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 SEPTEMBER 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER:
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 18,837,435 shares of the registrant's common shares issued
and outstanding as of September 30, 1999.
GENESIS MICROCHIP INCORPORATED
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 30, 1999
Index
Item Number Page
- ----------- ----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 and
September 30, 1999 1
Condensed Consolidated Statements of Operations for the three
and six month periods ended September 30, 1999 and August 31,
1998 2
Condensed Consolidated Statements of Comprehensive Income for
the three and six month periods ended September 30, 1999 and
August 31, 1998 2
Condensed Consolidated Statements of Cash Flows for the six
month periods ended September 30, 1999 and August 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 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 15
Item 5. Other Information *
Item 6. Exhibit 27 Financial Data Schedule 16
Exhibits and Reports on Form 8-K 16
Signature 16
* No information has been provided because 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
September March 31,
30, 1999 1999
-------------------------
Current assets:
Cash and cash equivalents $43,366 $ 38,479
Accounts receivable trade, net of allowance for doubtful 10,176 9,413
accounts of $190 at September 30 and $124 at March 31
Investment tax credits recoverable 904 1,221
Inventory 5,216 6,963
Other 853 2,958
-------------------------
Total current assets 60,515 59,034
Capital assets 6,633 3,871
Deferred income taxes 1,834 1,830
Other 1,180 80
-------------------------
Total assets $70,162 $ 64,815
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ - $ 145
Accounts payable 3,479 2,428
Accrued liabilities 3,337 4,865
Current portion of loans payable 97 1,465
-------------------------
Total current liabilities 6,913 8,903
Long-term liabilities:
Loans payable 519 504
-------------------------
Total liabilities 7,432 9,407
Shareholders' equity:
Special shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - no shares at September 30 or March 31
Common shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - 18,837,435 shares at September 30 and 70,457 68,447
18,345,093 shares at March 31
Additional paid in capital 1,293 1,293
Cumulative other comprehensive loss (94) (94)
Deferred compensation (313) (326)
Deficit (8,613) (13,912)
-------------------------
Total shareholders' equity 62,730 55,408
-------------------------
Total liabilities and shareholders' equity $70,162 $ 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 Six Months Ended
------------------ ----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
-------------------------------------------------------------
Revenues $16,362 $ 6,672 $32,668 $12,442
Cost of revenues 5,002 2,170 10,266 4,103
-------------------------------------------------------------
Gross profit 11,360 4,502 22,402 8,339
Operating expenses:
Research and development 3,741 2,187 7,141 4,380
Selling, general and administrative 3,112 2,117 6,385 3,947
Merger-related costs - - 3,455 -
-------------------------------------------------------------
Total operating expenses 6,853 4,304 16,981 8,327
-------------------------------------------------------------
Income from operations 4,507 198 5,421 12
Interest income 515 419 932 933
-------------------------------------------------------------
Income before income taxes 5,022 617 6,353 945
Provision for income taxes 996 - 1,054 -
-------------------------------------------------------------
Net income $ 4,026 $ 617 $ 5,299 $ 945
===========================================================
Earnings per share:
Basic $0.22 $0.04 $0.29 $0.06
Diluted $0.20 $0.03 $0.27 $0.05
Weighted average number of common shares
outstanding (in thousands):
Basic 18,499 16,192 18,437 16,008
Diluted 19,784 18,455 19,808 18,455
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 Six Months Ended
------------------ ----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
-------------------------------------------------------------------
Net income $4,026 $617 $5,299 $945
Cumulative translation adjustment - - - 7
-------------------------------------------------------------------
Comprehensive income $4,026 $617 $5,299 $952
===================================================================
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)
Six Months Ended
-----------------
September 30, August 31,
1999 1998
--------------------------------
Cash flows from operating activities:
Net income $ 5,299 $ 945
Adjustments to reconcile net income to cash
used in operating activities:
Amortization 1,232 529
Non-cash compensation expense related to stock
options 13 38
Inventory provision 350 -
Change in operating assets and liabilities:
Accounts receivable trade (857) (2,362)
Investment tax credits receivable 612 (471)
Inventory 1,396 (1,592)
Other current assets 2,208 27
Accounts payable 1,040 (32)
Accrued liabilities (1,843) (330)
--------------------------------
Net cash from (used in) operating activities 9,450 (3,248)
Cash flows from investing activities:
Additions to capital assets (3,993) (1,177)
Additions to other assets (1,100) -
--------------------------------
Cash used in investing activities (5,093) (1,177)
Cash flows from financing activities:
Proceeds from issue of common shares, net of
issue costs 2,034 3,961
Proceeds (repayment) of bank indebtedness - net (483) 608
Repayment of loans payable (1,034) (59)
--------------------------------
Net cash from financing activities 517 4,510
Effect of currency translation on cash balances 13 100
--------------------------------
Increase in cash and cash equivalents 4,887 185
Cash and cash equivalents, beginning of period 38,479 35,385
--------------------------------
Cash and cash equivalents, end of period $43,366 $35,570
================================
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 year ended March 31, 1999 that are included in our 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 September 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, our unaudited condensed statements of operations,
of comprehensive income and of cash flows compare the current three and six
month periods ended September 30, 1999 with the closest corresponding periods of
the previous year, which are the three and six month periods ended August 31,
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 Six Months Ended
------------------ ----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
----------------------------------------------------------------
Numerator:
Net income $ 4,026 $ 617 $ 5,299 $ 945
================================================================
Denominator for basic earnings per share-
Weighted average common shares outstanding 18,499 16,192 18,437 16,008
================================================================
Basic earnings per share $ 0.22 $ 0.04 $ 0.29 $ 0.06
================================================================
Denominator for diluted earnings per share-
Weighted average common shares outstanding 18,499 16,192 18,437 16,008
Stock options and warrants 1,285 2,263 1,371 2,447
----------------------------------------------------------------
Shares used in computing diluted earnings per share
19,784 18,455 19,808 18,455
================================================================
Diluted earnings per share $ 0.20 $ 0.03 $ 0.27 $ 0.05
================================================================
-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 Six Months Ended
------------------ ----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
----------------------------------------------------------
United States $ 3,988 $ 2,796 $ 6,937 $ 5,733
Japan and Asia 12,080 3,379 25,056 5,991
Europe 176 373 491 594
Canada 118 124 184 124
----------------------------------------------------------
$16,362 $ 6,672 $32,668 $12,442
==========================================================
Net long-lived assets by country of location were as follows (in thousands):
September 30, March 31,
1999 1999
--------------------------
United States $1,324 $1,291
Canada 5,429 2,580
--------------------------
$6,633 $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 Six Months Ended
------------------ ----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
----------------------------------------------------------
Customer A 13% - 11% -
Customer B - 12% - -
Customer C - - - 16%
Customer D - - - 13%
At September 30, 1999, no one customer accounted for more that 10% 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 six month periods ended September 30, 1999 and August 31, 1998, expressed as
a percentage of revenues:
Three Months Ended Six Months Ended
------------------ ----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 30.6% 32.5% 31.4% 33.0%
------------------------------------------------------------
Gross profit 69.4% 67.5% 68.6% 67.0%
Operating expenses:
Research and development 22.9% 32.8% 21.9% 35.2%
Selling, general and administrative 19.0% 31.7% 19.5% 31.7%
Merger-related costs 0.0% 0.0% 10.6% 0.0%
------------------------------------------------------------
Total operating expenses 41.9% 64.5% 52.0% 66.9%
------------------------------------------------------------
Income from operations 27.5% 3.0% 16.6% 0.1%
Interest income 3.2% 6.2% 2.8% 7.5%
------------------------------------------------------------
Income before income taxes 30.7% 9.2% 19.4% 7.6%
Provision for income taxes 6.1% 0.0% 3.2% 0.0%
------------------------------------------------------------
Net income 24.6% 9.2% 16.2% 7.6%
============================================================
Revenues: Revenue for the three months ended September 30, 1999 increased to
$16.4 million from $6.7 million in the three month period ended August 31, 1998,
an increase of 145%. Revenue for the six months ended September 30, 1999
increased to $32.7 million from $12.4 million in the six month period ended
August 31, 1998, an increase of 164%. The year over year increases in revenue
results primarily from increased demand for our products in the flat panel LCD
computer monitor market.
Revenue from the flat panel computer monitor market increased to $11.5 million,
or 70.0% of our revenue, in the three months ended September 30, 1999, from $3.7
million, or 55.3% of our revenue in the three months ended August 31, 1998. This
market represented 70.3% of our revenue, or $23.0 million, in the six months
ended September 30, 1999, compared with 52.4% of our revenue, or $6.5 million,
in the six months ended August 31, 1998. The increase in revenue was a result
of the overall growth of this market.
-6-
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.
Several new LCD panel manufacturing facilities are being built in Taiwan, as
well as other countries, in particular Korea and Japan. Any delays in bringing
these facilities into production would continue to restrict the overall growth
of the flat panel computer monitor market.
Revenue from our next largest market, the projection systems market, increased
to $1.8 million or 11.2% of our revenue in the three months ended September 30,
1999, from $1.2 million or 17.7% of our revenue in the three months ended August
31, 1998. This market represented 13.4% of our revenue, or $4.4 million, for the
six months ended September 30, 1999, compared to 27.3% of our revenue, or $3.4
million, for the six months ended August 31, 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.
In the three months ended September 30, 1999, 31.6% of our revenue was derived
from shipments to customers located in Taiwan. In addition, two suppliers
located in Taiwan manufacture most of our chips. On September 21, 1999 there
was a major earthquake in Taiwan, which caused disruption to both our suppliers
and our customers. We anticipate that there could be some disruption to the
operations of our customers and our suppliers in the next several months as a
result of earthquake damage. This disruption could reduce demand for our
products or result in our inability to procure sufficient product to satisfy
customer orders.
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 September 30, 1999
increased to $11.4 million from $4.5 million in the three months ended August
31, 1998. For the six months ended September 30, 1999, gross profit increased to
$22.4 million from $8.3 million in the six month period ended August 31, 1998.
As a percentage of revenues, gross profit represented 69.4% of revenues in the
three months ended September 30, 1999 from 67.5% of revenues in three months
ended August 31, 1998. Gross profit increased to 68.6% in the six months ended
September 30, 1999 from 67.0% in the six months ended August 31, 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. 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 September 30, 1999
increased to $3.7 million from $2.2 million in the comparable period in the
previous year. These expenses represented 22.9% of revenues in the 1999 period
and 32.8% of revenues in the 1998 period. Research and development expenses for
the six months ended September 30, 1999 increased to $7.1 million from $4.4
million in the six months ended August 31, 1998. These expenses represented
21.9% of revenues in the six months ended September 30, 1999 and 35.2% of
revenues in the six months ended August 31, 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 $3.1 million in the three months ended September
30, 1999 and $2.1 million in the comparable period in the previous year. These
expenses represented 19.0% of revenues in the 1999 period and 31.7 % of revenues
in the 1998 period. Selling, general and administrative expenses were $6.4
million in the six months ended September 30, 1999 and $3.9 million in the six
months ended August 31, 1998. These expenses represented 19.5% of revenues in
the 1999 period and 31.7 % 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 September 30, 1999
was
$515,000, compared with $419,000 in the three months ended August 31, 1998. For
the six months ended September 30, 1999, interest income was $932,000 compared
with $933,000 in the six months ended August 31, 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
six month periods ended September 30, 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 August 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 $43.4 million at September 30, 1999. Net cash
provided by operations for the six months ended September 30, 1999, was $9.5
million. This cash was generated primarily by net income, together with
reductions in inventory levels and amounts invested in other assets.
Net cash used in investing activities was $5.1 million in the six months ended
September 30, 1999. This cash was used for the purchase of capital assets,
including costs of leasehold improvements to our new Canadian operating
facilities, and for a $1.1 million investment in 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 six months ended September 30,
1999 was $517,000. This was primarily a result of funds received for the
purchase of shares under our various stock purchase plan and stock option plans
of $2.0 million, 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 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 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 has reviewed 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.
-9-
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 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.
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 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 September 30, 1999, 70.0% 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.
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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.
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 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
37.6% of our revenues for the three months ended September 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, 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 August 1998 quarter had we not had
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.
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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 September 30, 1999, sales to
regions outside of North America amounted to 74.9% 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.
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.
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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.
PART II: OTHER INFORMATION
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, shareholders voted on the following proposals:
1. A resolution confirming that no directors are to be elected to replace the
two directors whose terms of office expired at the general meeting, as described
in the information circular accompanying the proxy.
2. The appointment of KPMG LLP as auditors for the year ending March 31, 2000.
3. A special resolution giving Genesis the authority to acquire its own shares,
as described in the information circular accompanying the proxy.
4. A special resolution giving the Board of Directors the authority to exercise
the powers under subsection 26(4) of the Companies Act (Nova Scotia) described
in the information circular accompanying the proxy.
5. A special resolution approving the amendments to the articles of association
as described in the information circular accompanying the proxy.
6. A resolution approving the amendments to the 1997 Non-Employee Stock Option
Plan as described in the information circular accompanying the proxy.
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The following table shows the results of the voting on September 29, 1999 for
each proposal:
Proposal Broker Non-
Number For Against Abstained Votes
- ---------------------------------------------------------------------------
1 11,867,573 1,334,737 - -
2 13,184,012 4,352 13,946 -
3 9,088,853 21,606 13,039 4,078,812
4 8,808,484 195,645 119,369 4,078,812
5 8,676,828 327,129 119,541 4,078,812
6 12,740,534 433,392 28,384 -
As a result of this vote proposals 1, 2 and 6 were passed and became immediately
effective. Proposals 3,4 and 5 were passed, but because they were special
resolutions they were subject to a confirmatory before they could become
effective. A shareholder meeting was held on October 19, 1999 in order to hold
a confirmatory vote.
The result of the confirmatory vote was as follows:
Proposal Broker Non-
Number For Against Abstained Votes
- ---------------------------------------------------------------------------
3 9,088,853 21,606 13,039 4,078,812
4 8,808,484 195,645 119,369 4,078,812
5 8,676,828 327,129 119,541 4,078,812
As a result of the confirmatory vote, proposals 3, 4 and 5 became effective.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibit is attached:
27.1 Financial Data Schedule
b) Reports on Form 8-K:
We filed no reports on Form 8-K in the three months ended September 30,
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: November 5, 1999
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