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 June 30, 2004 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 by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes X No --- As of August 2, 2004, the issuer had 39,759,475 shares of common stock outstanding. -------------------------------------------------------------------------------- ================================================================================ GENUS, INC. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 2004 and June 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2004 and December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows(unaudited) for the six months ended June 30, 2004 and June 30, 2003. . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements (unaudited). . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . .21 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . .42 Item 4. Disclosure Controls and Procedures. . . . . . . . . . . . . . . . .42 PART II. OTHER INFORMATION Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .43 Item 4: Submission of Matters to a Vote of Security Holders. . . . . . . . .43 Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .44 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 2

5 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) BASIS OF PRESENTATION The accompanying unaudited 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004. The information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of financial position, results of operations and cash flows for the interim periods. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year. LIQUIDITY The Company has an accumulated deficit of $115.9 million as of June 30, 2004 and a net loss of $4.6 million during the six months ended June 30, 2004. The Company is in the process of executing its business strategy and has plans to eventually achieve profitable operations on an ongoing basis. Management believes that existing cash, cash generated by operations, and available financing will be sufficient to meet projected working capital, capital expenditure and other cash requirements for the next twelve months. Management cannot provide assurances that its cash, cash equivalents, and short term investments and its future cash flows from operations alone will be sufficient to meet operating requirements and allow the Company to service debt and repay any underlying indebtedness at maturity. If the Company does not achieve anticipated cash flows, we may not be able to meet planned product release schedules and forecast sales objectives. In such event the Company will require additional financing to fund on-going and planned operations and may need to implement expense reduction measures. In the event the Company needs additional financing, there is no assurance that funds would be available to the Company or, if available, under terms that would be acceptable to the Company. Any additional equity financing may be dilutive to shareholders, and any additional debt financing, if available, may involve restrictive covenants. Certain reclassifications have been made to the prior period's financial statements to conform to current period's presentation. Such reclassifications had no effect on the previously reported (loss) income from operations or accumulated deficit. 6 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) NET LOSS PER SHARE Basic net loss per share is computed by dividing net loss available 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 available to common shareholders by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). A reconciliation of the numerator and denominator of basic and diluted net loss per share is as follows (in thousands, except per share data):

Stock options, warrants and convertible debt to purchase approximately 8,824,137 and 8,746,000 shares of common stock were outstanding as of March 31, 2004 and June 30, 2004 respectively, but were not included in the computation of diluted net loss per share because their effect would be anti-dilutive. Stock options, warrants and convertible debt to purchase approximately 10,933,000 shares of common stock were outstanding as of June 30, 2003, but were not included in the computation of diluted net earnings per share because of the anti-dilutive effects. 7 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) Stock Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting Standards Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation." Generally, the Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the date of the grant. Accordingly, no compensation cost has been recognized in the Company's statements of operations. Pro forma information regarding net loss and net loss per share as if the Company recorded compensation expense based on the fair value of stock-based awards have been presented in accordance with Statement of Financial Accounting Standards No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure" and is as follows for the three and six months ended June 30, 2004 and 2003 (in thousands, except per share data):

8 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) The above pro forma effects on net loss may not be representative of the effects on future results as options granted typically vest over several years and additional option grants are expected to be made in future years. The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the three and six months ended June 30, 2004, and 2003:

The weighted average fair value of options granted in the three months ended June 30, 2004 and 2003 was $2.18 and $1.77, respectively. The weighted average fair value of options granted in the six months ended June 30, 2004 and 2003 was $2.72 and $1.78, respectively. The fair value of the employees' stock purchase rights under the 1989 Employee Stock Purchase Plan was estimated using the Black-Scholes option-pricing model with the following assumptions for the six months ended June 30, 2004 and 2003: 9 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED)

The weighted average fair value of those purchase rights granted in the six months ended June 30, 2004 and 2003 was $1.26 and $0.81, respectively. REVENUE RECOGNITION. The Company derives revenue from the sale and installation of semiconductor manufacturing systems and from engineering services and the sale of spare parts to support such systems. Equipment selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. The Company has obtained verifiable objective evidence of fair value of installation services, one of the requirements for Genus to recognize revenue for multiple-element arrangements prior to completion of installation services. Accordingly, under SAB 104, if Genus has met defined customer acceptance experience levels with both the customer and the specific type of equipment, then the Company recognizes equipment revenue upon shipment and transfer of title. A portion of revenue associated with undelivered elements such as installation and on-site support related tasks is recognized for installation when the installation is completed and the customer accepts the product and for on-site support as the support service is provided. For products that have not been demonstrated to meet product specifications for the customer prior to shipment, revenue is recognized only when installation is complete and the customer accepts the product. During the three months ended June 30, 2004, the Company recorded a sales return allowance of $2.1 million against revenue in anticipation of providing a post contract concession to allow a customer to return a 200 mm system for which revenue was initially recorded during the quarter ended December 31, 2003. Revenues can fluctuate significantly as a result of the timing of customer acceptances. At June 30, 2004 and December 31, 2003, the Company had deferred revenue of $2.2 million and $331,000, respectively. 10 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) Revenues from sale of spare parts are generally recognized upon shipment. Revenues from engineering services are recognized as the services are completed over the duration of the contract. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investment securities with original maturities of three months or less from the date of purchase to be cash equivalents. Management determines the appropriate classification of short-term investments at the time of purchase and evaluates such designations as of each balance sheet date. To date, all short-term investments have been categorized as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated comprehensive income in stockholders' equity, net of any related tax effects. Interest, dividends and realized gains and losses are included in interest income in the condensed consolidated statements of operations. SHORT-TERM BANK BORROWINGS On December 20, 2001 and as amended on March 27, 2002, March 20, 2003, and June 29, 2004, the Company maintained line of credit facilities from Silicon Valley Bank for $15.0 million. The borrowable amounts under the credit facilities are based on eligible receivables and/or cash (or cash equivalents) on deposit with Silicon Valley Bank. The interest rate is prime plus 0.50% per annum (4.75% as of June 30, 2004) and the facility expires on June 28, 2005. The line of credit 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 (calculated as the excess of total assets over total liabilities adjusted to exclude intangible assets and balances receivable from officers or affiliates and to exclude debt subordinated to Silicon Valley Bank) of $30 million as of the end of each fiscal quarter. As of June 30, 2004, and December 31, 2003, there was $0 and $6.5 million outstanding respectively, under this credit facility. On January 4, 2002, the Company received gross proceeds of $1.2 million under a secured loan, which is payable over 36 months, accrues interest of 8.75% per annum and is secured by two systems in the Company's demonstration lab. The balance outstanding under this agreement was $116,000 and $249,000 at June 30, 2004 and December 31, 2003, respectively. 11 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) CONVERTIBLE NOTES AND WARRANTS On August 15, 2002, the Company raised $7.0 million, net of issuance costs, by issuing $7.8 million unsecured 7% convertible notes and warrants to purchase 2,761,000 shares of common stock. $7.5 million of the convertible notes were convertible into common stock at a price of $1.42 per share and a $300,000 convertible notes were convertible into common stock at a price of $1.25 per share. During 2002, convertible notes with a face value of $525,000 were converted into common stock at a price of $1.42 and convertible notes with a face value of $150,000 were converted at a price of $1.25 per share. During 2003, convertible notes with a face value of $150,000 were converted at a price of $1.25 per share. The remaining convertible notes with a face value of $6,975,000 are redeemable three years after issuance or may be converted into 4,912,000 shares of common stock at a price of $1.42 per share prior to the redemption date at the election of the investors. 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. Warrants exercisable for 2,641,000 shares of common stock had an exercise price of $1.42 per share and warrants exercisable for 120,000 shares of common stock had an exercise price of $1.25 per share. In 2002, warrants for 300,000 shares were exercised for cash proceeds of approximately $400,000. The remaining warrants were exercised during 2003 for cash proceeds of approximately $3.5 million. The net cash proceeds from the issuance of the convertible notes and warrants were recorded as follows (in thousands):

12 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) 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. " Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The Company determined the fair value of the warrants, using the Black Scholes option-pricing model with a risk free interest rate of 4.4 %, volatility of 75%, a term of three years and no dividend yield. 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 exceeded the carrying value of the convertible notes, resulting in a beneficial conversion feature. The value of the beneficial conversion feature is accreted over the stated term of the convertible notes in accordance with EITF No. 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application Issue No. 98-5 to Certain Convertible Instruments". The $2.2 million difference between the $7.8 million face value of the notes and the $5.6 million original carrying value, representing the value of the warrants and the beneficial conversion feature, has been recorded as equity and is accreted as interest expense over the three year term of the convertible notes, using the effective interest rate method. The Company incurred issuance costs of approximately $868,000, representing cash obligations of $814,000 and warrants with a fair value of $54,000. The warrants to purchase 79,000 shares of common stock at $1.42 per share were subsequently net exercised for 38,631 shares of common stock. Issuance costs are included with other assets and are amortized as interest expense over the stated term of the convertible notes. 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. The Company recorded interest costs related to the convertible notes and warrants of $365,000 and $723,000 for the three and six month period ended June 30, 2004. The Company recorded interest costs related to the convertible notes and warrants of $386,000 and $733,000 for the three and six month period ended June 30, 2003. 13 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) INVENTORIES Inventories comprise the following (in thousands):

Inventory at customers' locations represent the cost of systems shipped to customers for which we were awaiting customer acceptance including the system for which we recorded a return allowance. 14 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) ACCRUED EXPENSES Accrued expenses comprise the following (in thousands):

WARRANTIES The Company warrants that each of the products we sell shall be free of defects in material and workmanship and meets performance specifications during our warranty period. The warranty period means the period commencing upon the earlier of, successful completion of acceptance tests agreed in writing by the Company's customers or ninety days after the product shipment date. In general, the Company's warranty period terminates for material coverage in twelve to twenty-four months and for labor coverage in twelve months after the warranty period begins, but in any event no later than twenty seven months from the product shipment date for material coverage and fifteen months for labor coverage, unless otherwise stated in the quotation. The Company provides labor for all product repairs and replacement parts, excluding consumable items, free of charge during the warranty period. 15 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) Changes in the warranty reserves during the three and six months ended June 30, 2004 and 2003 were as follows (in thousands):

COMMON STOCK AND WARRANTS On May 17, 2001, the Company sold 2,541,785 shares of our common stock and warrants to purchase up to 1,461,525 additional shares of common stock for net proceeds of approximately $6.9 million. The warrants were issued with exercise prices ranging from $3.00 to $5.24 per share of common stock. The warrants had terms providing for an adjustment of the number of shares underlying the warrants in the event that the Company issued new shares at a price lower than the exercise price of the warrants. In January 2002, warrants exercisable for 1,270,891 shares of common stock were adjusted and thereafter exercisable for an aggregate 760,203 additional shares of common stock. As of June 30, 2004, with the exception of certain warrants exercisable for 118,449 shares of common stock, the warrants issued in May 2001 have been exercised in full. 16 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) On January 25, 2002, the Company sold 3,871,330 shares of our common stock and warrants to purchase up to 580,696 additional shares of common stock for net proceeds of approximately $7.9 million. The warrants were issued at an exercise price of $3.23 per share of common stock. The warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that the Company issues new shares at a price lower than the exercise price of the warrants. In August 2002, the Company issued a convertible note with a face value of $7.8 million and warrants to purchase 2,760,669 shares of common stock with exercise prices ranging from $1.25 to $1.42 to the note holders. In connection with the issuance of convertible notes in August 2002, the Company adjusted the outstanding January 2002 warrants to be exercisable for an additional 86,979 shares of common stock. Additionally the exercise price of the January 2002 warrants was adjusted to $2.48. As of June 30, 2004, the warrants issued in January 2002, as amended in August 2002, have been exercised in full. 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 for further information. RELATED PARTY TRANSACTIONS Mario M. Rosati, a Director of the Company, is also a member of Wilson Sonsini Goodrich & Rosati, a professional corporation and general counsel of the Company. During the six month ended June 30, 2004 and 2003, the Company paid $105,000 and $280,000, respectively, to Wilson Sonsini Goodrich & Rosati. At June 30 2004, the Company owed approximately $337,000 to Wilson Sonsini Goodrich & Rosati. COMPREHENSIVE LOSS The following are the components of comprehensive loss (in thousands):

17 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) CUSTOMER CONCENTRATION Our global customer base consists of semiconductor and non-semiconductor manufacturers in the United States, Europe and Asia. Over the past few years we were dependent on one customer, Samsung, for a majority of our thin film product revenue. For the six months ended June 30, 2004 and 2003, Samsung accounted for 74% and 71% of our revenues, respectively. Samsung accounted for 69%, 58% and 73% of our revenue in 2003, 2002 and 2001, respectively. There is no long-term agreement between Genus and Samsung. Over the past three years, we have gradually expanded our customer base and at June 30, 2004, we had twelve active customers. SUBSEQUENT EVENTS - Merger with Aixtron - On July 2, 2004, we announced the execution of a definitive merger agreement with Aixtron Aktiengesellschaft or "Aixtron" (the "Merger Agreement"). Upon the closing of the transactions contemplated by the Merger Agreement, Genus will become a wholly-owned subsidiary of Aixtron and each share of Genus common stock will be converted into a right to receive 0.51 Aixtron American Depositary Shares. Each Aixtron American Depositary Share represents an ownership interest in one Aixtron ordinary share. The transaction is expected to close by the end of 2004 and is subject to customary closing conditions, including receipt of Genus and Aixtron shareholder approvals and U.S. regulatory clearance. Aixtron plans to file a registration statement on Form F-4 with the Securities and Exchange Commission, which will include a prospectus of Aixtron and a proxy statement of Genus relating to the proposed transaction. During the second quarter of 2004, we incurred $821,000 in expenses related to the merger. 18 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) - Genus and its directors have been named as defendants in two putative shareholder class action complaints filed on July 12, 2004 and July 19, 2004 in the California Superior Court in Santa Clara County related to the Merger Agreement and the merger. The complaints allege that the defendants breached their fiduciary duties in connection with the Merger Agreement and seek to enjoin the completion of the merger. The defendants believe that the lawsuits are without merit and intend to contest them vigorously. CONTINGENCIES - Under the terms of a Settlement with ASM International, N.V. ("ASMI"), ASMI has the right to pursue an appeal of the District Court's judgments of non-infringement regarding the ALD patents. If the Federal Circuit vacates the existing judgments in favor of Genus Inc. related to the ALD patents based on a change in the District Court's claim construction, Genus will be required to pay ASMI $1 million for the royalty-free licenses to the ALD patents it has been granted under the settlement agreement. ASMI filed a notice of appeal with the Federal Circuit on January 14, 2004. ASMI served its appeal brief on April 27, 2004. Genus' appeal brief was completed on July 12, 2004. The Company believes that the appeal is without merit and intends to defend the action vigorously. - In the event the transaction contemplated under the Merger Agreement is not completed, Genus will be required to pay significant costs incurred in connection with the Merger, including legal, accounting and a portion of the financial advisory fees. Moreover, under specified circumstances described in the Merger Agreement, Genus may be required to pay Aixtron a termination fee of $7 million in connection with the termination of the Merger Agreement. 19 GENUS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) - The convertible note holders may elect to receive payment of the notes at a premium of 10% over the face value of the notes when the merger is consummated. The total payment due, if all note holders elect to receive payment, will be $7.6 million, $1.5 million in excess of the carrying value at June 30, 2004. The Company did not attribute any value to the conversion feature at June 30, 2004 based upon the estimated conversion value of $16.8 million for the notes on June 30, 2004 being significantly in excess of the cash value of $7.6 million available upon the change of control. RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF No. 03-01 provides guidance on recording other-than-temporary impairments of cost method investments and requires additional disclosures for those investments. The recognition and measurement guidance in EITF No. 03-01 should be applied to other-than-temporary impairments evaluations in reporting periods beginning after June 15, 2004. The disclosure requirements are effective for fiscal years ending after June 15, 2004 and are required only for annual periods. The Company does not believe that the adoption of this standard will have a material impact on its consolidated balance sheet or statement of operations. In March 2004, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 03-6, "Participating Securities and the Two-class Method Under FASB Statement No. 128, Earnings Per Share." EITF Issue No. 03-6 addresses a number of questions regarding the computation of earnings per share ("EPS") by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of Computing EPS once it is determined that a security is participating, including how to allocate undistributed Earnings to such a security. This pronouncement is effective for fiscal periods beginning after March 31, 2004. The Company does not believe the adoption of EITF 03-6 will have a material impact on its computation of earnings per share. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information contained in this Quarterly Report on Form 10-Q is forward- looking in nature. All statements included in this Quarterly Report on Form 10- Q made by management of Genus, Inc., other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding the Company's future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. These forward-looking statements are based on management's estimates and projections as of the date hereof and include the assumptions that underlie such statements. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should", "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section below entitled "Risk Factors." Other risks and uncertainties are disclosed in the Company's prior SEC filings, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and its Quarterly Report of Form 10-Q for the fiscal quarter ended March 31, 2004. These and many other factors could affect the Company's future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. OVERVIEW Since 1982, we have been supplying advanced manufacturing systems to the semiconductor industry worldwide. Major semiconductor manufacturers use our leading-edge thin film deposition equipment and process technology to produce integrated circuits, commonly called chips, that are incorporated into a variety of products including personal computers, communications, and equipment and consumer electronics. We pioneered the development of chemical vapor deposition (CVD) tungsten silicide, which is used in certain critical steps in the manufacture of integrated circuits. In addition, today we are leading the commercialization of atomic layer deposition, also known as ALD technology and of our StrataGem family of products. This technology is designed to enable a wide spectrum of thin film applications such as aluminum oxide, hafnium oxide and other advanced dielectric insulating and conducting metal barrier materials for advanced integrated circuit manufacturing. 21 Genus' consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On a quarterly basis, management reevaluates its estimates and judgments based on historical experience and relevant current conditions and adjusts the financial statements as required. Our global customer base consists of semiconductor and non-semiconductor manufacturers in the United States, Europe and Asia. Over the past few years we were dependent on one customer, Samsung, for a majority of our thin film product revenue. For the six months ended June30, 2004 and 2003, Samsung accounted for 74% and 71% of our revenues, respectively. Samsung accounted for 69%, 58% and 73% of our revenue in 2003, 2002 and 2001, respectively. There is no long-term agreement between Genus and Samsung. Over the past three years, we have gradually expanded our customer base and at June 30, 2004, we had twelve active customers. During the fiscal year 2003, Genus increased efforts to generate revenue from service activities by providing on-site services and support for fees based on the time spent by our engineers. Currently, revenues from such services are not material, but the Company hopes to expand service revenues in the future. International revenue accounted for 85% and 87% for six months ended June 30, 2004 and 2003, respectively. International revenue accounted for 77% of revenue in 2003, 72% of revenue in 2002 and 93% of revenue in 2001. We anticipate that international sales, and, in particular, sales from South Korea, will continue to account for a significant portion of our total revenue. The local currency is the functional currency for our foreign operations in South Korea and Japan. All other foreign operations are dollar denominated. Gains or losses from translation of assets and liabilities of foreign operations where the local currencies are the functional currency are included as a component of shareholders' equity and comprehensive loss. Foreign currency transaction gains and losses are recognized in the statement of operations. To date, these gains and losses have not been material. Business activity in the semiconductor and semiconductor manufacturing equipment industries has been cyclical; for this and other reasons, Genus' results of operations for the three and six months ended June 30, 2004, may not necessarily be indicative of future operating results. 22 In order to support our business strategy and maintain our competitiveness, we will be required to make significant investments in research and development. In addition, we will need to divert additional resources to administration to comply with our reporting requirement under the Sarbanes-Oxley Act of 2002. Based on our cost structure, we believe selling, general and administrative expenses will increase as sales volumes increases. We depend on increases in sales in order to attain profitability. If our sales do not increase, we may need to reduce our operating costs, which could impair our competitiveness and our future viability. CRITICAL ACCOUNTING POLICIES The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and require management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Revenue recognition The Company derives revenue from the sale and installation of semiconductor manufacturing systems and from engineering services and the sale of spare parts to support such systems. Equipment selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. The Company has established verifiable objective evidence of fair value of installation services, one of the requirements for Genus to recognize revenue for multiple-element arrangements prior to completion of installation services. Accordingly, under SAB 104, if Genus has met defined customer acceptance experience levels with both the customer and the specific type of equipment, then the Company recognizes equipment revenue upon shipment and transfer of title. A portion of revenue associated with undelivered elements such as installation and on-site support related tasks is recognized for installation when the installation is completed and the customer accepts the product and for on-site support as the support service is provided. For products that have not been demonstrated to meet product specifications for the customer prior to shipment, revenue is recognized only when installation is complete and the customer accepts the product. Revenues can fluctuate significantly as a result of the timing of customer acceptances. At June 30, 2004 and December 31, 2003, the Company had deferred revenue of $2.2 million and $331,000 respectively. 23 Revenues from sale of spare parts are generally recognized upon shipment. Revenues from engineering services are recognized as the services are completed over the duration of the contract. Accrual for warranty expenses The Company generally provides one-year labor and two-year material warranty on its products. Warranty expenses are generally accrued at the time that revenue is recognized from the sale of products. At present, based upon historical experience, the Company accrues material warranty equal to 2% of shipment value for its 200mm products and 2%- 5% for its 300mm products, and labor warranty equal to $20,000 per system for both its 200mm and 300mm products. At the end of every quarter, the Company reviews its actual spending on warranty and reassesses if its accrual is adequate to cover warranty expenses on the systems in the field which are still under warranty. Differences between the required accrual and recorded accrual are charged or credited to warranty expenses for the period. At June 30, 2004 and December 31, 2003, the Company had accrued $927,000 and $1,451,000, respectively, for material and labor warranty obligations. Actual results could differ from estimates. In the unlikely event that a problem is identified that would result in the need to replace components on a large scale, we would experience significantly higher expenses and our results of operations and financial condition could be materially and adversely effected. Valuation of inventories Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. We write down inventories to net realizable value based on forecasted demand and market conditions. Raw material and purchased parts include spare parts inventory for systems and was $4.7 million and $4.6 million at June 30, 2004 and December 31, 2003, respectively. The forecasted demand for spare parts takes into account the Company's obligations to support systems for periods that are as long as five years. Actual demand and market conditions may be different from those projected by the Company. This could have a material effect on operating results and financial position. During the three-month period ended June 30, 2004 and 2003, the Company recorded inventory charges of $526,000 and $67,000, respectively to reduce the carrying value to market value. During the six-month period ended, June 30, 2004 and 2003, the Company recorded inventory charges of $670,000 and $167,000, respectively to reduce the carrying value to market value. 24 Valuation of research and demonstration equipment Equipment includes research and demonstration equipment, which is located in our Applications Laboratory and is used to demonstrate to our customers the capabilities of our equipment to process wafers and deposit films. The gross value of demonstration equipment is based on the cost of materials and actual factory labor and overhead expenses incurred in manufacturing the equipment. Costs related to refurbishing or maintaining existing demonstration equipment, which do not add to the capabilities or useful life of the equipment, are not capitalized and are expensed as incurred. Demonstration equipment is stated at cost and depreciated over a period of five years. If the Company sells the equipment, it may experience gross margins that are different from the gross margins achieved on equipment manufactured specifically for customers. RESULTS OF OPERATIONS --------------------- NET SALES. Net sales for the three and six months ended June 30, 2004 were $ 8.8 million and $21.0 million, which represented decreases of 41% and 35% when compared to net sales of $14.7 million and $32.4 million for the corresponding periods in 2003. The decrease was primarily attributable to delay of purchase decision made by our customers during the first half of 2004. In addition we reduced revenue in the three months ended June 30, 2004 by $2.1 million in anticipation of providing a post contact concession to allow a customer to return a 200 mm system for which revenue was initially recorded during the quarter ended December 31,2003. Two 300 mm CVD systems and one 200 mm ALD module were recognized as revenue during the second quarter of 2004 compared with two 300 mm CVD system and two 200 mm ALD system recognized in the second quarter of 2003. During the six months ended June 30, 2004, five systems and 2 modules were recognized as revenue as compared to nine systems in the first six months of 2003. Genus has maintained its booking guidance to the $60 million to $70 million range. Full year revenue guidance is still in the $55 million to $65 million range. COST OF GOODS SOLD. Cost of goods sold for the three and six months ended June 30, 2004 were $5.4 million and $14.0 million, compared to $10.8 million and $22.4 million for the same periods in 2003. Gross profit as a percentage of revenues was 38% for the second quarter of 2004 compared to 27% in the second quarter of 2003. Gross profit as a percentage of revenues was 33% for the six months ended June 30, 2004 compared to 31% for the corresponding period in 2003. The increase in gross margin during the three and six months ended June 30, 2004 as compared to the three and six months ended June 30, 2003 was 25 primarily due to a favorable product mix caused by a higher proportion of spares sales and services revenue which have higher margins than systems as well as reduction in certain manufacturing costs which was partially offset by $526,000 and $670,000, respectively, of inventory write-down during three and six months ended June 30, 2004. During the quarter ended June 30, 2004, we sold $180,000 of inventories that was previously written off. RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for the quarter ended June 30, 2004 were $1.7 million, or 19% of net sales, compared with $2.0 million or 13% of net sales for the same period in 2003. For the six months ended June 30, 2004, expenses were $3.7 million or 18% of sales, compared to $4.1 million or 13% of net sales for the first half of 2003. The decrease in R&D expenses for the three and six months ended June 30, 2004 compared with three and six months ended June 30, 2003 was primarily due to lower expenses recoded for depreciation expenses and development materials in the three and six months ended June 30, 2004. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expenses were $3.1 million and $6.2 million for the three and six months ended June 30, 2004 compared to $2.9 million and $6.0 million in the corresponding periods in 2003. As a percent of net sales, selling, general and administrative expenses were 36% and 29% for the three and six months ended June 30, 2004 compared to 19% for the corresponding periods in 2003. The increase in selling, general and administrative expenses during three and six months ended June 30, 2004 as compared to the corresponding periods in 2003 was primarily attributable to costs incurred related to Sarbanes Oxley section 404 readiness. PROPOSED MERGER RELATED EXPENSE. In the second quarter of 2004, we incurred legal and other professional expenses of $821,000 related to the proposed merger with Aixtron. INTEREST EXPENSE. Interest expenses for the three and six months ended June 30, 2004 was $415,000 and $848,000, respectively, compared to interest expense of $477,000 and $907,000 for the corresponding periods in 2003. The decrease in interest expenses during the three and six months ended June 30, 2004, compared with the corresponding period in 2003 was primarily due to a decrease in interest expenses related to short term bank borrowing from Silicon Valley Bank. OTHER INCOME, NET. Other income, net for the three and six months ended June 30, 2004 were $4,000 and $133,000 respectively compared to other income, net of $42,000 and $49,000 for the corresponding periods in 2003. The increase in other income during the six month period ended June 30, 2004 as compared to the corresponding period in 2003 was primarily attributable to higher interest earned on short term investment. PROVISION FOR INCOME TAXES. We record tax provisions of $181,000 and $199,000 for the three and six months ended June 30, 2004 respectively. The tax provision is related to taxable income of our South Korean subsidiary. We did not record any provision for income taxes in Japan, as we expect to incur loss for this entity for the year ending December 31, 2004. We did not record any provision for income taxes in the United States as we incurred losses in this entity and we provided for a full valuation allowance against the tax benefit 26 associated with these losses given sufficient uncertainty as to realization of any deferred tax assets.. We did not record any income tax expense for our South Korean subsidiary for the three and six months ended June 30, 2003. LIQUIDITY AND CAPITAL RESOURCES On June 30, 2004, our cash and cash equivalents were $23.6 million, a decrease of $18 million over cash and cash equivalents of $41.6 million held on December 31, 2003 and was primarily due to $12.2 million of cash invested in short term investments during the six months ended June 30, 2004, and $6.5 million related to net repayment of short term debt. Cash generated by operating activities totaled $4.1 million for the six months ended June 30, 2004, and consisted primarily of a decrease in customer accounts receivables of $2.9 million, primarily due to lower sales, depreciation and amortization expenses of $1.7 million, increased provision for excess and obsolete inventory of $670,000, related to inventory charges recorded during the six-month period ended June 30,2004 to reduce the carrying value to market value, increase in provision for doubtful accounts of $72,000, amortization of deferred finance costs of $477,000, increase in customer advances of $2.3 million, deferred revenue of $1.9 million, increase in accounts payable of $301,000 and increase in accrued expenses of $382,000 partially offset by net loss of $4.6 million, an increase of inventories of $2.0 million, for building future shipments. On June 30, 2003, our cash and cash equivalents were $10.9 million, a $600,000 decrease over cash and cash equivalents of $11.5 million held as of December 31, 2002. The reduction in cash and cash equivalent at June 30, 2003 as compared with cash and cash equivalents balance at December 31, 2002 primarily resulted from investment activities of $1.9 million, partially offset by cash provided by financing activities of $1.1 million and cash provided by operations of $568,000. Cash generated by operating activities totaled $568,000 for the six months ended June 30, 2003, and consisted primarily of net loss of $950,000, depreciation of $1.6 million, increase in deferred revenues of $2.5 million, partially offset by decreases in accounts payable of $2.5 million. Investing activities used $16.0 million of cash during the six months ended June 30, 2004 and was primarily due to $12.2 million of cash invested in short term investments. We made capital expenditures of $3.7 million for the six months ended June 30, 2004. These expenditures were primarily related to purchase of property, plant and equipment for our demo lab tools. Financing activities used cash of $6.1 million for the six months ended June 30, 2004 and primarily 27 consists of payment of the short-term borrowings for a net of $6.5 million and payment of long term debt of $133,000 partially offset by proceeds of $347,000 from stock option exercises and the issuance of the shares under the Genus Employee Stock Purchase Plan and proceeds from shareholder note of $187,000. Our primary source of funds at June 30, 2004 consisted of $23.6 million in cash and cash equivalents, $12.2 million in short term investment and $6.7 million of accounts receivable, and our credit line of up to $15 million with Silicon Valley Bank, of which $0 balance was outstanding at June 30, 2004. A summary of our contractual obligations as of June 30, 2004 is as follows (amounts in thousands): Less than After 5 Total 1 year 1-3 years 4-5 years years ------- ---------- ---------- ---------- -------- Citicapital 116 116 0 0 0 Convertible Notes* 6,975 0 6,975 0 0 Operating Leases 16,021 1,707 3,599 3,860 6,855 Purchase Commitments 6,100 6,100 0 0 0 ------- ---------- ---------- ---------- -------- $29,212 $ 7,923 $ 10,574 $ 3,860 $ 6,855 ======= ========== ========== ========== ======== *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% As of June 30, 2004, our cash, and cash equivalents and short-term investments, net of short-term debt, was $35.7 million. We believe that our existing working capital, credit lines and cash from operations will be sufficient to satisfy our cash needs for the next 12 months. Accordingly, these financial statements have been prepared on a going concern basis. The Company has an accumulated deficit of $116 million as of June 30, 2004 and a net loss of $4.6 million during the six months ended June 30, 2004. The Company is in the process of executing its business strategy and has plans to eventually achieve profitable operations on an ongoing basis. 28 Management believes that existing cash, cash generated by operations, and available financing will be sufficient to meet projected working capital, capital expenditure and other cash requirements for the next twelve months. Management cannot provide assurances that its cash, cash equivalents, and short term investments and its future cash flows from operations alone will be sufficient to meet operating requirements and allow the Company to service debt and repay any underlying indebtedness at maturity. If the Company does not achieve anticipated cash flows, we may not be able to meet planned product release schedules and forecast sales objectives. In such event the Company will require additional financing to fund on-going and planned operations and may need to implement expense reduction measures. In the event the Company needs additional financing, there is no assurance that funds would be available to the Company or, if available, under terms that would be acceptable to the Company. Any additional equity financing may be dilutive to shareholders, and any additional debt financing, if available, may involve restrictive covenants. RELATED PARTY TRANSACTIONS Mario M. Rosati, a Director of the Company, is also a member of Wilson Sonsini Goodrich & Rosati, a professional corporation and general counsel of the Company. During the six months ended June 30, 2004 and 2003, the Company paid $105,000 and $280,000, respectively, to Wilson Sonsini Goodrich & Rosati. At June 30 2004, the Company owed approximately $337,000 to Wilson Sonsini Goodrich & Rosati. RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF No. 03-01 provides guidance on recording other-than-temporary impairments of cost method investments and requires additional disclosures for those investments. The recognition and measurement guidance in EITF No. 03-01 should be applied to other-than-temporary impairments evaluations in reporting periods beginning after June 15, 2004. The disclosure requirements are effective for fiscal years ending after June 15, 2004 and are required only for annual periods. The Company does not believe that the adoption of this standard will have a material impact on its consolidated balance sheet or statement of operations. In March 2004, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 03-6, "Participating Securities and the Two-class Method Under FASB Statement No. 128, Earnings Per Share." EITF Issue 29 No. 03-6 addresses a number of questions regarding the computation of earnings per share ("EPS") by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of Computing EPS once it is determined that a security is participating, including how to allocate undistributed Earnings to such a security. This pronouncement is effective for fiscal periods beginning after March 31, 2004. The Company does not believe that the adoption of EITF 03-6 will have a material impact on its computation of earnings per share. SUBSEQUENT EVENTS - On July 2, 2004, we announced the execution of a definitive merger agreement with Aixtron Aktiengesellschaft (the "Merger Agreement"). Upon the closing of the transactions contemplated by the Merger Agreement, Genus will become a wholly-owned subsidiary of Aixtron and each share of Genus common stock will be converted into a right to receive 0.51 Aixtron American Depositary Shares. Each Aixtron American Depositary Share represents an ownership interest in one Aixtron ordinary share. The transaction is expected to close by the end of 2004 and is subject to customary closing conditions, including receipt of Genus and Aixtron shareholder approvals and U.S. regulatory clearance. Aixtron plans to file a registration statement on Form F-4 with the Securities and Exchange Commission, which will include a prospectus of Aixtron and a proxy statement of Genus relating to the proposed transaction. During the second quarter of 2004, we incurred $821,000 in expenses related to the merger. - Genus and its directors have been named as defendants in two putative shareholder class action complaints filed on July 12, 2004 and July 19, 2004 in the California Superior Court in Santa Clara County related to the Merger Agreement and the merger. The complaints allege that the defendants breached their fiduciary duties in connection with the Merger Agreement and seek to enjoin the completion of the merger. The defendants believe that the lawsuits are without merit and intend to contest them vigorously. 30 RISK FACTORS You should carefully consider the following risks before making an investment decision in our common stock. The risks described below are not the only risks that we face. Additional risks and uncertainties not presently known to us, or that are currently deemed immaterial may also impair our business operations. Our business, operating results or financial condition could be harmed by, and the trading price of our common stock could decline due to any of those risks and you may lose all or part of your investment. You should also refer to the other information and our financial statements included in this Quarterly Report on Form 10-Q and the related information incorporated by reference into this Quarterly Report on Form 10-Q. WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY We have experienced losses of $4.6 million during the six months ended June 30, 2004 and $3.5 million, $11.6 million and $6.7 million for twelve month periods ended December 31, 2003, 2002 and 2001, respectively. While we believe our cash position, anticipated cash from operations, and our available credit facilities are 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 2004 and beyond, nor can we provide assurances that we will achieve the sales necessary to avoid further expense reductions in the future. 31 SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE COMPANIES In the six months ended June 30, 2004, Samsung Electronics Company, Ltd., HGST, University of Albany and Western Digital, accounted for 74%, 5%, 3% and 3%, of revenues, respectively. In six month period ended June 30, 2003, Samsung Electronics Company, Ltd., Seagate Technologies, Inc., IBM, and Selete accounted for 71%, 10%, 10%, and 5% of revenues, respectively. In 2003, Samsung Electronics Company, Ltd, Infineon, Seagate Technologies, Inc., HGST (formerly IBM), and Western Digital (which acquired Read-Rite Corporation) accounted for 69%, 8%, 7%, 7%, and 4% of revenues, respectively. In 2002, Samsung Electronics Company, Ltd., Seagate Technologies, Inc., IBM, and Asuka Project accounted for 58%, 24%, 7%, and 6% of revenues, respectively. The semiconductor manufacturing industry generally consists of a limited number of larger companies. Consequently, we expect that a significant portion of our future product sales will continue to be concentrated within a limited number of customers, even though we are making progress in reducing the concentration of our reliance on these customers through our strategy of product and customer diversification. None of our customers have entered into a long-term agreement with us requiring them to purchase our products. In addition, sales to these customers may decrease in the future when they complete their current semiconductor equipment purchasing requirements. If any of our customers were to encounter financial difficulties or become unable to continue to do business with us at or near current levels, our business, results of operations and financial condition could be materially harmed. Customers may delay or cancel orders or may stop doing business with us for a number of reasons including: - customer departures from historical buying patterns; - general market conditions; - economic conditions; or - competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing integrated circuits. WE 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 32 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. 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 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 85% of our total net sales for the six months ended June 30, 2004 versus 87% for the six months ended June 30, 2003. Net sales to our South Korean-based customers accounted for approximately 72% of total net sales for the six months ended June 30, 2004 versus 71% of total net sales for the six months ended June 30, 2003. Export sales accounted for approximately 77%, 72% and 93% of our total net sales in 2003, 2002 and 2001, respectively. Net sales to our South Korean-based customers accounted for approximately 68%, 56% and 73% of total net sales in 2003, 2002 and 2001, respectively. We anticipate that international sales, including sales to South Korea, will continue to account for a significant portion of our net sales. As a result, a significant portion of our net sales will be subject to risks, including: - unexpected changes in foreign law or regulatory requirements; - exchange rate volatility; - tariffs and other barriers; - political and economic instability; - military confrontation; - difficulties in accounts receivable collection; - extended payment terms; - difficulties in managing distributors or representatives; - difficulties in staffing our subsidiaries; - difficulties in managing foreign subsidiary operations; and - potentially adverse tax consequences. Our foreign sales are primarily denominated in U.S. dollars and we do not engage in hedging transactions. As a result, our foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could increase the cost of our products to our customers and could lead these customers to delay or defer their purchasing decisions. 33 Wherever currency devaluations occur abroad, our goods become more expensive for our customers in that country. In addition, difficult economic conditions may limit capital spending by our customers. These circumstances may also affect the ability of our customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional 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 sales to semiconductor manufacturers. The semiconductor industry is cyclical which impacts 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 occurred from year 2000 to around year 2003. 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. 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 34 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. 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 35 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. Consequently, our penetrating these markets and our ability to get additional orders may be limited. 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 36 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. 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 any such 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. 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 or any other intellectual property rights of others, in addition to potential monetary damages and any injunctive relief granted, we may need either to obtain a license to commercialize our products or redesign our products so they do not infringe any third party's intellectual property. 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 or our atomic layer products. In this case our business may not develop as planned, and our results could materially suffer. Under the terms of a Settlement with ASM International, N.V. ("ASMI"), ASMI has the right to pursue an appeal of the District Court's judgments of non-infringement regarding the ALD patents. If the Federal Circuit vacates the existing judgments in favor of Genus Inc. related to the ALD patents based on a change in the District Court's claim construction, Genus will be required to pay ASMI $1 million for the royalty-free licenses to the ALD patents it has been granted under the settlement agreement. ASM filed a notice of appeal with the Federal Circuit on January 14, 2004. ASM served its appeal brief on April 27, 2004. Genus' appeal brief was completed on July 12, 2004. The Company believes that the appeal is without merit and intends to defend the action vigorously. We may in the future be party to litigation arising in the course of our business, including claims that we 37 allegedly infringe third party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. 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 designand process engineers. Competition for such personnel is intense, particularly in the San Francisco bay area where we are based. If we are unable to retain our existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to customers, or fail to meet delivery commitments or experience deterioration in service levels or decreased customer satisfaction. OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL LIABILITY TO US We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations. If we fail to comply with present or future regulations, we could be subject to substantial liability for clean up efforts, property damage, personal injury and fines or suspension or cessation of our operations. We use the following regulated gases at our manufacturing facility in Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen. We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The city of Sunnyvale, California, imposes high environmental standards to businesses operating within the city. Genus has received an operating license from Sunnyvale. Presently, our 38 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 SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US We currently sell and support our thin film products through direct sales and customer support organizations in the United States, Europe, South Korea and Japan and through six independent sales representatives and distributors in the United States, Taiwan, Singapore 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 In 2000, we invested significant resources in Japan by establishing a direct sales organization, Genus-Japan, Inc. To date, we have had limited success in penetrating the Japanese semiconductor industry. 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 our office 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. CHANGES IN ACCOUNTING RULES We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the Securities and Exchange Commission (the "SEC") and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may even retroactively affect previously reported transactions. In particular, changes to FASB guidelines relating to accounting for stock-based compensation will likely increase our compensation expense, could make our net income less predictable in any given reporting period and could change the way we compensate our employees or cause other changes in the way we conduct our business. 39 OUR INTERNAL CONTROL OVER FINANCIAL REPORTING MAY NOT BE CONSIDERED EFFECTIVE RESULTING IN POSSIBLE REGULATORY SANCTIONS AND A DECLINE IN OUR STOCK PRICE Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will be required to furnish a report on our internal control over financial reporting. Such report will contain an assessment by our management of the effectiveness of our internal control over financial reporting (including the disclosure of any material weakness) and a statement that our auditors have attested to and reported on management's evaluation of such internal controls. We are currently in the process of upgrading controls and procedures to be fully compliant with the new, more stringent requirement of Section 404 of the Sarbanes-Oxley Act. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. While we feel that our key controls are currently effective, we face a significant challenge to bring all of our operations up to the [level of documentation, segregation of duty, enterprise resource planning, security process discipline, and support systems] required under the COSO standard for internal control. Although we are currently working towards completion of this effort to meet our year-end deadline, we cannot be certain that all internal control processes will be deemed effective based on COSO standards. Our internal control over financial reporting may not be considered effective if, among others: * any material weaknesses in our internal control over financial reporting exist * we fail to evaluate key controls in a timely fashion * we fail to remediate assessed deficiencies Due to the number of controls to be examined, the complexity of the project, as well as the subjectivity involved in determining effectiveness of controls we cannot be certain that all of our controls will be considered effective by our management or, if considered effective by our management, that our auditors will agree with such assessment. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest that our management's report is fairly stated or they are unable to express an opinion on our management's evaluation, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on our stock price. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A disaster could severely damage our ability to deliver our products to our customers. Our products depend on our ability to maintain and protect our operating equipment and computer systems, which are primarily located in or near our principal headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake fault zone. Although our facilities are designed to be fault tolerant, the systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events. 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. 40 WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND WARRANTS AND SUCH ISSUANCE WILL DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS As of June 30, 2004, we had approximately of 3,833,682 shares of common stock underlying warrants and outstanding employee stock options. Of the stock options, 2,120,452 shares were exercisable as of June 30,2004. There were 118,449 warrants outstanding as of June 30, 2004. All of the shares underlying the warrants are currently exercisable. Some warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that we issue new shares at a price lower than the exercise price of the warrants, where we make a distribution of common stock to our shareholders or effect a reclassification. If all of the shares underlying the exercisable options and warrants were exercised and sold in the public market, the value of your current holdings in Genus may decline because there may not be sufficient demand to purchase the increased number of shares that would be available for sale. THE STOCK PRICE OF GENUS AND GENUS' RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF THE MERGER WITH AIXTRON IS NOT COMPLETED. Completion of the merger with Aixtron is subject to several closing conditions, including obtaining requisite regulatory and shareholder approvals, and Aixtron and Genus may be unable to obtain such approvals on a timely basis or at all. If the merger is not completed, the price of Genus common stock may decline to the extent that the current market price of Genus common stock reflects a market assumption that the merger will be completed. In addition, Genus' operations may be harmed to the extent that investors and others believe that Genus cannot effectively compete in the marketplace without the merger, or there is uncertainty surrounding the future direction of the product offerings and strategy of Genus on a standalone basis. Genus will also be required to pay significant costs incurred in connection with the merger, including legal, accounting and a portion of the financial advisory fees, whether or not the merger is completed. Moreover, under specified circumstances described in the merger agreement, Genus may be required to pay Aixtron a termination fee of $7 million in connection with the termination of the merger agreement. Additionally, in the event that Aixtron terminates the merger agreement under specified circumstances described in the merger agreement, Genus is required by the agreement in principle to grant Aixtron a personal, non-transferable and non-exclusive license or sublicense to certain ALD background technology owned or licensed by Genus and all inventions created pursuant to the agreement in principle based on its ALD background technology. WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR PERCENTAGE OWNERSHIP OF GENUS STOCK On September 7, 2000, the Company's Board of Directors declared a dividend pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar earlier plan that had expired on July 3, 2000. The intended purpose of the Rights Plan is to protect shareholders' rights and to maximize share value in the event of an unfriendly takeover attempt. As of the record date of October 13, 2000, each share of common stock of Genus, Inc. outstanding was granted one right under the new plan. Each right is exercisable only under certain circumstances and upon the occurrence of certain events and permits the holder to purchase from the Company one one-thousandth (0.001) of a share of Series C Participating Preferred Stock at an initial exercise price of forty dollars ($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred stock authorized in connection with the Rights Plan will be used for the exercise of any preferred shares purchase rights in the event that any person or group (the Acquiring Person) acquires beneficial ownership of 15% or more of the outstanding common stock. In such event, the shareholders (other than the Acquiring Person) would receive common stock of the Company having a market value of twice the exercise price. Subject to certain restrictions, the Company may redeem the 41 rights issued under the Rights Plan for $0.001 per right and may amend the Rights Plan without the consent of rights holders. The rights will expire on October 13, 2010, unless redeemed by the Company. In the event that circumstances trigger the transferability and exercisability of rights granted in our Rights Plan, 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 and your failure to exercise your rights under the Rights Plan. In the event of a change of control of the Company, the convertible note holders may elect to receive repayment of the notes at a premium of 10% over face value of the notes. 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. The spare parts and service sales of $5.4 million during the first six months of 2004 was generated by the South Korean subsidiary and are denominated in Korean Won. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, reduce the demand for our products. Reduced demand for our products could materially adversely affect our business, results of operations and financial condition. We have both fixed rate and floating rate interest obligations. Fixed rate obligations may result in interest expenses in excess of market rates if interest rates fall, while floating rate obligations may result in additional interest costs if interest rates rise. 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. DISCLOSURE CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes in our internal control over financial reporting or in other factors during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 42 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Refer to the Sections entitled "Contingencies" and " Subsequent Events" in Item 1, Part I of this Quarterly Report on Form 10-Q for the information required by this Item. Such information is incorporated by reference into this Item 1 of Part II of this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS THE COMPANY'S ANNUAL MEETING OF SHAREHOLDERS WAS HELD ON JUNE 10, 2004 IN SUNNYVALE, CALIFORNIA. PROXIES FOR THE MEETING WERE SOLICITED PURSUANT TO REGULATION 14A. AT THE COMPANY'S ANNUAL MEETING, THE SHAREHOLDERS APPROVED THE FOLLOWING RESOLUTIONS: (1) Election of the following persons as directors. Director In Favor Withheld -------------------- ---------- --------- William W. R. Elder 33,345,168 727,463 G. Frederick Forsyth 31,932,126 2,140,505 Todd S. Myhre 33,530,412 542,219 Mario M. Rosati 33,410,762 661,869 Robert J. Richardson 33,501,442 571,189 (2) Ratification and appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm. For: 33,473,054 Against: 488,809 Abstain: 110,768 Broker Non-Vote: 0 43 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description -------- ----------- 2.1 Agreement and Plan of Merger dated as of July 1, 2004 between Aixtron Aktiengesellschaft and Registrant (1) 3.1 Second Amended and Restated Articles of Incorporation of Registrant as filed June 25, 2003 3.2 By-laws of Registrant, as amended (2) 4.1 Registration Rights Agreement, dated January 17, 2002, as amended, amongst the Registrant and the Investors (3) 4.2 Securities Purchase Agreement dated July 31, 2002 among the Company and the Purchasers signatory thereto. (4) 4.3 Resale Registration Rights Agreement dated August 14, 2002 among the Company and the Purchasers signatory thereto. (4) 4.4 7% Convertible Subordinated Note Due 2005 dated August 14, 2002. (4) 4.5 Stock Purchase and Registration Agreement dated November 7, 2003 (5) 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of 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 the Registrant's Current Report on Form 8-K dated July 2, 2004. (2) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (3) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated January 25, 2002. (4) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated August 20, 2002. (5) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement of Form S-3 filed November 26, 2003. 44 (b) Report on Form 8-K The Company furnished, but did not file, one Current Report on Form 8-K during the fiscal quarter ended June 30, 2004. The report dated April 22, 2004 contained the Company's press release announcing its earnings for the fiscal quarter ended March 31, 2004. 45 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: August 6th, 2004 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) 46

GENUS INC 10-Q