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 DECEMBER 31, 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:
000-29592
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.)
165 COMMERCE VALLEY DRIVE WEST
THORNHILL, ONTARIO, CANADA L3T 7V8
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (905) 889-5400
Former name, former address and former fiscal year if
changed since last report.
Former address: N/A
Former Fiscal Year: N/A
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 18,935,620 shares of the registrant's common shares issued
and outstanding as of December 31, 1999.
GENESIS MICROCHIP INCORPORATED
FORM 10-Q
THREE MONTHS ENDED DECEMBER 31, 1999
Index
Item Number Page
- ----------- ----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1999 1
Condensed Consolidated Statements of Operations for the three and nine month periods ended December
31, 1999 and November 30, 1998 2
Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended
December 31, 1999 and November 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the nine month periods ended December 31, 1999
and November 30, 1998 3
Notes To Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II: Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information *
Item 6. Exhibit 27 Financial Data Schedule 13
Exhibits and Reports on Form 8-K 13
Signature 13
* No information has been provided because this item is not applicable.
-i-
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands of U.S. dollars)
(unaudited)
ASSETS
December March 31,
31, 1999 1999
-------------------------
Current assets:
Cash and cash equivalents $ 43,962 $ 38,479
Accounts receivable trade, net of allowance for
doubtful accounts of $228 at December 31 and $124 at
March 31 6,519 9,413
Income taxes recoverable 147 1,221
Inventory 5,775 6,963
Other 789 2,958
-------------------------
Total current assets 57,192 59,034
Capital assets 8,783 3,871
Deferred income taxes 3,690 1,830
Other 1,180 80
-------------------------
Total assets $ 70,845 $ 64,815
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ - $ 145
Accounts payable 3,789 2,428
Accrued liabilities 3,022 4,865
Current portion of loans payable 93 1,465
-------------------------
Total current liabilities 6,904 8,903
Long-term liabilities:
Loans payable 500 504
-------------------------
Total liabilities 7,404 9,407
Shareholders' equity:
Special shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - no shares at December 31 or
March 31
Common shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - 18,935,620 shares at December 31 70,950 68,447
and 18,345,093 shares at March 31
Additional paid in capital 1,293 1,293
Cumulative other comprehensive loss (94) (94)
Deferred compensation (295) (326)
Deficit (8,413) (13,912)
-------------------------
Total shareholders' equity 63,441 55,408
-------------------------
Total liabilities and shareholders' equity $ 70,845 $ 64,815
=========================
See accompanying notes to condensed consolidated financial statements.
-1-
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
December November December November
31, 1999 30, 1998 31, 1999 30, 1998
-----------------------------------------------------
Revenues $ 10,059 $ 10,627 $ 42,727 $ 23,069
Cost of revenues 3,263 4,315 13,529 8,418
-----------------------------------------------------
Gross profit 6,796 6,312 29,198 14,651
Operating expenses:
Research and development 4,082 2,412 11,223 6,792
Selling, general and 2,991 2,889 9,376 6,836
administrative
Merger-related costs - - 3,455 -
-----------------------------------------------------
Total operating expenses 7,073 5,301 24,054 13,628
-----------------------------------------------------
Income (loss) from operations (277) 1,011 5,144 1,023
Interest income 550 503 1,482 1,436
-----------------------------------------------------
Income before income taxes 273 1,514 6,626 2,459
Provision for income taxes 73 - 1,127 -
-----------------------------------------------------
Net income $ 200 $ 1,514 $ 5,499 $ 2,459
=====================================================
Earnings per share:
Basic $ 0.01 $ 0.09 $ 0.29 $ 0.15
Diluted $ 0.01 $ 0.08 $ 0.28 $ 0.13
Weighted average number of common
shares outstanding (in thousands):
Basic 18,923 16,390 18,669 16,135
Diluted 19,807 19,042 19,878 18,650
See accompanying notes to condensed consolidated financial statements.
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands of U.S. dollars)
(unaudited)
Three Months Ended Nine Months Ended
December November December November
31, 1999 30, 1998 31, 1999 30, 1998
-----------------------------------------------------
Net income $200 $1,514 $5,499 $2,459
Cumulative translation adjustment - - - 7
-----------------------------------------------------
Comprehensive income $200 $1,514 $5,499 $2,466
=====================================================
See accompanying notes to condensed consolidated financial statements.
-2-
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands of U.S. dollars)
(unaudited)
Nine Months Ended
December November
31, 1999 30, 1998
---------------------------
Cash flows from operating activities:
Net income $ 5,499 $ 2,459
Adjustments to reconcile net income to cash
used in operating activities:
Amortization 1,973 854
Stock compensation expense 31 57
Inventory provision 550 -
Deferred income taxes (1,860) -
Change in operating assets and liabilities:
Accounts receivable trade 2,895 (4,440)
Income taxes receivable 1,333 74
Inventory 637 (3,385)
Other current assets 2,166 (356)
Accounts payable 1,354 1,730
Accrued liabilities (2,157) 789
--------------------------
Net cash from (used in) operating activities 12,421 (2,218)
Cash flows from investing activities:
Additions to capital assets (6,884) (1,972)
Additions to other assets (1,100) -
--------------------------
Cash used in investing activities (7,984) (1,972)
Cash flows from financing activities:
Proceeds from issue of common shares, net of
issue costs 2,507 5,250
Proceeds (repayment) of bank indebtedness - net (145) 753
Repayment of loans payable (1,371) (110)
--------------------------
Net cash from financing activities 991 5,893
Effect of currency translation on cash balances 55 75
--------------------------
Increase in cash and cash equivalents 5,483 1,778
Cash and cash equivalents, beginning of period 38,479 35,385
--------------------------
Cash and cash equivalents, end of period $43,962 $37,163
==========================
See accompanying notes to condensed consolidated financial statements.
-3-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
We have prepared the accompanying unaudited condensed financial statements
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. These condensed
financial statements should be read in conjunction with our financial statements
and notes thereto for the ten months ended March 31, 1999 that are included in
our most recent 10-K filing with the Securities and Exchange Commission. We
believe that 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 periods ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full fiscal year.
2. Comparative figures
On May 28, 1999, we changed our fiscal year to March 31 from May 31, effective
March 31, 1999. As a result, our unaudited condensed statements of operations,
of comprehensive income and of cash flows compare the current three and nine
month periods ended December 31, 1999 with the closest corresponding periods of
the previous year, which are the three and nine month periods ended November 30,
1998.
3. Earnings per share
Basic earnings per common share are computed by dividing the net income in a
period by the weighted average number of common shares outstanding during that
period. Diluted earnings per share are calculated in order to 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, such as stock options, 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
December November December November
31, 1999 30, 1998 31, 1999 30, 1998
--------------------------------------------------------------
Numerator:
Net income $ 200 $ 1,514 $ 5,499 $ 2,459
=============================================================
Denominator for basic earnings per share-
Weighted average common shares outstanding 18,923 16,390 18,669 16,135
=============================================================
Basic earnings per share $ 0.01 $ 0.09 $ 0.29 $ 0.15
=============================================================
Denominator for diluted earnings per share-
Weighted average common shares outstanding 18,923 16,390 18,669 16,135
Stock options and warrants 884 2,652 1,209 2,515
-------------------------------------------------------------
Shares used in computing diluted earnings per share 19,807 19,042 19,878 18,650
=============================================================
Diluted earnings per share $ 0.01 $ 0.08 $ 0.28 $ 0.13
=============================================================
-4-
4. Segmented information
We operate and track our results in one operating segment. We design, develop
and market integrated circuits that manipulate and process digital images.
Revenues from our unaffiliated customers by geographic region were as follows
(in thousands):
Three Months Ended Nine Months Ended
December November December November
31, 1999 30, 1998 31, 1999 30, 1998
--------------------------------------------------------------
United States $ 2,663 $ 1,714 $ 9,600 $ 7,447
Japan and Asia 7,001 8,470 $32,057 14,461
Canada 95 70 279 194
Rest of World 300 373 791 967
-------------------------------------------------------------
$10,059 $10,627 $42,727 $23,069
=============================================================
Net long-lived assets by country of location were as follows (in thousands):
December March 31,
31, 1999 1999
------------------------
United States $ 1,392 $1,291
Canada 7,391 2,580
------------------------
$ 8,783 $3,871
========================
The following table shows the percentage of our revenue in each period that was
derived from customers who individually accounted for more than 10% of revenue
in that period:
Three Months Ended Nine Months Ended
December November December November
31, 1999 30, 1998 31, 1999 30, 1998
--------------------------------------------------------------
Customer A 15% 22% 11% 14%
Customer B 12% 12%
At December 31, 1999 one customer accounted for 20% of accounts receivable
trade. At March 31, 1999, one customer accounted for 21% of accounts receivable
trade and a second customer accounted for 11% of accounts receivable trade.
5. Recent accounting pronouncements
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 to our
financial statements of adopting SFAS 133, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, has not been determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains numerous statements of a forward-
looking nature relating to potential future events or to our future financial
performance. Our 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.
-5-
Overview
We design, develop and market integrated circuits, or chips, that process
digital video and graphic images. Our 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. We do not manufacture
our chips. We procure them from third party manufacturers, such as IBM
Corporation, Taiwan Semiconductor Manufacturing Corporation and United
Semiconductor Corporation.
Applications for our products include:
. flat panel computer monitors,
. digital CRT computer monitors,
. digital projection systems,
. advanced image processing applications such as video editing, medical and
security systems, and
. emerging consumer electronics applications, such as digital television and
DVD.
Results of operations
The following table shows unaudited statement of operations data for the three
and nine month periods ended December 31, 1999 and November 30, 1998, expressed
as a percentage of revenues:
Three Months Ended Nine Months Ended
December November December November
31, 1999 30, 1998 31, 1999 30, 1998
--------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 32.4 40.6 31.7 36.5
--------------------------------------------------------------
Gross profit 67.6 59.4 68.3 63.5
Operating expenses:
Research and development 40.6 22.7 26.3 29.4
Selling, general and administrative 29.7 27.2 21.9 29.6
Merger-related costs 0.0 0.0 8.1 0.0
--------------------------------------------------------------
Total operating expenses 70.3 49.9 56.3 59.0
--------------------------------------------------------------
Income (loss) from operations (2.7) 9.5 12.0 4.5
Interest income 5.5 4.7 3.5 6.2
--------------------------------------------------------------
Income before income taxes 2.8 14.2 15.5 10.7
Provision for income taxes 0.7 0.0 2.6 0.0
--------------------------------------------------------------
Net income 2.1% 14.2% 12.9% 10.7%
==============================================================
Revenues: Revenues for the three months ended December 31, 1999 decreased to
$10.1 million from $10.6 million in the three months ended November 30, 1998, a
decrease of 5.3%. Revenue for the nine months ended December 31, 1999 increased
to $42.7 million from $23.1 million in the nine months ended November 30, 1998,
an increase of 85.2%. The year-over-year increase in revenue results primarily
from increased demand for our products in the flat panel computer monitor
market.
Revenue from the flat panel computer monitor market decreased to $7.0 million,
or 69.2% of our revenue, in the three months ended December 31, 1999, from $7.5
million, or 70.6% of our revenue, in the three months ended November 30, 1998.
This market represented 70.1% of our revenue, or $30.0 million, in the nine
months ended December 31, 1999, compared with 60.8% of our revenue, or $14.0
million, in the nine months ended November 30, 1998. The year-over-year
increase in revenue was primarily a result of the overall growth of this market.
-6-
The overall growth of the flat panel computer monitor market was positively
impacted in calendar 1998 by significant reductions in their retail selling
prices. Retail prices declined from about $2,500 in early calendar 1998 to
about $800 in early calendar 1999. This decline was primarily as a result of
reductions in the cost of LCD panels which are the primary component in flat
panel monitors. The reduction in the cost of LCD panels was caused by improved
panel manufacturing yields and by the devaluation of currencies in the
countries, principally in Asia, where LCD panels are manufactured.
Since early calendar 1999, there has been a lack of capacity to manufacture a
sufficient number of LCD panels to satisfy the increasing demand. This lack of
panel availability resulted in an increase in the cost of LCD panels, which in
turn, resulted in an increase in the retail selling price of flat panel computer
monitors to about $1,200 by the end of the year. The increase in retail selling
prices in 1999 resulted in a reduced rate of growth for the flat panel monitor
market through reduced end consumer demand, which caused a build-up of analog
interface monitor inventories. This inventory build-up has reduced demand for
our products in the three months ended December 31, 1999 as vendors seek to
reduce their monitor inventory levels.
Several new manufacturing facilities for LCD panels are being built, principally
in Asia. Any delays in bringing these facilities into production could continue
to restrict the overall growth of the flat panel computer monitor market by
limiting the rate of decline of the cost of LCD panels.
Revenue from our next largest market, the projection systems market, decreased
to $1.5 million or 14.6% of our revenue in the three months ended December 31,
1999, from $1.8 million or 17.3% of our revenue in the three months ended
November 30, 1998. This market represented 13.7% of our revenue, or $5.8
million, for the nine months ended December 31, 1999, compared to 22.7% of our
revenue, or $5.2 million, for the nine months ended November 30, 1998. The
dollar increase in revenue was primarily a result of an increase in units sold,
partially offset by a reduction of average selling prices. The decline of
projection systems market revenue as a percentage of our total revenue was a
result of a faster rate of revenue growth from the flat panel computer monitor
market compared to the projection systems market.
As a result of the factors described above, we do not expect to sustain the past
annual rates of revenue growth in future periods.
Gross Profit. Gross profit for the three months ended December 31, 1999
increased to $6.8 million from $6.3 million in the three months ended November
30, 1998. For the nine months ended December 31, 1999, gross profit increased to
$29.2 million from $14.7 million in the nine months ended November 30, 1998. As
a percentage of revenues, gross profit represented 67.6% of revenues in the
three months ended December 31, 1999, up from 59.4% of revenues in three months
ended November 30, 1998. Gross profit increased to 68.3% in the nine months
ended December 31, 1999 from 63.5% in the nine months ended November 30, 1998.
The increase in gross profit percentage in 1999 over 1998 was primarily
attributable to a more favorable mix of products sold, including the transition
of customers to newer, cost-reduced products and products that have more
integrated functionality. We expect gross margins to decline in future periods
as a result of price competition with other chip suppliers.
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 three months ended December 31, 1999
increased to $4.1 million from $2.4 million in the comparable period in the
previous year. These expenses represented 40.6% of revenues in the 1999 period
and 22.7% of revenues in the 1998 period. Research and development expenses for
the nine months ended December 31, 1999 increased to $11.2 million from $6.8
million in the nine months ended November 30, 1998. These expenses represented
26.3% of revenues in the nine months ended December 31, 1999 and 29.4% of
revenues in the nine months ended November 30, 1998.
-7-
The dollar increase in the 1999 periods over the comparative periods in 1998
reflects higher personnel costs associated with an expansion in our research and
development activities and increased prototype and pre-production expenses for
new products under development. We expect to continue to make substantial
investments in our research and development activities and anticipate that the
dollar amount of research and development expenses will continue to increase.
The decline in research and development expenses as a percentage of revenues is
a result of the rate of growth of revenues exceeding the rate of growth of
research and development expenses.
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 $3.0 million in the three months ended December 31,
1999 and $2.9 million in the comparable period in the previous year. These
expenses represented 29.7% of revenues in the 1999 period and 27.2 % of revenues
in the 1998 period. Selling, general and administrative expenses were $9.4
million in the nine months ended December 31, 1999 and $6.8 million in the nine
months ended November 30, 1998. These expenses represented 21.9% of revenues in
the 1999 period and 29.6% of revenues in the 1998 period.
The dollar increases in 1999 over 1998 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. We expect the dollar amount of selling,
general and administrative expenses to increase because of additions to
administrative, marketing, selling and customer support personnel and continued
expansion of our international operations. The decline in selling, general and
administrative expenses as a percentage of revenues results from the rate of
growth in revenues exceeding the rate of growth of selling, general and
administrative expenses.
Interest Income. Interest income in the three months ended December 31, 1999 was
$550,000, compared with $503,000 in the three months ended November 30, 1998.
For the nine months ended December 31, 1999, interest income was $1.5 million
compared with $1.4 million in the nine months ended November 30, 1998. Changes
in interest income result from changes in the average amount of cash and cash
equivalents on hand, and from interest earned on income taxes and tax credits
recoverable. Future interest income will depend on the amount of funds available
to invest and on future interest rates.
Provision for Income Taxes. The provisions for income taxes for the three and
nine month periods ended December 31, 1999, are calculated based on our expected
tax rate for the entire fiscal year. There were no provisions for income taxes
in the three and six month periods ended November 30, 1998, because we had
investment tax credits, non-capital losses or unclaimed research and development
expenditures available to reduce taxes payable or taxable income. Future income
taxes will depend on our effective tax rates and the distribution of taxable
income between taxation jurisdictions.
Liquidity and capital resources
Cash and cash equivalents were $44.0 million at December 31, 1999. Net cash
provided by operations for the nine months ended December 31, 1999, was $12.4
million. This cash was generated primarily by net income, together with
reductions in accounts receivable trade, and amounts invested in other current
assets.
Net cash used in investing activities was $8.0 million in the nine months ended
December 31, 1999. Cash of $6.9 million was used for the purchase of capital
assets, including costs of leasehold improvements to our new Canadian operating
facilities and a mixed-signal chip tester. We also invested $1.1 million for a
minority interest in a private company.
Continued expansion of our business may require higher levels of capital
equipment purchases. We have no significant capital spending or purchase
commitments other than purchase commitments made in the ordinary course of
business.
-8-
Net cash provided by financing activities in the nine months ended December 31,
1999 was $1.0 million. This was primarily a result of receiving $2.5 million for
the purchase of shares under the terms of our stock purchase plan and stock
option plans, offset by our net repayment of indebtedness of $1.5 million.
We believe that our existing cash balances together with any cash generated from
our operations will be sufficient to meet our capital requirements on a short-
term basis.
Longer term, we may need to raise additional capital to fund investments in
operating assets to assist in the growth of our business, such as investments in
accounts receivable or inventory, or to purchase capital assets, such as land,
buildings or equipment. Because we do not have our own semiconductor
manufacturing facility, we may be required to make deposits to secure supply in
the future. Although we currently have no plans to raise additional funds, we
could be required or could decide to try and raise additional capital in the
future.
We periodically evaluate acquisitions of businesses, products or technologies
that complement our business. If we were to enter into a transaction of this
nature, we may either have to use a portion of our cash, issue debt or issue
additional equity securities. If we were to issue additional equity securities,
there could be further dilution to our shareholders.
Year 2000 compliance
Many businesses face issues relating to the inability of some computer systems
to correctly recognize dates starting January 1, 2000. We have evaluated our
products and believe that they function in the year 2000.
We established a committee to identify any systems that are not year 2000
compliant. Our committee has reviewed our systems, as well as those of our
suppliers and major customers to determine whether or not their systems are year
2000 compliant. Our committee continues to review potential year 2000 issues and
their impact, and will investigate possible methods of remediation if needed. We
do not believe that we have any material non-compliant systems. Our costs to
date related to year 2000 compliance have not been material.
Factors that may affect future operating results
The following factors may have a harmful impact on our business:
We subcontract our manufacturing, assembly and test operations
We do not have our own chip fabrication facilities, assembly or testing
operations. Instead, we rely on others to fabricate, assemble and test all of
our chip products. We have our chip products manufactured by IBM, United
Semiconductor Corporation, Taiwan Semiconductor Manufacturing Corporation and
Samsung Semiconductor, Inc. None of our chip products are purchased from more
than one supplier. There are many risks associated with our dependence upon
outside manufacturing, including:
. reduced control over manufacturing and delivery schedules of products,
. potential political risks in the countries where the manufacturing
facilities are located,
. 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.
-9-
We depend upon outside manufacturers to fabricate silicon wafers on which our
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. We have at
times experienced delivery delays and long manufacturing lead times. We cannot
be sure that our manufacturers will devote adequate resources to the production
of our products or deliver sufficient quantities of finished products to us on
time or at an acceptable cost. The lead-time necessary to establish a strategic
relationship with a new manufacturing partner is considerable. We would be
unable to readily obtain an alternative source of supply for any of our products
if this proves necessary. Any occurrence of these manufacturing difficulties
could harm our business.
We face intense competition and may not be able to compete effectively
We compete with both large companies and start-up companies, including Arithmos,
Inc., Macronix International Co., Ltd., Philips Semiconductors, a division of
Philips Electronics N.V., Pixelworks, Inc., Sage, Inc. and Silicon Image, Inc.
We anticipate that as the markets for our products develop, our 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 us.
Increased competition could harm our business, by, for example, increasing
pressure on our profit margins or causing us to lose customers.
Our success will depend on the growth of the flat panel and digital CRT computer
monitor markets and other consumer electronics video markets
Our ability to generate increased revenues will depend on the growth of the flat
panel and digital CRT computer monitor markets. These markets are at early
stages of development. Our continued growth will also depend upon emerging
markets for consumer electronics video products, 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.
For the three months ended December 31, 1999, 69.2% of our revenue was derived
from sales to customers in the flat panel computer monitor market. This and
other potential markets may not develop as expected, which would harm our
business.
We must develop new products and enhance our existing products to react to rapid
technological change
We must develop new products and enhance our existing products with improved
technologies to meet rapidly evolving customer requirements and industry
standards. We need to design products for customers that continually require
higher functionality at lower costs. This requires us to continue to add
features to our products and to include all of these features on a single chip.
The development process for these advances is lengthy and will require us to
accurately anticipate technological innovations and market trends. We may be
unable to successfully develop new products or product enhancements in a timely
manner, or at all. Any new products or product enhancements may not be accepted
in new or existing markets. If we fail to develop and introduce new products or
product enhancements, that failure will harm our business.
-10-
Our products may not be accepted in the flat panel computer monitor market and
other emerging markets
Our success in the flat panel computer monitor market, as well as the markets
for digital CRTs, home theater, DVD, flat panel and digital television, and HDTV
will depend upon the extent to which manufacturers of those products incorporate
our integrated circuits into their products. We have only recently begun
shipping our products in quantity to manufacturers of flat panel computer
monitors, and have only recently begun shipping limited commercial quantities of
products to manufacturers in some of the other developing consumer electronics
markets. Our ability to sell products into these markets will depend upon demand
for the functionality provided by our products. For example, some computer
industry participants have proposed that the image processing functions
performed by our products should be incorporated within the computer itself
rather than in the flat panel computer monitor. If this were to occur, we would
be subject to direct competition from suppliers of graphics integrated circuits,
many of whom have more resources than we have. The failure of our products to be
accepted in the flat panel computer monitor market in particular would harm our
business.
A large percentage of our revenue comes from sales to a small number of large
customers
The markets for our products are highly concentrated. Our sales are derived from
a limited number of customers. Sales to our largest five customers accounted for
47.3% of our revenues for the three months ended December 31, 1999. We expect
that a small number of customers will continue to account for a large amount of
our revenues. Substantially all of our sales are made on the basis of purchase
orders rather than long-term agreements. Consequently, any customer could cease
purchasing products at any time without penalty. The decision by any large
customer to decrease or cease using our products would harm our business.
Our business depends on relationships with industry leaders that are non-binding
We work closely with industry leaders in the markets we serve to design products
with improved performance, cost and functionality. We typically commit
significant research and development resources to such design activities. We
often divert financial and personnel resources from other development projects
without entering into agreements obligating these industry leaders 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 our business, financial condition and results of
operations. Our inability to establish such relationships in the future would,
similarly, harm our business.
A large percentage of our revenues will come from sales outside of North
America, which creates additional business risks
A large portion of our 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 three months ended December 31, 1999, sales to
regions outside of North America amounted to 72.6% of revenues. 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 our sales are denominated in United States dollars, increases in the
value of the United States dollar could increase the price of our products in
non-U.S. markets and make our products more expensive than competitors' products
denominated in local currencies.
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We may not be able to attract or retain the key personnel we need to succeed
Competition for qualified management, engineering and technical employees is
intense. As a result, employees could leave with little or no prior notice. We
cannot assure you that we will be able to attract and retain employees.
If we cannot attract and retain key employees, our business would be harmed.
Other factors to consider
You should also consider the following factors:
It may be difficult for our shareholders to enforce civil liabilities under the
United States federal securities laws because we are incorporated in Canada
The enforcement by our shareholders of civil liabilities under the federal
securities laws of the United States may be adversely affected because:
. we are incorporated under the laws of Nova Scotia, Canada,
. some of our directors and officers are residents of Canada, and
. substantial portions of our assets are located outside the United
States.
As a result, it may be difficult for holders of our common shares to effect
service of a legal claim within the United States upon our directors and
officers or upon 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.
Our anti-takeover defense provisions may deter potential acquirers
Our authorized capital consists of 1,000,000,000 special shares issuable in one
or more series and 1,000,000,000 common shares. Our 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 our shareholders, including voting and
dividend rights. The rights of holders of our common shares will be subject to,
and may be adversely affected by, rights of holders of any special shares that
we may issue in the future. The issuance of special shares could make it more
difficult for a third party to acquire a majority of our outstanding voting
shares. We have no present plans to issue any special shares. We have adopted a
shareholder rights plan with respect to our common shares. This plan is
specifically designed to make an unsolicited, non-negotiated takeover attempt
more difficult. We also have 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
We carry out a significant portion of our operations in Canada. Although
virtually all our revenues and costs of revenues are denominated in U.S.
dollars, a substantial portion of our operating expenses are denominated in
Canadian dollars. Accordingly, our 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 US dollar could negatively
impact our operating results by increasing our operating expenses. We do 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. We 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 has not been
material.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 8, 1999, a Complaint for Damages in Northshore Laboratories Inc. v.
-------------------------------
Genesis Microchip, Inc., docket no. 99-cv-4774(MCL) was filed in Federal
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District Court in Trenton, New Jersey. In that Complaint, Northshore claimed an
unspecified amount of damages for breach of contract arising out of a licensing
agreement between us. On December 6, 1999, we filed an Answer to Complaint,
Counterclaim, Third Party Complaint and Demand for Jury Trial. In our response,
we denied the allegations of the Northshore Complaint and made counterclaims for
declaratory and injunctive relief as a minority shareholder in Northshore. We
believe that our defenses and counterclaims are meritorious.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual and Special General Meeting of Shareholders held on September 28,
1999, our shareholders voted on a number of proposals that are detailed on our
Quarterly Report of Form 10-Q for the Period Ended September 30, 1999. Several
of these proposals were subject to a confirmatory vote held on October 19, 1999.
The results of the September 28, 1999 vote and the October 19, 1999 confirmatory
vote are included in Item 4 of Part II of our report on Form 10-Q for the
quarterly period ended September 30, 1999, and are incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are attached:
10.1 Property Lease
27.1 Financial Data Schedule
b) Reports on Form 8-K:
We filed no reports on Form 8-K in the three months ended December 31,
1999.
SIGNATURE
Our authorized representative has signed this report on our behalf as required
by the Securities Exchange Act of 1934.
GENESIS MICROCHIP INCORPORATED
By: /s/ I. ERIC ERDMAN
---------------------------------
I. Eric Erdman
Chief Financial Officer & Secretary
(Authorized Officer &
Principal Financial Officer)
Date: February 11, 2000