compatibility. As with most
businesses today, these resources have become essential communications tools,
both internal and external to the Company, making their continued operation
mission critical. The effort to upgrade client computer resources (notebook and
desktop personal computers) is on-going, with completion of all upgrades
expected by December 1, 1999.
The Company's estimated expenses incurred through December 31, 1998 are
$300,000. The 1999 projected costs are $350,000, of which $320,000 has been
incurred so far. The Company believes that costs to fix the Company's products
have already been fully incurred. Several capital investments have already been
made in 1999 to replace aging equipment, and Year 2000 compliant systems were
purchased in all cases. This includes new network and electronic mail file
servers. The Company's voicemail system was not Year 2000 compliant, but
replacement is complete. There are a few more hardware and software systems,
both mission critical and non-mission critical, which may require upgrades at
the Company's expense during the fourth quarter, but preliminary estimates
indicate these expenses will not be material. There can be no assurance that the
Company's current estimated costs associated with the Year 2000 issue, or the
consequences of incomplete or untimely resolution of the Year 2000 issue, will
not have a material adverse effect on the result of operations or financial
position of the Company in any given year.
The Company has not yet identified any specific contingency plans in the event
that projects are not completed in time or if planned fixes fail to operate as
expected. Each implementation project manager is responsible for completing
contingency plans for assigned projects as part of the planning process.
At this time, the Company does not plan to use any outside agencies to provide
independent verification of readiness, although individual implementation
project managers may decide to include independent verification as part of their
project plans. The independent verification requirement will be based on the
risk associated with failure of the particular project/system. The Company is
setting up a program to use in-house quality system auditors to perform audits
of some of the critical projects to provide some independent assessment of
readiness.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying "Index to Exhibits" are filed as part
hereof, or incorporated by reference into, the report.
<PAGE>
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 15, 1999 GENUS, INC.
/s/ William W.R. Elder
------------------------------------
William W.R. Elder, President,
Chief Executive Officer and Chairman
/s/ Kenneth Schwanda
-----------------------------------
Kenneth Schwanda
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
<PAGE>
GENUS, INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------
27.1 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5534
<SECURITIES> 0
<RECEIVABLES> 12580
<ALLOWANCES> (499)
<INVENTORY> 5561
<CURRENT-ASSETS> 23594
<PP&E> 27067
<DEPRECIATION> (22571)
<TOTAL-ASSETS> 28422
<CURRENT-LIABILITIES> 7637
<BONDS> 0
0
0
<COMMON> 100787
<OTHER-SE> (80002)
<TOTAL-LIABILITY-AND-EQUITY> 28422
<SALES> 22736
<TOTAL-REVENUES> 22736
<CGS> 13120
<TOTAL-COSTS> 23092
<OTHER-EXPENSES> 237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (119)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
