1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER:
------------------------
GENESIS MICROCHIP INCORPORATED
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 TOWN CENTRE BOULEVARD, SUITE 400,
MARKHAM, ONTARIO, CANADA L3R 8G5
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (905) 470-2742
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 Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 [ ]
There were 14,439,249 shares of the registrant's common shares issued and
outstanding as of February 28, 1999.
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GENESIS MICROCHIP INCORPORATED
FORM 10-Q
NINE MONTHS ENDED FEBRUARY 28, 1999
INDEX
ITEM NUMBER PAGE
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at May 31, 1998
and February 28, 1999........................................ [3]
Condensed Consolidated Statements of Operations for the
three months and nine months ended
February 28, 1998 and 1999................................... [4]
Condensed Consolidated Statements of Cash Flows for the nine
months ended February 28, 1998 and 1999...... [5]
Notes To Condensed Consolidated Financial Statements......... [6]
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... [7-15]
Item 3. Quantitative and Qualitative Disclosures About Market Risk... [15]
Part II: Other Information
Item 1. Legal Proceedings............................................ *
Item 2. Changes in Securities........................................ *
Item 3. Defaults Upon Senior Securities.............................. *
Item 4. Submission of Matters to a Vote of Security Holders.......... *
Item 5. Other Information............................................ *
Item 6. Exhibits and Reports on Form 8-K............................. [16]
Exhibit 27 Financial Data Schedule
Signatures...................................................................... [16]
---------------
* No information provided due to inapplicability of item.
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
MAY 31, FEBRUARY 28,
1998 1999
-------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 35,904 $ 36,096
Accounts receivable trade, net of allowance for 2,523 7,261
doubtful accounts of $90 at May 31, 1998 and February
28, 1999
Employee loan receivable 69 --
Investment tax credits receivable 1,735 1,504
Inventory 3,278 7,482
Other current assets 135 990
-------- --------
Total current assets 43,644 53,333
Capital assets 2,080 2,657
Deferred income taxes 1,642 1,642
Other 80 80
-------- --------
Total assets $ 47,446 $ 57,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,498 $ 2,040
Accrued liabilities 1,045 1,880
Current portion of loan payable 97 130
-------- --------
Total current liabilities 2,640 4,050
Long-term liability:
Loan payable 655 597
-------- --------
Total liabilities 3,295 4,647
-------- --------
Shareholders' equity:
Special shares:
Authorized - 1,000,000,000 shares without
par value
Issued and outstanding--no shares at May 31, 1998 and
February 28, 1999 -- --
Common shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - 13,808,132 shares at May 31,
1998 and 14,439,249 shares at February 28, 1999 59,619 61,397
Share purchase loans receivable (124) --
Cumulative other comprehensive income (loss) (94) (94)
Deferred compensation (169) (113)
Deficit (15,081) (8,125)
-------- --------
Total shareholders' equity 44,151 53,065
-------- --------
Total liabilities and shareholders' equity $ 47,446 $ 57,712
======== ========
See accompanying notes to condensed consolidated financial statements.
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GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1999 1998 1999
------- ------- ------- -------
Revenues:
Products $ 4,439 $11,125 $ 9,440 $25,078
Design services and other 337 404 766 1,363
------- ------- ------- -------
Total revenues 4,776 11,529 10,206 26,441
Cost of revenues 1,402 4,892 2,936 10,654
------- ------- ------- -------
Gross profit 3,374 6,637 7,270 15,787
Operating expenses:
Research and development 1,069 1,524 2,522 4,008
Selling, general and administrative 1,258 2,648 3,451 6,232
------- ------- ------- -------
Total operating expenses 2,327 4,172 5,973 10,240
------- ------- ------- -------
Income from operations 1,047 2,465 1,297 5,547
Interest income 60 457 188 1,409
------- ------- ------- -------
Income before income taxes 1,107 2,922 1,485 6,956
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net income $ 1,107 $ 2,922 $ 1,485 $ 6,956
======= ======= ======= =======
Earnings per share:
Basic $ 0.13 $ 0.21 $ 0.18 $ 0.49
Diluted $ 0.10 $ 0.19 $ 0.13 $ 0.46
Weighted average number of common
shares outstanding (in thousands):
Basic 8,800 14,297 8,168 14,131
Diluted 11,600 15,453 11,367 15,040
See accompanying notes to condensed consolidated financial statements.
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GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28,
1998 1999
-------- --------
Cash flows from operating activities:
Net income $ 1,485 $ 6,956
Adjustments to reconcile net income to cash used in
operating activities:
Amortization 449 696
Non-cash compensation expense related to stock options 276 56
Inventory provision 154 --
Change in operating assets and liabilities:
Accounts receivable trade (1,608) (4,748)
Investment tax credits receivable (8) 138
Inventory (1,236) (4,226)
Other current assets (102) (787)
Accounts payable 986 557
Accrued liabilities 421 888
-------- --------
Net cash from (used in) operating activities 817 (470)
-------- --------
Cash flows from investing activities:
Additions to capital assets (762) (1,272)
-------- --------
Cash used in investing activities (762) (1,272)
-------- --------
Cash flows from financing activities:
Proceeds from issue of common shares, net of issue costs 28,102 1,778
Repayment (issuance) of share purchase loans (94) 119
-------- --------
Net cash from financing activities 28,008 1,897
-------- --------
Effect of currency translation on cash balances (126) 37
-------- --------
Increase in cash and cash equivalents 27,937 192
Cash and cash equivalents, beginning of period 3,687 35,904
-------- --------
Cash and cash equivalents, end of period $ 31,624 $ 36,096
======== ========
See accompanying notes to condensed consolidated financial statements.
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GENESIS MICROCHIP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
Genesis Microchip Incorporated according to the rules and regulations of the
Securities and Exchange Commission for interim financial reporting.
Consequently, they do not include all of the information and footnotes required
by United States generally accepted accounting principles for complete financial
statements. The condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended May 31, 1998
included in Genesis' 20-F filing with the Securities and Exchange Commission. In
the opinion of management, the accompanying financial statements reflect all
adjustments, consisting solely of normal, recurring adjustments, that are
necessary for fair presentation of the results for the interim periods
presented. The results of operations for the nine months ended February 28, 1999
are not necessarily indicative of the results to be expected for the full fiscal
year.
2. EARNINGS PER SHARE
Earnings per share are presented in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Basic earnings per common
share are computed by dividing the net income for the period available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share give effect to all potential common
shares issuable during the period. The weighted average number of diluted shares
outstanding is calculated by assuming that any proceeds from potential common
shares are used to repurchase common shares at the average share price in the
period.
Per share information calculated on this basis is as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1999 1998 1999
------- ------- ------- -------
Numerator-
Net income $ 1,107 $ 2,922 $ 1,485 $ 6,956
======= ======= ======= =======
Denominator for basic earnings per share -
Weighted average common shares
outstanding 8,800 14,297 8,168 14,131
======= ======= ======= =======
Basic earnings per share $ 0.13 $ 0.21 $ 0.18 $ 0.49
======= ======= ======= =======
Denominator for diluted earnings per share
Weighted average common shares
outstanding 8,800 14,297 8,168 14,131
Stock options and warrants 2,800 1,156 3,199 909
------- ------- ------- -------
Shares used in computing diluted earnings per share 11,600 15,453 11,367 15,040
======= ======= ======= =======
Diluted earnings per share $ 0.10 $ 0.19 $ 0.13 $ 0.46
======= ======= ======= =======
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," or SFAS 130. SFAS 130 establishes standards
for the reporting and disclosure of comprehensive income and its components in
financial statements. Components of comprehensive income or loss include net
income or loss and all other changes in other non-owner changes in equity such
as the change in the cumulative translation adjustment. Initial application of
SFAS 130 is required for interim periods of fiscal years that begin after
December 15, 1997, although interim period disclosure is limited to reporting a
total for comprehensive income. In accordance with SFAS 130, total comprehensive
income (loss) is $1,107,000 for the three months ended February 28, 1998,
$2,922,000 for the three months ended February 28, 1999, $1,345,000 for the nine
months ended February 28, 1998 and $6,956,000 for the nine months ended
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February 28, 1999. Genesis' total comprehensive income represents net income
plus the change in the cumulative translation equity account for the periods
presented.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosure about Segments of an Enterprise and Related Information," or
SFAS 131. SFAS 131 requires publicly held companies to report financial and
other information about key revenue-producing segments of the entity for which
such information in available and is used by the chief operating decision maker.
Specific information to be reported for individual segments includes profit or
loss, certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided. The impact of adopting SFAS 131, which is effective for
Genesis' 1999 fiscal year, has not been determined.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," or SFAS 133.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The impact of adopting
SFAS 133, which is effective for Genesis' 2001 fiscal year, has not been
determined.
5. SUBSEQUENT EVENT
On January 22, 1999, Genesis signed a definitive agreement to merge with
Paradise Electronics, Inc. Under the terms of the merger 4,500,000 common shares
of Genesis will be exchanged for all of the outstanding capital stock, options
and warrants of Paradise. Genesis expects that the merger will be accounted for
as a pooling of interests after it closes. This transaction had not closed as of
February 28, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This 10-Q contains numerous statements of a forward-looking nature relating to
potential future events or financial performance of Genesis. Genesis' actual
future results may differ significantly from those forward-looking statements.
You should consider the various factors identified under the caption, "Factors
that may affect future operating results," in evaluating those statements.
OVERVIEW
Genesis designs, develops and markets integrated circuits, or chips, that
process digital video and graphic images. These chips translate source video,
graphics and digital images in order to be able to show them on various display
systems, such as flat panel computer monitors or digital televisions. Genesis
does not manufacture its chip, and instead procures them from third party
manufacturers, such as IBM Corporation and United Semiconductor Corporation.
Applications for Genesis' products include:
- - flat panel computer monitors,
- - digital projection systems,
- - advanced image processing markets such as video editing, medical and
security systems, and
- - emerging consumer electronics applications, such as digital television and
DVD.
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RESULTS OF OPERATIONS
The following table shows unaudited statement of operations data for the
three-month and nine-month periods ended February 28, 1998 and 1999, expressed
as a percentage of total revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1999 1998 1999
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 29.4% 42.4% 28.8% 40.3%
------ ------ ------ ------
Gross profit 70.6% 57.6% 71.2% 59.7%
------ ------ ------ ------
Operating expenses:
Research and development 22.4% 13.2% 24.7% 15.2%
Selling, general and administrative 26.3% 23.0% 33.8% 23.6%
------ ------ ------ ------
Total operating expenses 48.7% 36.2% 58.5% 38.8%
------ ------ ------ ------
Income from operations 21.9% 21.4% 12.7% 20.9%
Interest income 1.3% 4.0% 1.8% 5.3%
------ ------ ------ ------
Income before income taxes 23.2% 25.4% 14.5% 26.2%
Provision for income taxes 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------
Net income 23.2% 25.4% 14.5% 26.2%
====== ====== ====== ======
TOTAL REVENUES. Total revenues for the nine months ended February 28, 1999
increased to $26.4 million from $10.2 million in the same period of 1998, an
increase of 159.1%. For the three months ended February 28, 1999, total revenues
increased by 141.4% to $11.5 million from $4.8 million in the three months ended
February 28, 1998. The increases in total revenues primarily result from
increased demand for Genesis' products in the flat panel computer monitor
market.
Revenues from the flat panel monitor market segment increased to $16.2 million
or 61.2% of total revenues in the nine months ended February 28, 1999 from $3.1
million or 30.0% of total revenues in the nine months ended February 28, 1998.
For the three months ended February 28, 1999, revenues from this segment
increased to $7.4 million or 64% of total revenues from $1.4 million or 29% of
total revenues in the three months ended February 28, 1998. These increases were
a result of both increasing share in that market as well as overall growth of
the market segment. As the share of any market increases, the ability to grow in
that market segment will be limited by the overall growth rate of the market
segment.
The overall growth of the flat panel monitor market segment has been positively
impacted by significant reductions in retail selling prices of the end products,
which have declined from approximately $2,500 in early calendar 1998 to under
$1,000 in early calendar 1999. This decline was primarily as a result of
reductions in the cost of LCD panels, caused by improved manufacturing yields
for the panels and by the devaluation of certain currencies in the countries,
principally in Asia, where LCD panels are manufactured. It is unlikely that this
rate of decline in retail selling prices will continue. There have been reports
of a lack of current capacity to manufacture a sufficient number of LCD panels
to meet the demand for flat panel computer monitors. A lack of supply of LCD
panels could reduce the rate of growth of the flat panel monitor market by
limiting product availability, or by causing the retail price of flat panel
monitors to increase such that demand would be reduced.
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Genesis began shipping resale products called analog to digital converters, or
ADC's, in fiscal 1999. These products were sold to flat panel monitor customers
who had difficulty in purchasing them directly from the manufacturer. Genesis
arranged to procure and supply these ADC's for its customers in order to assist
them into production so that they would also purchase Genesis' proprietary
parts. Genesis intends to discontinue the sales of these ADC's. For the nine
months ended February 28, 1999, total revenue from sales of ADC's was $610,000.
Genesis has also indicated that several other proprietary products will be
discontinued. These discontinued proprietary products are being replaced by new
proprietary products, and no material impact on revenues is expected as a result
of this replacement.
Revenues from Genesis' second largest market segment, the projection systems
market, decreased to $5.5 million or 21.0% of total revenues in the nine months
ended February 28, 1999, from $5.7 million or 55.4% of total revenues in the
nine months ended February 28, 1998. For the three months ended February 28,
1999, revenues from this segment were $2.5 million or 22% of total revenues,
compared with $2.7 million or 57% of total revenues for the three months ended
February 28, 1998. These declines were primarily a result of reduction of
inventory levels in the distribution channels of Genesis' customers.
As a result of the factors described above, Genesis does not expect to sustain
the past rates of revenue growth in future periods.
GROSS PROFIT. Gross profit for the nine months ended February 28, 1999 increased
to $15.8 million from $7.3 million in the same period in 1998, representing
59.7% of total revenues in the 1999 period and 71.2% of total revenues in the
1998 period. For the three months ended February 28, 1999, gross profit
increased to $6.6 million from $3.4 million in the same period in 1998,
representing 57.6% of total revenues in the 1999 period and 70.6% of total
revenues in the three months ended February 28, 1998. The decreases in gross
profit percentages were attributable both to higher sales volumes coupled with
lower average selling prices, and to a less favorable mix of products sold. This
reduction in average selling prices accounted for a decline in the gross profit
percentage of 6.4% between the comparable nine-month periods and 6.6% between
the comparable three-month periods. The change in product mix accounted for a
decline in the gross profit percentage of 5.1% between the comparable nine-month
periods and 6.4% between the comparable three-month periods.
In the periods ended February 28, 1999, Genesis began increasing shipments of
its gmFC1 product. This product has a lower gross profit percentage than
Genesis' other products. Genesis also began to sell lower margin resale ADC
products in the 1999 fiscal year. As a result, Genesis' overall gross profit
percentage declined in the periods ended February 28, 1999. A new lower-cost
product, the gmFC1A, has been introduced to replace the gmFC1. Genesis also
expects to discontinue sales of the ADC products. In addition, Genesis has
recently introduced a new lower-cost gmZ2 product. The gmZ2 is expected to
replace the gmZ1 product. As a result of these factors, Genesis believes that
overall gross margins will not continue the same rate of decline in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with research and development personnel, development tools and
prototyping costs, less investment tax credits and government assistance.
Research and development expenses for the nine months ended February 28, 1999
increased to $4.0 million from $2.5 million in the same period in the previous
year. These expenses represented 15.2% of total revenues in the 1999 period and
24.7% of total revenues in the 1998 period. For the three months ended February
28, 1999, research and development expenses were $1.5 million, or 13.2% of total
revenues, compared with $1.1 million, or 22.4% of total revenues, for the three
months ended February 28, 1998. The increase in absolute dollars in periods
ended February 28, 1999 over the same periods in 1998 reflects greater personnel
costs associated with an expansion in Genesis' research and development
activities and increased prototype and pre-production expenses of new products.
Genesis expects to continue to make substantial investments in its research and
development activities and anticipates that research and development expenses
will continue to increase in absolute dollars. The decline in research and
development expenses as a percentage of total revenues resulted from the rate of
growth in total revenues exceeding the rate of growth of research and
development expenses.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist of personnel and related overhead costs for selling, marketing,
customer support, finance, human resources and general management functions and
of commissions paid to regional sales representatives. Selling, general and
administrative expenses were $6.2 million in the nine months ended February 28,
1999 and $3.5 million in the same period in the previous year. These expenses
represented 23.6% of total revenues in the 1999 period and 33.8 % of total
revenues in the 1998 period. For the three months ended February 28, 1999,
selling, general and administrative expenses were $2.6 million, or 23.0% of
revenues, compared with $1.3 million, or 26.3% of revenues in the three months
ended February 28, 1998. The dollar increases in selling, general and
administrative expenses reflects increased personnel costs related to increased
selling, administrative and customer support activities and to increased
commissions associated with higher sales volumes. Genesis expects selling,
general and administrative expenses to increase in absolute dollars due to the
addition of administrative, marketing, selling and customer support personnel
and due to continued expansion of Genesis' international operations. The decline
in selling, general and administrative expenses as a percentage of total
revenues resulted from the rate of growth in total revenues exceeding the rate
of growth of selling, general and administrative expenses.
INTEREST INCOME. Interest income in the nine months ended February 28, 1999 was
$1.4 million, compared with $188,000 in the same period in the previous year.
Interest income for the three months ended February 29, 1999 was $457,000
compared to $60,000 in the same period in the previous year. The increase was
primarily due to increases in interest income on the additional balances of cash
and cash equivalents held by Genesis from its initial public offering at the end
of February 1998. Future interest income will depend on the amount of funds
available to invest and on future interest rates.
PROVISION FOR INCOME TAXES. There was no provision for income taxes in the
periods ended February 28, 1999 or 1998 because Genesis had investment tax
credits, non-capital losses or unclaimed research and development expenditures
available to reduce taxes payable or taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $36.1 million at February 28, 1999. Net cash used
in operations was $470,000 for the nine months ended February 28, 1999. Net cash
used in operations in the nine months ended February 28, 1999 was primarily a
result of cash invested in accounts receivable and inventory exceeding cash
generated from the net income and from increases in accounts payable and accrued
liabilities. Increases in accounts receivable and inventory are generally a
result of growth in the business. Increased revenues result in a need to grant
larger amounts of credit to customers and therefore to carry larger accounts
receivable balances. This growth also results in a need to stock increased
quantities of products to meet greater demand. Increases in accounts payable and
accrued liabilities are a result of increases in operating expenses and of
increased purchases of Genesis' products from manufacturers.
Net cash used in investing activities was approximately $1.3 million in the nine
months ended February 28, 1999 for the purchase of capital assets. Continued
expansion of Genesis' business may require higher levels of capital equipment
purchases. Genesis has no significant capital spending or purchase commitments
other than purchase commitments made in the ordinary course of business.
Net cash provided by financing activities was $1.9 million in the nine months
ended February 28, 1999. This was primarily a result of funds received for the
purchase of shares under Genesis' share purchase and stock option plans.
Genesis believes that its existing cash balances together with any cash
generated from its operations will be sufficient to meet its capital
requirements on a short-term basis.
Longer term, Genesis may be required to raise additional capital to fund
investments in operating assets such as accounts receivable or inventory to
assist in the growth of its business, or for capital assets such as land,
buildings or equipment. Because Genesis does not have its own semiconductor
manufacturing facility, it may be required to make deposits to secure supply in
the event there is a shortage of
11
manufacturing capacity in the future. Although Genesis currently has no plans to
raise additional funds for such uses, Genesis could be required, or could elect,
to seek to raise additional capital in the future.In addition, from time to time
Genesis evaluates acquisitions of businesses, products or technologies that
complement Genesis' business. Any such transactions, if consummated, may use a
portion of Genesis' working capital or require the issuance of equity securities
that may result in further dilution to Genesis' shareholders.
YEAR 2000 COMPLIANCE
Many businesses face issues relating to the inability of some computer systems
to correctly recognize dates starting January 1, 2000. Genesis has evaluated its
products and believes that they will function in the year 2000. Although
Genesis' management does not expect year 2000 compliance to have a material
impact on its business or future results of operations, Genesis cannot assure
you that there will not be interruptions of operations or other limitations of
system functionality. Genesis cannot be sure that it will not incur significant
costs to avoid such interruptions or limitations. In addition, Genesis currently
does not have complete information about the year 2000 compliance status of all
of its suppliers and customers. In the event that any of Genesis' significant
suppliers or customers do not successfully achieve year 2000 compliance,
Genesis' financial condition or results of operations could be adversely
affected.
Genesis uses a number of computer software programs, including operating
systems, financial and administrative systems and other information technology,
or IT systems, and a number of non-IT systems, typically embedded technologies,
in its internal operations. To the extent that Genesis' IT and non-IT systems
are unable to appropriately interpret the upcoming calendar year 2000,
modification or replacement of such systems will be necessary. Genesis has
established a committee to identify the IT and non-IT systems that are not year
2000 compliant. The committee will also review the IT and non-IT systems of
Genesis' suppliers and major customers to determine whether or not their systems
are year 2000 compliant. Genesis has been communicating with its suppliers and
major customers regarding this issue. The committee is currently reviewing
potential year 2000 issues and their impact, as well as investigating possible
methods of remediation. Genesis intends to implement remediation programs by the
middle of 1999 and to be fully year 2000 compliant shortly thereafter. Genesis'
costs to date related to year 2000 compliance have not been material. Although
the total estimated costs of remediation have not yet been determined, Genesis
anticipates that any future costs will also not be material. Genesis is not yet
certain as to what a reasonably likely worst case year 2000 scenario will be.
This issue will be reviewed by Genesis' year 2000 committee. Consequently,
Genesis has not yet established a contingency plan to handle such a scenario,
although it plans to by mid-1999.
Given the information known at this time about Genesis' systems, coupled with
Genesis' ongoing efforts to upgrade or replace critical business systems as
necessary, it is currently anticipated that known year 2000 compliance costs
will not have a material adverse impact on Genesis' business, financial
condition and results of operations. Genesis is still analyzing its IT and
non-IT systems, as well as those of its suppliers and major customers.
Consequently, we cannot assure you that that the costs necessary to update or
replace these systems or the potential systems or business interruptions that
could occur will not have a material adverse effect on Genesis' business,
financial condition and results of operations.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The following factors may have an impact on Genesis' business:
GENESIS SUBCONTRACTS ITS MANUFACTURING, ASSEMBLY AND TEST OPERATIONS.
Genesis does not have its own fabrication facilities, assembly or testing
operations. Instead, it relies on others to fabricate, assemble and test all of
its products. Genesis has its products manufactured by IBM, United Semiconductor
Corporation, Chip Express Corporation and Samsung Semiconductor, Inc. No single
product is purchased from more than one supplier. There are many risks
associated with Genesis' dependence upon outside manufacturing, including:
- - reduced control over manufacturing and delivery schedules of products,
- - reduced control over quality assurance,
- - difficulty of management of manufacturing costs and quantities,
- - potential lack of adequate capacity during periods of excess demand, and
- - potential unauthorized use of intellectual property.
Genesis depends upon outside manufacturers to fabricate silicon wafers on which
its integrated circuits are imprinted. These wafers must be of acceptable
quality and in sufficient quantity and the manufacturers must deliver them to
assembly and testing subcontractors on time for packaging into final products.
Genesis has at times experienced delivery delays and long manufacturing lead
times. Genesis can not assure you that its manufacturers will devote adequate
resources to the production its products or deliver sufficient quantities of
finished products on time or at an acceptable cost. The lead time necessary to
establish a strategic relationship with a new manufacturing partner is
considerable Genesis would be unable to readily obtain an alternative source of
supply for any of its products if this proves necessary. The occurrence of these
manufacturing difficulties could have a material and adverse effect on Genesis'
business, financial condition and results of operations.
GENESIS FACES INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY
Genesis competes with both large companies and start-up companies, including
Macronix International Co., Ltd., Philips Semiconductors, a division of Philips
Electronics N.V., Silicon Image, Inc., Arithmos, Inc., Pixelworks Inc., and Sage
Inc. Genesis anticipates that as the markets for its products develop, its
current customers may develop their own products and competition from
diversified electronic and semiconductor companies will intensify. Some
competitors are likely to include companies with greater financial and other
resources than Genesis. Increased competition could have a material and adverse
effect on Genesis' business, financial condition and results of operations by,
for example, increasing pressure on its profit margins or causing it to lose
customers.
GENESIS' SUCCESS WILL DEPEND ON THE GROWTH OF THE FLAT PANEL COMPUTER MONITOR
MARKET AND OTHER CONSUMER ELECTRONICS MARKETS
Genesis' ability to generate increased revenues will depend on the growth of the
flat panel computer monitor market. This market is at an early stage of
development. Genesis' continued growth will also depend upon emerging consumer
electronics markets, such as home theater, DVD, flat screen and digital
television, and HDTV. The potential size of these markets and the timing of
their development is uncertain and will depend in particular upon:
- - a significant reduction in the costs of products in the respective markets,
- - the availability of components required by such products, and
- - the emergence of competing technologies.
13
For nine months ended February 28, 1999, 61% of Genesis' revenues were derived
from sales to customers in the flat panel computer monitor market. This and
other potential markets may not develop as expected, which would have a material
and adverse effect on Genesis' business, financial condition and results of
operations.
GENESIS MUST DEVELOP NEW PRODUCTS AND ENHANCE ITS EXISTING PRODUCTS TO REACT TO
RAPID TECHNOLOGICAL CHANGE
Genesis must develop new products and enhance its existing products with
improved technologies to meet rapidly evolving customer requirements and
industry standards. Genesis needs to design products for customers that
continually require higher functionality at lower costs. This requires Genesis
to continue to add features to its products and to include all of these on a
single chip. The development process for these advances is lengthy and will
require Genesis to accurately anticipate technological innovations and market
trends. Genesis may be unable to successfully develop new products or product
enhancements. Any new products or product enhancements may not be accepted in
new or existing markets. If Genesis fails to develop and introduce new products
or product enhancements, that failure will have a material and adverse effect on
its business, financial condition and results of operations.
GENESIS' PRODUCTS MAY NOT BE ACCEPTED IN THE FLAT PANEL COMPUTER MONITOR MARKET
AND OTHER CONSUMER ELECTRONICS MARKETS
Genesis' success in the flat panel computer monitor market, as well as the
markets for home theater, DVD, flat panel and digital television, and HDTV will
depend upon the extent to which manufacturers of those products incorporate its
integrated circuits into their products. Genesis has only recently begun
shipping its products in quantity to manufacturers of flat panel computer
monitors, and has only recently begun shipping limited commercial quantities of
products to manufacturers in some of the other developing consumer electronics
markets. Genesis' ability to sell products in these markets will depend upon
demand for the functionality provided by its products. For example, if, as has
been proposed by some computer industry participants, the image processing
functions performed by Genesis' products are incorporated within the computer
rather than in the flat panel computer monitor, Genesis would be subject to
direct competition from graphics integrated circuit suppliers, many of which
have resources greater than those of Genesis.
The failure of Genesis' products to be accepted in the flat panel computer
monitor market in particular would have a material and adverse effect on its
business, financial condition and results of operations.
A LARGE PERCENTAGE OF GENESIS' REVENUES COME FROM SALES TO A SMALL NUMBER OF
LARGE CUSTOMERS
The markets for Genesis' products are highly concentrated. Genesis' sales are
derived from a limited number of customers. In particular, sales by Genesis to
Samsung Electronics Co., Ltd. accounted for 20% of its total revenues for the
nine months ended February 28, 1999. Genesis expects that a small number of
customers will continue to account for a large amount of its total revenues. All
of Genesis' sales are made on the basis of purchase orders rather than long-term
agreements so that any customer could cease purchasing products at any time
without penalty. For example, In Focus Systems, Inc., Genesis' largest customer
in its second largest market segment, projection systems, ceased placing orders
in May 1998 in order to reduce its inventory levels. This would have had a
significant impact on the first quarter of fiscal 1999 without the offsetting
growth in the flat panel computer monitor market. The decision by any large
customer to decrease or cease using Genesis' products would have a material and
adverse effect on its business, financial condition and results of operations.
14
GENESIS' BUSINESS DEPENDS ON RELATIONSHIP WITH INDUSTRY LEADERS THAT ARE
NON-BINDING
Genesis works closely with industry leaders in the markets it serves to design
products with improved performance, cost and functionality. Genesis typically
commits significant research and development resources to such design
activities. Genesis often diverts financial and personnel resources from other
development projects without entering into agreements under which these industry
leaders are obligated to continue the collaborative design project or to
purchase the resulting products. The failure of an industry leader to complete
development of a collaborative design project or to purchase the products
resulting from such projects would have an immediate and serious impact on
Genesis' business, financial condition and results of operations. Genesis'
inability to establish such relationships in the future would, similarly, have a
material and adverse effect on its business, financial condition and results of
operations.
A LARGE PERCENTAGE OF GENESIS' REVENUES WILL COME FROM SALES OUTSIDE OF NORTH
AMERICA WHICH CREATES ADDITIONAL BUSINESS RISKS
A large portion of Genesis' revenues will come from sales to customers outside
of North America, particularly to equipment manufacturers located in Japan and
other parts of Asia. For the nine months ended February 28, 1999, sales to
regions outside of North America amounted to 72.3% of total revenues, compared
to 46.5% in the same period in the previous year. These sales are subject to
numerous risks, including:
- - fluctuations in currency exchange rates, tariffs, import restrictions and
other trade barriers,
- - unexpected changes in regulatory requirements,
- - longer payment periods,
- - potentially adverse tax consequences,
- - export license requirements,
- - political and economic instability, and
- - unexpected changes in diplomatic and trade relationships.
Because Genesis' sales are denominated in United States dollars, increases in
the value of the United States dollar could increase the price of its products
in non-U.S. markets and make its products more expensive than competitors'
products that are denominated in local currencies. Some of Genesis' accounts
receivable that result from sales outside of North America have been insured
against loss. Insurance coverage may not be available to Genesis at commercially
reasonable terms in the future, if at all.
GENESIS MAY NOT BE ABLE TO ATTRACT OR RETAIN THE KEY PERSONNEL IT NEEDS TO
SUCCEED
Competition for qualified management, engineering and technical employees is
intense. As a result, employees could leave with little or no prior notice.
Genesis cannot assure you that it will be able to attract and retain employees.
If Genesis is unable to attract and retain key employees, its business,
financial condition and results of operations would be materially and adversely
affected.
15
OTHER FACTORS TO CONSIDER
The following factors should also be considered:
IT MAY BE DIFFICULT FOR SHAREHOLDERS TO ENFORCE CIVIL LIABILITIES UNDER THE
UNITED STATES FEDERAL SECURITIES LAWS BECAUSE GENESIS IS INCORPORATED IN CANADA
The enforcement by shareholders of civil liabilities under the federal
securities laws of the United States may be adversely affected because:
- - Genesis is incorporated under the laws of Nova Scotia, Canada,
- - Some or all of its directors and officers are residents of Canada
- - Some of the experts named in the registration statement are residents of
Canada, and
- - A substantial portion of Genesis' assets are located outside the United
States.
As a result, it may be difficult for holders of Genesis common shares to effect
service of a legal claim within the United States upon directors and officers of
Genesis or other individuals who are not residents of the United States. It may
also be difficult to satisfy any judgements of courts of the United States based
upon civil liabilities under the federal securities laws of the United States.
GENESIS' ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRERS
The authorized capital of Genesis consists of 1,000,000,000 special shares
issuable in one or more series and 1,000,000,000 common shares. The Genesis
board of directors has the authority to issue special shares and to determine
the price, designation, rights, preferences, privileges, restrictions and
conditions of these shares without any further vote or action by the
shareholders, including voting and dividend rights. The rights of the holders of
Genesis common shares will be subject to, and may be adversely affected by, the
rights of holders of any special shares that may be issued in the future. The
issuance of special shares could make it more difficult for a third party to
acquire a majority of the outstanding voting shares of Genesis. Genesis has no
present plans to issue any special shares. Genesis has adopted a shareholder
rights plan with respect to its common shares which is specifically designed to
make an unsolicited, non-negotiated takeover attempt more difficult. Genesis
also has a board of directors with three-year staggered terms, which may, in
certain circumstances, make an unsolicited, non-negotiated takeover attempt more
difficult.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Genesis carries out a significant portion of its operations in Canada. Although
virtually all revenues and costs of sales are denominated in U.S. dollars, a
substantial portion of Genesis' operating expenses are denominated in Canadian
dollars. Accordingly, Genesis' operating results are affected by changes in the
exchange rate between the Canadian and U.S. dollars. Any future strengthening of
the Canadian dollar against the U.S. dollar could negatively impact Genesis'
operating results by increasing its operating expenses. Genesis does not
presently engage in any hedging or other transactions intended to manage the
risks relating to foreign currency exchange rate fluctuations, other than
natural hedges that occur as a result of holding both Canadian dollar
denominated assets and Canadian dollar denominated liabilities. Genesis may in
the future undertake hedging or other such transactions if management determines
that it is necessary to offset exchange rate risks. To date, net exchange gains
and losses on Canadian dollar denominated assets and liabilities have not been
material.
PART II: OTHER INFORMATION
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT 27 FINANCIAL DATA SCHEDULE
b) REPORTS ON FORM 8-K
None.
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.
GENESIS MICROCHIP INCORPORATED
By: /s/ I. ERIC ERDMAN
------------------------------------
I. Eric Erdman
Vice President, Finance,
Chief Financial Officer & Secretary
(Duly Authorized Officer &
Principal Financial Officer)
Date: April 14, 1999
17
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule