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 JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER:
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:
200 TOWN CENTRE BOULEVARD, SUITE 400
MARKHAM, ONTARIO, CANADA
L3R 8G5
Former Fiscal Year:
May 31
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 18,424,975 shares of the registrant's common shares issued
and outstanding as of June 30, 1999.
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GENESIS MICROCHIP INCORPORATED
FORM 10-Q
THREE MONTHS ENDED JUNE 30, 1999
Index
Item Number Page
- ----------- ----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999
and June 30, 1999 1
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and May 31, 1998 2
Condensed Consolidated Statements of Cash Flows for
the three months ended June 30, 1999 and May 31, 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. Exhibits and Reports on Form 8-K 13
Exhibit 27 Financial Data Schedule 13
Signatures 14
* 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)
(unaudited)
ASSETS
June 30, March 31,
----------- -----------
1999 1999
---- ----
Current assets:
Cash and cash equivalents $ 42,302 $ 38,479
Accounts receivable trade, net of allowance for doubtful accounts of $141 at
June 30, 1999 and $124 at March 31, 1999 9,278 9,413
Investment tax credits recoverable 1,480 1,221
Inventory 5,733 6,963
Other current assets 750 2,958
------------------------
Total current assets 59,543 59,034
Capital assets 5,762 3,871
Deferred income taxes 1,830 1,830
Other 80 80
========================
Total assets $ 67,215 $ 64,815
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 435 $ 145
Accounts payable 3,438 2,428
Accrued liabilities 5,240 4,865
Current portion of loans payable 96 1,465
------------------------
Total current liabilities 9,209 8,903
Long-term liability:
Loans payable 516 504
------------------------
Total liabilities 9,725 9,407
------------------------
Shareholders' equity:
Special shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - no shares at June 30, 1999 and March 31, 1999 - -
Common shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - 18,424,975 shares at June 30, 1999 and 18,345,093
shares at March 31,1999 69,243 68,447
Additional paid-in capital 1,293 1,293
Cumulative other comprehensive income (loss) (94) (94)
Deferred compensation (313) (326)
Deficit (12,639) (13,912)
------------------------
Total shareholders' equity 57,490 55,408
------------------------
Total liabilities and shareholders' equity $ 67,215 $ 64,815
========================
See accompanying notes to condensed consolidated financial statements.
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands of U.S. dollars, except per share amounts)
(unaudited)
Three Months Ended
-----------------------
June 30, May 31,
-------- -------
1999 1998
---- ----
Revenues $ 16,306 $ 5,770
Cost of revenues 5,264 1,933
-----------------------
Gross profit 11,042 3,837
Operating expenses:
Research and development 3,400 2,193
Selling, general and administrative 3,273 1,830
Merger-related costs 3,455 -
-----------------------
Total operating expenses 10,128 4,023
-----------------------
Income from operations 914 (186)
Interest income 417 514
-----------------------
Income before income taxes 1,331 328
Provision for income taxes 58 -
=======================
Net income $ 1,273 $ 328
=======================
Earnings per share:
Basic $ 0.07 $ 0.02
Diluted $ 0.06 $ 0.02
Weighted average number of common shares
outstanding (in thousands):
Basic 18,375 15,824
Diluted 19,817 18,454
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)
Three Months Ended
June 30, May 31,
1999 1998
Cash flows from operating activities:
Net income $ 1,273 $ 328
Adjustments to reconcile net income to cash
used in operating activities:
Amortization 686 300
Non-cash compensation expense related to stock
options 13 19
Inventory provision 100 -
Change in operating assets and liabilities:
Accounts receivable trade (66) (233)
Investment tax credits receivable (233) (293)
Inventory 1,129 (662)
Other current assets 2,413 133
Accounts payable 1,009 (48)
Accrued liabilities 368 208
--------------------
Net cash from (used in) operating activities 6,692 (248)
--------------------
Cash flows from investing activities:
Additions to capital assets (2,576) (872)
--------------------
Cash used in investing activities (2,576) (872)
--------------------
Cash flows from financing activities:
Proceeds from issue of common shares, net of
issue costs 795 3,606
Proceeds (repayment) of bank indebtedness - net (48) 580
Repayment of loans payable (1,034) (59)
--------------------
Net cash from (used in) financing activities (287) 4,127
--------------------
Effect of currency translation on cash balances (6) 30
--------------------
Increase in cash and cash equivalents 3,823 3,037
Cash and cash equivalents, beginning of period 38,479 35,385
--------------------
Cash and cash equivalents, end of period $ 42,302 $ 38,422
====================
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
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 year ended May 31, 1998 included in our 20-F 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 three
months ended June 30, 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, the unaudited condensed statements of operations
and of cash flows compare the current three month period ended June 30, 1999,
with the closest corresponding fiscal period of the previous year, which is the
three month period ended May 31, 1998. We intend to file a transition report on
Form 10-K with the Securities and Exchange Commission for the ten months ended
March 31, 1999.
3. 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
June 30, May 31,
-------- -------
1999 1998
---- ----
Numerator:
Net income $ 1,273 $ 328
======== ========
Denominator for basic earnings per share -
Weighted average common shares outstanding 18,375 15,824
======== ========
Basic earnings per share $ 0.07 $ 0.02
======== ========
Denominator for diluted earnings per share-
Weighted average common shares outstanding 18,375 15,824
Stock options and warrants 1,442 2,630
======== ========
Shares used in computing diluted earnings per share 19,817 18,454
======== ========
Diluted earnings per share $ 0.06 $ 0.02
======== ========
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4. Comprehensive income
Comprehensive income is defined as the change in equity of a company during a
period resulting from certain transactions and other events and circumstances,
excluding transactions resulting from investments by owners and distributions to
owners. There is no difference between our net income and our comprehensive
income in the three months ended June 30, 1999. The difference between our net
income and comprehensive income in the three months ended May 31, 1998 is from
foreign currency translations.
The components of comprehensive income for the three month periods ended June
30, 1999, and May 31, 1998, are as follows (in thousands):
Three Months Ended
June 30, May 31,
-------- -------
1999 1998
---- ----
Net income $ 1,273 $ 328
Cumulative translation adjustment - 7
-------- -------
Comprehensive income $ 1,273 $ 335
======== =======
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 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 10-Q contains numerous statements of a forward-looking nature relating to
potential future events or our 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.
Overview
We design, develop and market 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. 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.
-5-
Results of operations
The following table shows unaudited statement of operations data for the
three-month periods ended June 30, 1999 and May 31, 1998, expressed as a
percentage of revenues:
Three Months Ended
June 30, May 31,
-------- -------
1999 1998
---- ----
Revenues 100.0% 100.0%
Cost of revenues 32.3% 33.5%
--------------------
Gross profit 67.7% 66.5%
Operating expenses:
Research and development 20.9% 38.0%
Selling, general and administrative 20.0% 31.7%
Merger-related costs 21.2% 0.0%
--------------------
Total operating expenses 62.1% 69.7%
--------------------
Income from operations 5.6% -3.2%
Interest income 2.6% 8.9%
--------------------
Income before income taxes 8.2% 5.7%
Provision for income taxes 0.4% 0.0%
=====================
Net income 7.8% 5.7%
=====================
Revenues: Revenues for the three months ended June 30, 1999 increased to $16.3
million, from $5.8 million in the three month period ended May 31, 1998, an
increase of 183%. The increase in revenue primarily results from increased
demand for our products in the flat panel LCD computer monitor market.
Revenues from the flat panel computer monitor market increased to $11.5 million,
or 70.8% of revenues, in the three months ended June 30, 1999, from $2.8
million, or 49.1% of revenues, in the three months ended May 31, 1998. This
increase was a result of increasing our share in that market and overall growth
of the market segment.
The overall growth of the flat panel computer monitor market 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 about
$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 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.
-6-
Revenue from our second largest market segment, the projection systems market,
increased to $2.6 million or 15.6% of revenues in the three months ended June
30, 1999, from $2.2 million or 38.4% of revenues in the three months ended May
31, 1998. The dollar increase in revenues 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 revenues was a
result of a faster rate of growth in 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
rates of revenue growth in future periods.
Gross Profit. Gross profit for the three months ended June 30, 1999 increased to
$11.0 million from $3.8 million in the three months ended May 31, 1998. As a
percentage of revenues, gross profit represented 67.7% of revenues in the 1999
period and 66.5% of revenues in the 1998 period. The increase in gross profit
percentage was primarily attributable to a more favorable mix of products sold.
In the three month period ended June 30, 1999, we reduced shipments of our gmFC1
product, which is being replaced by the gmFC1A product. The gmFC1 product had a
lower gross profit percentage than our other products. We also significantly
reduced sales of lower-margin resale ADC products in the three months ended June
30, 1999. As a result, our overall gross profit percentage increased in the
three month period ended June 30, 1999 compared to previous quarters. In
addition, we recently introduced a new lower-cost gmZ2 product. The gmZ2
replaces the gmZ1 product. As a result of these factors, we believe that our
overall gross margins will not continue at 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 three months ended June 30, 1999
increased to $3.4 million from $2.2 million in the comparable period in the
previous year. These expenses represented 20.9% of revenues in the 1999 period
and 38.0% of revenues in the 1998 period. The increase in absolute dollars in
the three months ended June 30, 1999 over the three months ended May 31, 1998
reflects greater personnel costs associated with an expansion in our research
and development activities and increased prototype and pre-production expenses
of new products. We expect to continue to make substantial investments in our
research and development activities and anticipate that research and development
expenses will continue to increase in absolute dollars. The decline in research
and development expenses as a percentage of revenues resulted from 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 $3.3 million in the three months ended June 30,
1999 and $1.8 million in the comparable period in the previous year. These
expenses represented 20.0% of revenues in the 1999 period and 31.7 % of revenues
in the 1998 period. The absolute 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. We expect 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 our international operations. The decline in selling,
general and administrative expenses as a percentage of revenues resulted from
the rate of growth in revenues exceeding the rate of growth of selling, general
and administrative expenses.
Merger-related Costs. Merger-related costs of $3.5 million in the three months
ended June 30, 1999 represent the costs associated with our merger with Paradise
Electronics, Inc., which closed on May 28, 1999. These costs consist primarily
of professional fees and the costs of printing and distributing information to
shareholders.
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Interest Income. Interest income in the three months ended June 30, 1999 was
$417,000, compared with $514,000 in the three months ended May 31, 1998. The
decrease in interest income was primarily due to a reduction of interest earned
on balances of investment tax credits receivable. Future interest income will
depend on the amount of funds available to invest and on future interest rates.
Provision for Income Taxes. The provision for income taxes for the three months
ended June 30, 1999, is calculated based on our expected tax rate for the entire
fiscal year. There was no provision for income taxes in the three months ended
May 31, 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 $42.3 million at June 30, 1999. Net cash provided
by operations for the three months ended June 30, 1999, was $6.7 million. Net
cash provided by operations in the three months ended June 30, 1999 was
primarily a result of net income, reductions in inventory levels and other
assets, and increases in accounts payable and accrued liabilities.
Net cash used in investing activities was approximately $2.6 million in the
three months ended June 30, 1999 for the purchase of capital assets, including
costs of leasehold improvements to our new Canadian operating facilities.
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.
Net cash used in financing activities was $287,000 in the three months ended
June 30, 1999. This was primarily a result of funds received for the purchase of
shares under our employee stock purchase plan and our stock option plans of
$785,000, offset by our net repayment of long-term indebtedness of $1.0 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 event there is a shortage of manufacturing capacity in the future. Although
we currently have no plans to raise additional funds for such uses, we could be
required, or could elect, to seek to raise additional capital in the future. In
addition, from time to time we evaluate acquisitions of businesses, products or
technologies that complement our business. Any such transactions, if
consummated, may use a portion of our working capital or require the issuance of
equity securities that may result in 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 will function in the year 2000. We do not
currently expect year 2000 compliance to have a material impact on our business
or future results of operations, however, there could be interruptions of
operations or other limitations of system functionality, and we may have to
incur significant costs to avoid such interruptions or limitations. In addition,
we currently do not have complete information about the year 2000 compliance
status of all of our suppliers and customers. In the event that any of our
significant suppliers or customers cannot successfully achieve year 2000
compliance, our business would be harmed.
We use 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 our
internal operations. To the extent that our IT and non-IT systems are unable
-8-
to appropriately interpret the upcoming calendar year 2000, modification or
replacement of those systems will be necessary. We have established a committee
to identify the IT and non-IT systems that are not year 2000 compliant. Our
committee is reviewing our IT and non-IT systems, as well as those of our
suppliers and major customers to determine whether or not their systems are year
2000 compliant, and has been communicating with our suppliers and major
customers regarding this issue. Our committee is currently reviewing potential
year 2000 issues and their impact, as well as investigating possible methods of
remediation. We have now substantially implemented remediation programs and
expect to be year 2000 compliant in the fourth quarter of calendar 1999. Our
costs to date related to year 2000 compliance have not been material. Although
the total estimated costs of remediation have not yet been determined, we
anticipate that any future costs will also not be material. We believe that a
reasonably likely worst case year 2000 scenario would be limitations in the
transportation of our products by third parties, either to us from our
suppliers, or from us to our customers. This issue is still under review by our
year 2000 committee. Our contingency plan to handle such a scenario is to hold
additional inventory on our premises, in order to mitigate potential delays in
receiving products from our suppliers.
Given the information known at this time about our systems, coupled with our
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 our business, financial condition and results of
operations. We are still analyzing our IT and non-IT systems, as well as those
of our suppliers and major customers. Consequently, we cannot be sure that that
the costs necessary to update or replace these systems or the potential systems
or business interruptions that could occur will not harm our business.
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 fabrication facilities, assembly or testing operations.
Instead, we rely on others to fabricate, assemble and test all of our products.
We have our products manufactured by IBM, United Semiconductor Corporation,
Taiwan Semiconductor Manufacturing Corporation and Samsung Semiconductor, Inc.
No single product is 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.
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.
-9-
We face intense competition and may not be able to compete effectively
We compete 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. 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 computer monitor market
and other consumer electronics markets
Our 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.
Our continued growth will also depend upon emerging markets for digital CRT
monitors, and for 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.
For the three months ended June 30, 1999, 70.8% of our 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 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. 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.
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 resources greater than ours. The failure of our products to be
accepted in the flat panel computer monitor market in particular would harm our
business.
-10-
A large percentage of our revenues come 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
36.7% of our revenues for the three months ended June 30, 1999. We expect that a
small number of customers will continue to account for a large amount of our
revenues. All of our 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., our largest customer
in our second largest market segment, projection systems, temporarily 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 had there not
been offsetting growth in the flat panel computer monitor market. 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 June 30, 1999, sales to regions
outside of North America amounted to 80.5% of revenues, compared to 49.1 % in
the comparable three month period ended May 31, 1998. 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.
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
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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 US 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 US 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 September 30, 1998 Arithmos Inc. ("Arithmos") filed a complaint against
Paradise Electronics, Inc. ("Paradise"), a wholly-owned subsidiary of the
Company. Pursuant to the Settlement Agreement and Mutual General Release entered
into as of June 10, 1999 by and between Arithmos and Paradise, Paradise paid
Arithmos the sum of $100,000 as a settlement fee.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Shareholders held on May 28, 1999,
shareholders approved the issuance of the Company's common shares to
stockholders of Paradise Electronics, Inc. ("Paradise"), pursuant to an
agreement and plan of reorganization, among the Company, Paradise and Rainbow
Acquisition Corporation ("Rainbow"), providing for the merger of Paradise and
Rainbow, including the issuance of the Company's common shares pursuant to
currently outstanding options, warrants and other rights to purchase Paradise
common stock that will be assumed by the Company. The results of the voting from
the proposal were as follows:
For Against Abstained
9,094,663 20,673 6,980
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are attached hereto.
10.1 Genesis/Northshore Licensing Agreement Buyout dated May 18, 1999.
27.1 Financial Data Schedule
b) Reports on Form 8-K
Form 8-K was filed with the Securities and Exchange Commission on June 11,
1999.
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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
Chief Financial Officer & Secretary
(Duly Authorized Officer &
Principal Financial Officer)
Date: August 13, 1999
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